-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TCYd2O5LqepUfHFjG7POkFbeDC6ahLDuHnkQyC8m0P4+Rpxfzb4osTVK/uwHGrMq TvrT8JVFv4dBgwx4fuC5pg== 0001005477-02-001160.txt : 20020415 0001005477-02-001160.hdr.sgml : 20020415 ACCESSION NUMBER: 0001005477-02-001160 CONFORMED SUBMISSION TYPE: N-14 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20020308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN SOVEREIGN BOND FUND CENTRAL INDEX KEY: 0000045288 IRS NUMBER: 042528977 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-14 SEC ACT: 1933 Act SEC FILE NUMBER: 333-84042 FILM NUMBER: 02570953 BUSINESS ADDRESS: STREET 1: 101 HUNTINGTON AVE STREET 2: JOHN HANCOCK FUNDS CITY: BOSTON STATE: MA ZIP: 02199-7603 BUSINESS PHONE: 6173751702 MAIL ADDRESS: STREET 1: JOHN HANCOCK FUNDS STREET 2: 101 HUNTINGTON AVENUE CITY: BOSTON STATE: MA ZIP: 02199-7603 FORMER COMPANY: FORMER CONFORMED NAME: HANCOCK JOHN BONDS DATE OF NAME CHANGE: 19930921 FORMER COMPANY: FORMER CONFORMED NAME: HANCOCK JOHN BOND TRUST DATE OF NAME CHANGE: 19910704 FORMER COMPANY: FORMER CONFORMED NAME: HANCOCK JOHN BOND FUND INC DATE OF NAME CHANGE: 19841225 N-14 1 file.txt JOHN HANCOCK SOVEREIGN BOND FUND SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-14 ---- REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_X__/ ---- Pre-Effective Amendment No. __ /____/ ---- Post-Effective Amendment No. ___ /____/ (Check appropriate box or boxes) JOHN HANCOCK SOVEREIGN BOND FUND - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 101 Huntington Avenue, Boston, Massachusetts 02199-7603 - -------------------------------------------------------------------------------- (Address of principal executive office) Zip Code (617) 375-1702 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, including Area Code) Susan S. Newton, Esq. John Hancock Advisers, LLC 101 Huntington Avenue Boston, MA 02199 - -------------------------------------------------------------------------------- (Name and address of agent for service) Title of Securities Being Registered: shares of beneficial interest of John Hancock Sovereign Bond Fund. Approximate Date of Proposed Public Offering: As soon as practicable after the effectiveness of the registration statement. No filing fee is required because an indefinite number of shares has previously been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended. This Registration Statement relates to shares previously registered on Form N-1A (File Nos. 2-48925 and 811-2402). It is proposed that this filing will become effective on April 8, 2002 pursuant to Rule 488 under the Securities Act of 1933. JHF LOGO April 15, 2002 Dear Shareholder: I am writing to ask for your vote on important matters concerning your investment in certain funds within the John Hancock Institutional Series Trust. You may be aware that in addition to the institutional series of mutual funds John Hancock offers a series of retail mutual funds that have the same investment process and style as the institutional funds. Your fund's trustees are proposing the merger of certain funds within the John Hancock Institutional Series Trust into similar retail John Hancock Funds. As a result of the merger of your fund(s), you will receive Class I shares of the similar retail fund(s). (Class I shares have the same institutional expense structure as your current fund(s), and are not subject to sales charges or 12b-1 distribution fees.) The fund merger proposals have been unanimously approved by each fund's board of trustees, who believe the mergers will benefit you through increased diversification and economics of scale. These merges will allow your investments(s) to be part of a larger investment pool while maintaining its low institutional expense structure. The proposed mergers are detailed in the enclosed proxy statement and summarized in the questions and answers on the following page. I suggest you read both thoroughly before voting. Your Vote Makes a Difference! No matter what the size your investment may be, your vote is critical. I urge you to review the enclosed materials and to complete, sign and return the enclosed proxy ballot to us immediately. Your prompt response will help avoid the need for additional mailings at your fund's expense. For your convenience you may vote: |_| By mail - a postage paid envelope in enclosed |_| By Phone - 1-800-755-4371 |_| By email - www. |_| By Internet - www.jhfunds.com |_| Select shareholder entryway and click on the proxy-voting link If you have any questions or need additional information, please contact your investment professional or call your Customer Service Representative at 1-800-755-4371, Monday through Friday between 8:00 a.m. and 5:30 p.m. Eastern time. I thank you for your prompt vote on this matter. Sincerely, Maureen R. Ford Chairman and Chief Executive Officer Q: What are the changes being proposed? A: Generally, these proposals focus on merging the institutional funds into Class I shares of similar John Hancock funds. Since the Class I shares are part of a larger mutual fund portfolio, each Aquiring Fund has significantly larger assets and may offer a greater opportunity for future growth. Specifically, the trustees of your fund(s) are proposing the following mergers: - -------------------------------------------------------------------------------- Acquired Fund Acquiring Fund - -------------------------------------------------------------------------------- Proposal 1 Active Bond Fund Bond Fund - -------------------------------------------------------------------------------- Proposal 2 Independence Balanced Fund Balanced Fund - -------------------------------------------------------------------------------- Proposal 3 International Equity International Fund - -------------------------------------------------------------------------------- Proposal 4 Medium Capitalization Growth Fund Mid Cap Growth Fund - -------------------------------------------------------------------------------- Proposal 5 Small Cap Equity Fund Y Small Cap Equity Fund - -------------------------------------------------------------------------------- Q: What are the benefits of merging the institutional funds into a Class I share ? A: Your trustees firmly believe these mergers will eliminate the duplication of the legal, administration and portfolio management responsibilities associated with managing different mutual funds with the same investment style and process. In addition your investments will benefit from being part of a larger pool of assets, providing increased diversification and economics of scale. Q: Will this change affect the number of shares I currently have? Will there be any tax implications? A: While the market value of your shares will remain the same, the number of shares you own in the Acquiring Fund will differ from those in the Acquired Fund. There are no tax implications (no Form 1099R will be generated). Q: Will my contact information and service team change? A: No. You will still be serviced through a dedicated Institutional Service team within John Hancock Signature Services, the fund's transfer agent. You Client Relationship Contact at John Hancock Funds will also remain the same. Q: How do I vote? A: In order to facilitate the proxy voting process you may vote using one of four methods. |_| By mail - a postage paid envelope in enclosed |_| By Phone - 1-800-755-4371 |_| By email - www. |_| By Internet - www.jhancock.com/funds/NEED MORE INFORMATION Q: Does my vote make a difference? A: Whether you are a large or small investor, your vote is important, and we urge you to participate in this process. The board of trustees of your fund(s) voted unanimously to recommend these changes, and your approval is needed to implement the changes. 2 DRAFT 2/27/02 JOHN HANCOCK ACTIVE BOND FUND JOHN HANCOCK INDEPENDENCE BALANCED FUND JOHN HANCOCK INTERNATIONAL EQUITY FUND JOHN HANCOCK MEDIUM CAPITALIZATION GROWTH FUND JOHN HANCOCK SMALL CAP EQUITY FUND Y (each a "fund," and each a series of John Hancock Institutional Series Trust) 101 Huntington Avenue Boston, MA 02199 NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS SCHEDULED FOR MAY 29, 2002 This is the formal agenda for each fund's shareholder meeting. It tells you what matters will be voted on and the time and place of the meeting, in case you want to attend in person. To the shareholders of each fund: A joint shareholder meeting for your fund(s) will be held at 101 Huntington Avenue, Boston, Massachusetts on Wednesday, May 29, 2002 at 9:00 a.m., Eastern Time, to consider the following: 1. A proposal to approve an Agreement and Plan of Reorganization between John Hancock Active Bond Fund ("Active Bond Fund") and John Hancock Bond Fund ("Bond Fund"). Under this Agreement, your fund would transfer all of its assets to Bond Fund in exchange for Class I shares of Bond Fund. These shares would be distributed proportionately to you and the other shareholders of Active Bond Fund. Bond Fund would also assume Active Bond Fund's liabilities. Active Bond Fund's board of trustees recommends that you vote FOR this proposal. 2. A proposal to approve an Agreement and Plan of Reorganization between John Hancock Independence Balanced Fund ("Independence Balanced Fund") and John Hancock Balanced Fund ("Balanced Fund"). Under this Agreement, your fund would transfer all of its assets to Balanced Fund in exchange for Class I shares of Balanced Fund. These shares would be distributed proportionately to you and the other shareholders of Independence Balanced Fund. Balanced Fund would also assume Independence Balanced Fund's liabilities. Independence Balanced Fund's board of trustees recommends that you vote FOR this proposal. 3. A proposal to approve an Agreement and Plan of Reorganization between John Hancock International Equity Fund ("International Equity Fund") and John Hancock International Fund ("International Fund"). Under this Agreement, your fund would transfer all of its assets to International Fund in exchange for Class I shares of International Fund. These shares would be distributed proportionately to you and the other shareholders of International Equity Fund. International Fund would also assume International Equity Fund's liabilities. International Equity Fund's board of trustees recommends that you vote FOR this proposal. 4. A proposal to approve an Agreement and Plan of Reorganization between John Hancock Medium Capitalization Growth Fund ("Medium Capitalization Growth Fund") and John Hancock Mid Cap Growth Fund ("Mid Cap Growth Fund"). Under this Agreement, your fund would transfer all of its assets to Mid Cap Growth Fund in exchange for Class I shares of Mid Cap Growth Fund. These shares would be distributed proportionately to you and the other shareholders of Medium Capitalization Growth Fund. Mid Cap Growth Fund would also assume Medium Capitalization Growth Fund's liabilities. Medium Capitalization Growth Fund's board of trustees recommends that you vote FOR this proposal. 5. A proposal to approve an Agreement and Plan of Reorganization between John Hancock Small Cap Equity Fund Y ("Small Cap Equity Fund Y") and John Hancock Small Cap Equity Fund ("Small Cap Equity Fund"). Under this Agreement, your fund would transfer all of its assets to Small Cap Equity Fund in exchange for Class I shares of Small Cap Equity Fund. These shares would be distributed proportionately to you and the other shareholders of Small Cap Equity Fund Y. Small Cap Equity Fund would also assume Small Cap Equity Fund Y's liabilities. Small Cap Equity Fund Y's board of trustees recommends that you vote FOR this proposal. 3 7. Any other business that may properly come before the meeting. Shareholders of record as of the close of business on March 15, 2002 are entitled to vote at the meeting and any related follow-up meetings. Whether or not you expect to attend the meeting, please complete and return the enclosed proxy card. If shareholders do not return their proxies in sufficient numbers, your fund will incur the cost of extra solicitations, which is indirectly borne by shareholders. By order of the board of trustees, Susan S. Newton Secretary April 15, 2002 420PX 11/01 4 PROXY STATEMENT OF JOHN HANCOCK ACTIVE BOND FUND JOHN HANCOCK INDEPENDENCE BALANCED FUND JOHN HANCOCK INTERNATIONAL EQUITY FUND JOHN HANCOCK MEDIUM CAPITALIZATION GROWTH FUND JOHN HANCOCK SMALL CAP EQUITY FUND Y (each an "Acquired Fund" or "your fund" and each a series of John Hancock Institutional Series Trust) 101 Huntington Avenue Boston, MA 02199 PROSPECTUS FOR JOHN HANCOCK BOND FUND (a series of John Hancock Sovereign Bond Fund) JOHN HANCOCK BALANCED FUND (a series of John Hancock Investment Trust) JOHN HANCOCK INTERNATIONAL FUND (a series of John Hancock Investment Trust III) JOHN HANCOCK MID CAP GROWTH FUND (a series of John Hancock Investment Trust III) JOHN HANCOCK SMALL CAP EQUITY FUND (a series of John Hancock Investment Trust II) (each an "Acquiring Fund" and together the "Acquiring Funds") 101 Huntington Avenue Boston, MA 02199 This proxy statement and prospectus contains the information shareholders should know before voting on the proposed reorganizations. Please read it carefully and retain it for future reference. How Each Reorganization Will Work
- ------------------------------------------------------------------------------------------------------------------------------------ Acquired Fund Acquiring Fund Shareholders Entitled to Vote - ------------------------------------------------------------------------------------------------------------------------------------ Proposal 1 Active Bond Fund Bond Fund Active Bond Fund shareholders - ------------------------------------------------------------------------------------------------------------------------------------ Proposal 2 Independence Balanced Fund Balanced Fund Independence Balanced Fund shareholders - ------------------------------------------------------------------------------------------------------------------------------------ Proposal 3 International Equity Fund International Fund International Equity Fund shareholders - ------------------------------------------------------------------------------------------------------------------------------------ Proposal 4 Medium Capitalization Growth Fund Mid Cap Growth Fund Medium Capitalization Growth Fund shareholders - ------------------------------------------------------------------------------------------------------------------------------------ Proposal 5 Small Cap Equity Fund Y Small Cap Equity Fund Small Cap Equity Fund Y shareholders - ------------------------------------------------------------------------------------------------------------------------------------
o Each Acquired Fund will transfer all of its assets to the corresponding Acquiring Fund. Each Acquiring Fund will assume the corresponding Acquired Fund's liabilities. o Each Acquiring Fund will issue Class I shares to the corresponding Acquired Fund in an amount equal to the value of the Acquired Fund's shares. These shares will be distributed to Acquired Fund shareholders in proportion to their holdings on the reorganization date. o Each Acquired Fund will be liquidated and fund shareholders will become shareholders of the corresponding Acquiring Fund. o The reorganization will be tax-free to shareholders. Shares of the Acquiring Funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other depository institution. These shares are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Shares of the Acquiring Funds have not been approved or disapproved by the Securities and Exchange Commission. The Securities and Exchange Commission has not passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. 5 Why Each Acquired Fund's Trustees are Recommending the Reorganizations The Acquired Funds' trustees believe that reorganizing each fund into a larger fund with similar investment policies will enable the shareholders of the funds to benefit from increased diversification, the ability to achieve better net prices on securities trades and economies of scale that may contribute to a lower expense ratio. Therefore, the trustees recommend that Acquired Fund shareholders vote FOR the reorganization. - -------------------------------------------------------------------------------- Where to Get More Information - -------------------------------------------------------------------------------- Prospectuses for the Acquiring In the same envelope as this proxy Funds dated March 1, 2002. statement and prospectus. Incorporated by reference into this proxy statement and prospectus. - --------------------------------------- Acquiring Fund annual report and Bond Fund's semi-annual report to shareholders. - -------------------------------------------------------------------------------- Prospectuses for the Acquired On file with the Securities and Funds dated July 2, 2001. The Exchange Commission ("SEC") and Acquired Funds' annual and available at no charge by calling semiannual reports to 1-888-972-8696. Incorporated by shareholders. reference into this proxy statement and prospectus. - --------------------------------------- A statement of additional information dated April 15, 2002. It contains additional information about the Acquired Funds and the Acquiring Fund. - -------------------------------------------------------------------------------- The date of this proxy statement and prospectus is April 15, 2002. 6 TABLE OF CONTENTS Page INTRODUCTION PROPOSAL 1 - ACTIVE BOND FUND Summary Investment risks Proposal To Approve The Agreement And Plan Of Reorganization PROPOSAL 2 - INDEPENDENCE BALANCED FUND Summary Investment risks Proposal To Approve The Agreement And Plan Of Reorganization PROPOSAL 3 - INTERNATIONAL FUND Summary Investment risks Proposal To Approve The Agreement And Plan Of Reorganization PROPOSAL 4 - MEDIUM CAPITALIZATION GROWTH FUND Summary Investment risks Proposal To Approve The Agreement And Plan Of Reorganization PROPOSAL 5 - SMALL CAP EQUITY FUND Y Summary Investment risks Proposal To Approve The Agreement And Plan Of Reorganization FURTHER INFORMATION ON EACH REORGANIZATION CAPITALIZATION ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES BOARDS' EVALUATION AND RECOMMENDATION VOTING RIGHTS AND REQUIRED VOTE INFORMATION CONCERNING THE MEETING OWNERSHIP OF SHARES OF THE FUNDS EXPERTS AVAILABLE INFORMATION EXHIBIT A - FORM OF AGREEMENT AND PLAN OF REORGANIZATION INTRODUCTION This proxy statement and prospectus is being used by the Acquired Funds' board of trustees to solicit proxies to be voted at a special meeting of each Acquired Fund's shareholders. This meeting will be held at 101 Huntington Avenue, Boston, Massachusetts on Wednesday, May 29, 2002 at 9:00 a.m., Eastern Time. The purpose of the meeting is to consider proposals to approve Agreements and Plans of Reorganization providing for the reorganization of the Acquired Funds into the Acquiring Funds. This proxy statement and prospectus is being mailed to your fund's shareholders on or about April 15, 2002. For each proposal, this proxy statement and prospectus includes information that is specific to that proposal, including a summary of more complete information appearing later in the proxy statement. The information beginning on page ___ is relevant to all proposals. Please read the sections of the proxy statement related specifically to your fund(s), as well as the information relevant to all proposals, carefully, as well as Exhibit A and the enclosed documents. Who is Eligible to Vote? Shareholders of record on March 15, 2002 are entitled to attend and vote at the meeting or any adjourned meeting. Each share is entitled to one vote. Shares represented by properly executed proxies, unless revoked before or at the meeting, will be voted according to shareholders' instructions. If you sign a proxy but do not fill in a vote, your shares will be voted to approve the Agreement and Plan of Reorganization. If any other business comes before the meeting, your shares will be voted at the discretion of the persons named as proxies. 7 PROPOSAL 1 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN ACTIVE BOND FUND AND BOND FUND A proposal to approve an Agreement and Plan of Reorganization between Active Bond Fund and Bond Fund. Under this Agreement, Active Bond Fund would transfer all of its assets to Bond Fund in exchange for Class I shares of Bond Fund. These shares would be distributed proportionately to the shareholders of Active Bond Fund. Bond Fund would also assume Active Bond Fund's liabilities. Active Bond Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of Active Bond Fund to Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------ Active Bond Fund Bond Fund - ------------------------------------------------------------------------------------------------------------------------------------ Business The fund is a diversified series of John The fund is a diversified series of John Hancock Institutional Series Trust. The trust Hancock Sovereign Bond Fund (the "Trust"). The is an open-end investment company organized as trust is an open-end investment company a Massachusetts business trust. organized as a Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------------------------ Net assets as of $9.1 million $1,433.5 million December 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Investment adviser Investment Adviser: Investment Adviser: and portfolio John Hancock Advisers, LLC John Hancock Advisers, LLC managers Portfolio managers: Portfolio managers: James K. Ho, CFA James K. Ho, CFA -Executive Vice President of adviser -Executive Vice President of adviser -Joined fund team in 1995 -Joined fund team in 1988 -Joined adviser in 1985 -Joined adviser in 1985 -Began business career in 1977 -Began business career in 1977 Benjamin A. Matthews Benjamin A. Matthews -Vice President of adviser -Vice President of adviser -Joined fund team in 1995 -Joined fund team in 1995 -Joined adviser in 1995 -Joined adviser in 1995 -Began business career in 1970 -Began business career in 1970 - ------------------------------------------------------------------------------------------------------------------------------------ Investment objective The fund seeks a high rate of total return The fund seeks to generate a high level of consistent with prudent investment risk. This current income consistent with prudent objective can be changed without shareholder investment risk. approval. - ------------------------------------------------------------------------------------------------------------------------------------ Primary investments The fund normally invests at least 80% of The fund normally invests at least 80% of its assets in a diversified portfolio of assets in a diversified portfolio of bonds and investment-grade debt securities. These other debt securities. These include corporate include corporate bonds and debentures as well bonds and debentures as well as U.S. as U.S. government and agency securities. government and agency securities. Most of these securities are investment grade. - ------------------------------------------------------------------------------------------------------------------------------------ Junk bonds The fund may invest up to 20% of assets in The fund may invest up to 25% of assets in junk bonds rated as low as CC/Ca and their junk bonds rated as low as CC/Ca and their unrated equivalents. unrated equivalents. - ------------------------------------------------------------------------------------------------------------------------------------ Foreign securities The fund may invest up to 25% of total assets The fund may invest up to 25% of total assets in U.S. dollar (excluding U.S. in U.S. dollar-denominated foreign securities dollar-denominated Canadian securities) and (excluding U.S. dollar-denominated Canadian foreign currency denominated securities of securities). foreign issuers. - ------------------------------------------------------------------------------------------------------------------------------------ Mortgage-backed Each fund invests in mortgage-backed and asset-backed securities. and asset-backed securities - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash Under normal conditions, each fund does not invest more than 10% of assets in cash or cash equivalents. equivalents - ------------------------------------------------------------------------------------------------------------------------------------
8 - ------------------------------------------------------------------------------------------------------------------------------------ Average maturity There is no limit on either fund's average maturity. - ------------------------------------------------------------------------------------------------------------------------------------ Diversification The fund is diversified and, with respect to The fund is diversified and cannot invest more 75% of total assets, cannot invest more than than 5% of total assets in securities of a 5% of total assets in securities of a single single issuer. issuer. - ------------------------------------------------------------------------------------------------------------------------------------ Derivatives The funds may invest in certain derivatives (investments whose value is based on indexes, securities or currencies). - ------------------------------------------------------------------------------------------------------------------------------------ Temporary defensive In abnormal market conditions, the fund may In abnormal circumstances, the fund may invest positions temporarily invest in investment-grade short-term extensively in investment-grade short-term securities. In these and other cases, the fund securities. In these and other cases, the fund might not achieve its goal. might not achieve its investment goal. - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ SHARES - ------------------------------------------------------------------------------------------------------------------------------------ Active Bond Fund Bond Fund - Class I - ------------------------------------------------------------------------------------------------------------------------------------ Sales charge Shares are offered with no sales charge. - ------------------------------------------------------------------------------------------------------------------------------------ Distribution and Shares are not subject to a 12b-1 distribution fee. Service (12b-1) fee - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ BUYING, SELLING AND EXCHANGING SHARES - ------------------------------------------------------------------------------------------------------------------------------------ Both Active Bond Fund and Bond Fund - Class I - ------------------------------------------------------------------------------------------------------------------------------------ Buying shares Investors may buy shares at their public offering price through a financial representative or the funds' transfer agent, John Hancock Signature Services, Inc. After March 15, 2002, investors will not be allowed to open new accounts in Active Bond Fund but can add to existing accounts. - ------------------------------------------------------------------------------------------------------------------------------------ Minimum initial $10,000. No minimum investment for retirement plans with at least 350 eligible employees. investment - ------------------------------------------------------------------------------------------------------------------------------------ Exchanging Shareholders may exchange their shares for Class I shares of other John Hancock funds, or for shares of any John shares Hancock Institutional Fund. - ------------------------------------------------------------------------------------------------------------------------------------ Selling shares Shareholders may sell their shares by submitting a proper written or telephone request to John Hancock Signature Services, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value All purchases, exchanges and sales are made at a price based on the next determined net asset value per share (NAV) of the fund. Both funds' NAVs are determined at the close of regular trading on the New York Stock Exchange, which is normally 4:00 p.m. Eastern Time. - ------------------------------------------------------------------------------------------------------------------------------------
The Funds' Expenses Shareholders of both funds pay various expenses, either directly or indirectly. The expense table appearing below shows the expenses for the twelve-month period ended November 30, 2001, adjusted to reflect any changes. Bond Fund's Class I shares began on September 4, 2001 and expenses were projected as if Class I had been in existence for the entire year. Future expenses may be greater or less. The examples contained in the expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. Pro Forma Expenses The following expense table shows the pro forma expenses of Bond Fund for the year ended November 30, 2001 assuming that a reorganization with Active Bond Fund had occurred December 1, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended November 30, 2001, adjusted to reflect any changes. Bond Fund's Class I shares began on September 4, 2001 and expenses were projected as if Class I had been in existence for the entire year. Bond Fund's actual expenses after the reorganization may be greater or less than those shown. 9 The example contained in the pro forma expense table shows what you would have paid on a $10,000 investment if the reorganization had occurred on December 1, 2000. The example assumes that you had reinvested all dividends and that the average annual return was 5%. The pro forma example is for comparison purposes only and is not a representation of Bond Fund's actual expenses or returns, either past or future.
Bond Fund Class I (PRO FORMA for the year ended 11/30/01) (Assuming Active reorganization Bond Bond Fund with Fund Class I Active Bond Fund) Shareholder transaction expenses - ------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a % of purchase price) none none none Maximum sales charge imposed on reinvested dividends none none none Maximum deferred sales charge (load) as a % of purchase or sale price, none none none whichever is less Redemption fee none none none Exchange fee none none none Annual fund operating expenses (as a % of average net assets) - ------------------------------------------------------------------------------------------------------------------------------- Management fee 0.50% 0.50% 0.50% Distribution and service (12b-1) fee none none none Other expenses 1.05% 0.11% 0.11% Total fund operating expenses 1.55% 0.61% 0.61% Expense reduction(1) 0.95% none none Net fund operating expenses 0.60% 0.61% 0.61% Expenses - ------------------------------------------------------------------------------------------------------------------------------- Year 1 $ 61 $ 62 $ 62 Year 3 $ 502 $195 $195 Year 5 $ 970 $340 $340 Year 10 $2,264 $762 $762
(1) The Adviser has agreed to limit Active Bond Fund's total operating expenses to 0.60% of the fund's average daily net assets at least until June 30, 2002. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on June 7, 2002, but may occur on any later date before December 31, 2002. Active Bond Fund will transfer all of its assets to Bond Fund. Bond Fund will assume Active Bond Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern Time, on the reorganization date. o Bond Fund will issue to Active Bond Fund Class I shares in an amount equal to the net assets attributable to Active Bond Fund's shares. These shares will immediately be distributed to Active Bond Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of Active Bond Fund will end up as Class I shareholders of Bond Fund. o After the shares are issued, Active Bond Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to the funds. 10 The following diagram shows how the reorganization would be carried out. ---------------- ------------------ Active Bond Fund Bond Fund receives transfers assets Active Bond Fund assets & assumes & liabilities assets and liabilities of To Bond Fund liabilities Active Bond Fund ---------------- ------------------ ---------------- -------------- Active Bond Fund Issues Class I shareholders Shares ---------------- -------------- Active Bond Fund receives Bond Fund Class I shares and distributes them to Active Bond Fund shareholders Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: - --------------------------------------------------------------------------- Fund Asset Breakpoints Active Bond Fund - --------------------------------------------------------------------------- First $1.5 Billion 0.50% - --------------------------------------------------------------------------- Amount over $1.5 Billion 0.45% - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- Fund Asset Breakpoints Bond Fund - --------------------------------------------------------------------------- First $1.5 Billion 0.50% - --------------------------------------------------------------------------- Next $500 Million 0.45% - --------------------------------------------------------------------------- Next $500 Million 0.40% - --------------------------------------------------------------------------- Amount over $2.5 Billion 0.35% - --------------------------------------------------------------------------- Bond Fund's management fee rate of 0.50% and its pro forma management fee rate of 0.50% are the same as Active Bond Fund's management fee rate of 0.50%. Bond Fund's other expenses of 0.11% and its pro forma other expenses of 0.11% are lower than your fund's other expenses of 1.05%. Bond Fund's current annual expense ratio (equal to 0.61% of average net assets) and its pro forma expense ratio (equal to 0.61% of average net assets) are both slightly higher than Active Bond Fund's expense ratio (equal to 0.60% of average net assets) after the expense reduction. However, Active Bond Fund's expense ratio before the expense reduction is 1.55% and there is no guarantee that the expense reduction will be extended beyond June 30, 2002. INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table compares the risks affecting each fund.
- ------------------------------------------------------------------------------------------------------------------------------------ Active Bond Fund Bond Fund - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate risk When interest rates rise, bond prices usually fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. - ------------------------------------------------------------------------------------------------------------------------------------ Prepayment (call) If interest rate movements cause the fund's mortgage-related and callable securities to be paid off and extension risks earlier or later than expected, the fund's share price or yield could be hurt. - ------------------------------------------------------------------------------------------------------------------------------------ Credit risk The fund could lose money if the credit rating of any bond in its portfolio is downgraded or if the issuer of the bond defaults on its obligations. In general, lower-rated bonds involve more credit risk. The prices of lower-rated bonds may also be more volatile and more sensitive to adverse economic developments. - ------------------------------------------------------------------------------------------------------------------------------------ Sector If the fund concentrates in certain sectors of the bond market, its performance could be worse than that concentration risk of the overall bond market. - ------------------------------------------------------------------------------------------------------------------------------------
11 - ------------------------------------------------------------------------------------------------------------------------------------ Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ------------------------------------------------------------------------------------------------------------------------------------ Foreign Foreign investments involve additional risks, including potentially inaccurate financial information and securities risk social or political instability. The prices of foreign bonds may also be more volatile and more sensitive to adverse economic developments occuring outside the U.S. - ------------------------------------------------------------------------------------------------------------------------------------ Foreign currency risk Unfavorable foreign currency exchange rates could Not applicable because the fund invests only reduce the value of bonds denominated in foreign in U.S. dollar-denominated bonds. currencies. - ------------------------------------------------------------------------------------------------------------------------------------ Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------------------------------------------------------------ Liquidity and In a down or unstable market, the fund's investments could become harder to value accurately or to sell at valuation risks a fair price. - ------------------------------------------------------------------------------------------------------------------------------------ Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - ------------------------------------------------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization You are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on June 7, 2002 but may occur on any later date before December 31, 2002. Active Bond Fund will transfer all of its assets to Bond Fund and Bond Fund will assume all of Active Bond Fund's liabilities. This will result in the addition of Active Bond Fund's assets to Bond Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern Time, on the reorganization date. o Bond Fund will issue to Active Bond Fund Class I shares in an amount equal to the net assets attributable to Active Bond Fund's shares. As part of the liquidation of Active Bond Fund, these shares will immediately be distributed to shareholders of record of Active Bond Fund in proportion to their holdings on the reorganization date. As a result, shareholders of Active Bond Fund will end up as Class I shareholders of Bond Fund. o After the shares are issued, the existence of Active Bond Fund will be terminated. Reasons for the Proposed Reorganization The board of trustees of Active Bond Fund believes that the proposed reorganization will be advantageous to the shareholders of Active Bond Fund for several reasons. The board of trustees considered the following matters, among others, in approving the proposal. First, that Active Bond Fund does not have sufficient assets to justify maintaining this fund as a separate investment portfolio (i.e. this fund had $9.1 million in assets as of December 31, 2001). Active Bond Fund, which as been in existence for approximately seven years, has not grown in asset size and in light of the history of the fund, there is no foreseeable potential for future growth. The investment adviser has subsidized Active Bond Fund by absorbing expenses since the inception of the fund. Without these subsidies, Active Bond Fund would have had a substantially higher expense ratio and lower performance. Second, that shareholders may be better served by a fund offering greater diversification. Bond Fund has a larger asset size than your fund and invests in the same types of securities. Combining the funds' assets into a single investment portfolio will afford greater diversification, making investors less vulnerable to weakness in any single sector of the bond market. Thrid, that a combined fund offers economies of scale that may lead to lower per share expenses. Both funds incur costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. Many of these expenses are duplicative and there may be an opportunity to reduce Bond Fund's expense ratio over time because of economies of scale if the funds are combined. 12 The board of trustees of Bond Fund considered that the reorganization presents an excellent opportunity for Bond Fund to acquire investment assets without the obligation to pay commissions or other transaction costs that a fund normally incurs when purchasing securities. This opportunity provides an economic benefit to Bond Fund and its shareholders. The boards of both funds also considered that the adviser and the funds' distributor will benefit from the reorganization. For example, the adviser might realize time savings from a consolidated portfolio management effort and from the need to prepare fewer reports and regulatory filings as well as prospectus disclosure for one fund instead of two. The boards believe, however, that these savings will not amount to a significant economic benefit to the adviser or distributor. Comparative Fees and Expense Ratios. As discussed above, the advisory fee rates paid by Active Bond Fund are the same as the rates paid by Bond Fund. Bond Fund's management fee rate of 0.50% and pro forma management fee rate of 0.50% are the same as Active Bond Fund's management fee rate of 0.50%. Bond Fund's other expenses of 0.11% and its pro forma other expenses of 0.11%, are lower than Active Bond Fund's other expenses of 1.05%. Bond Fund's current annual expense ratio (0.61% of average net assets) and pro forma expense ratio (0.61% of average net assets) are both slightly higher than Active Bond Fund's current expense ratio (0.60% of average net assets) after the expense reduction. However, Active Bond Fund's expense ratio before the expense reduction is 1.55% and there is no guarantee that the expense reduction will be extended beyond June 30, 2002. Comparative Performance. The trustees also took into consideration the relative performance of Active Bond Fund and Bond Fund as of November 30, 2001. 13 PROPOSAL 2 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN INDEPENDENCE BALANCED FUND AND BALANCED FUND A proposal to approve an Agreement and Plan of Reorganization between Independence Balanced Fund and Balanced Fund. Under this Agreement, Independence Balanced Fund would transfer all of its assets to Balanced Fund in exchange for Class I shares of Balanced Fund. These shares would be distributed proportionately to the shareholders of Independence Balanced Fund. Balanced Fund would also assume Independence Balanced Fund's liabilities. Independence Balanced Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of Independence Balanced Fund to Balanced Fund
- ----------------------------------------------------------------------------------------------------------------------------------- Independence Balanced Fund Balanced Fund - ----------------------------------------------------------------------------------------------------------------------------------- Business A diversified series of John Hancock A diversified series of John Hancock Investment Institutional Series Trust. The Trust is an Trust. The Trust is an open-end investment open-end investment management company organized management company organized as a Massachusetts as a Massachusetts Business Trust. Business Trust. - ----------------------------------------------------------------------------------------------------------------------------------- Net assets as of $16.9 million $184.4 million December 31, 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Investment adviser, Investment Adviser: Investment Adviser: subadviser and John Hancock Advisers, LLC John Hancock Advisers, LLC portfolio managers Subadviser: Portfolio Managers: Independence Investment LLC John F. Snyder, III -A subsidiary of John Hancock Financial -Executive Vice President of adviser Services, Inc. -Joined fund team in 1994 -Founded in 1982 -Joined adviser in 1991 -Supervised by the adviser -Began business career in 1971 Portfolio Managers: Barry H. Evans, CFA Team responsible for day-to-day investment -Senior Vice President of adviser management -Joined fund team in 1996 -Joined adviser in 1986 -Began business career in 1986 Peter M. Schofield, CFA -Vice President of adviser -Joined fund team in 1996 -Joined adviser in 1996 -Portfolio manager at Geewax, Terker & Co. (1984-1996) Began business career in 1984 - ----------------------------------------------------------------------------------------------------------------------------------- Investment objective The fund seeks above-average total return through The fund seeks current income, long-term growth of capital appreciation and income. This objective capital and income and preservation of capital. can be changed without shareholder approval. This objective can be changed without shareholder approval. - -----------------------------------------------------------------------------------------------------------------------------------
14 - ----------------------------------------------------------------------------------------------------------------------------------- Primary Investments The fund invests in a diversified portfolio of The fund allocates its investments among a investment-grade bonds and primarily diversified mix of debt and equity securities. large-capitalization stocks. The bond The fund normally invests at least 25% of assets portfolio's risk profile is substantially similar in equity securities and at least 25% of assets to that of the Lehman Brothers Aggregate Bond in senior debt securities. Index and the stock portfolio's risk profile is substantially similar to that of the Standard & At least 80% of the fund's common stock investments Poor's 500 Index. are "dividend performers." These are companies that have typically increased their dividend The fund invests at least 25% of assets in senior payments over time, or which the managers believe debt securities and, in normal market conditions, demonstrate the potential for above-average at least 25% of assets in stocks. The managers stability of growth of earnings and dividends. adjust the fund's asset mix according to changing Historically, these companies have tended to have market and economic conditions. In normal market large or medium market capitalizations. conditions, the fund is almost entirely invested in stocks and bonds. The fund's investments in bonds of any maturity are primarily investment grade (rated BBB/Baa or above and their unrated equivalents). - ----------------------------------------------------------------------------------------------------------------------------------- Junk bonds The fund does not invest in junk bonds (bonds The fund may invest up to 20% of assets in junk rated as low as C and their unrated equivalents). bonds rated below BBB/Baa and their unrated equivalents. - ----------------------------------------------------------------------------------------------------------------------------------- Foreign Securities The fund may invest in U.S. dollar-denominated The fund may invest up to 35% of assets in U.S. foreign securities. dollar and foreign currency denominated securities of foreign issuers. - ----------------------------------------------------------------------------------------------------------------------------------- Mortgage-backed and Each fund may invest in mortgage-backed and asset-backed securities. asset-backed securities - ----------------------------------------------------------------------------------------------------------------------------------- Diversification Each fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total assets in securities of a single issuer. - ----------------------------------------------------------------------------------------------------------------------------------- Derivatives The fund does not normally use derivatives. The fund may make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). - ----------------------------------------------------------------------------------------------------------------------------------- Temporary defensive In abnormal market conditions, the fund may In abnormal market conditions, the fund may positions temporarily invest more than 75% of assets in temporarily invest extensively in investment-grade investment-grade short-term securities. In these short-term securities. In these and other cases, and other cases, the fund might not achieve its the fund might not achieve its goal. goal. - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- SHARES - ----------------------------------------------------------------------------------------------------------------------------------- Independence Balanced Fund Balanced Fund - Class I - ----------------------------------------------------------------------------------------------------------------------------------- Sales charge Shares are offered with no sales charge. - ----------------------------------------------------------------------------------------------------------------------------------- Distribution and Shares are not subject to a 12b-1 distribution fee. Service (12b-1) fee - -----------------------------------------------------------------------------------------------------------------------------------
15 - -------------------------------------------------------------------------------- BUYING, SELLING AND EXCHANGING SHARES - -------------------------------------------------------------------------------- Both Independence Balanced Fund and Balanced Fund - Class I - -------------------------------------------------------------------------------- Buying shares Investors may buy shares at their public offering price through a financial representative or the funds' transfer agent, John Hancock Signature Services, Inc. After March 15, 2002, investors will not be allowed to open new accounts in Independence Balanced Fund but can add to existing accounts. - -------------------------------------------------------------------------------- Minimum initial $10,000. No minimum investment for retirement plans with investment at least 350 eligible employees. - -------------------------------------------------------------------------------- Exchanging shares Shareholders may exchange their shares for Class I shares of other John Hancock funds, or for shares of any John Hancock Institutional Fund. - -------------------------------------------------------------------------------- Selling shares Shareholders may sell their shares by submitting a proper written or telephone request to John Hancock Signature Services, Inc. - -------------------------------------------------------------------------------- Net asset value All purchases, exchanges and sales are made at a price based on the next determined net asset value per share (NAV) of the fund. Both funds' NAVs are determined at the close of regular trading on the New York Stock Exchange, which is normally 4:00 p.m. Eastern Time. - -------------------------------------------------------------------------------- The Funds' Expenses Shareholders of both funds pay various expenses, either directly or indirectly. The expense table appearing below shows the expenses for the twelve-month period ended December 31, 2001, adjusted to reflect any changes. Balanced Fund's Class I shares have no operational history. As a result, expenses were projected based on expenses incurred by other classes of the Fund. Future expenses may be greater or less. The examples contained in the expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. Pro Forma Expenses The following expense table shows the pro forma expenses of Balanced Fund for the year ended December 31, 2001 assuming that a reorganization with Independence Balanced Fund had occurred January 1, 2001. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended December 31, 2001, adjusted to reflect any changes. Balanced Fund's Class I shares have no operational history. As a result, expenses were projected based on expenses incurred by other classes of the Fund. Balanced Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would have paid on a $10,000 investment if the reorganization had occurred on January 1, 2001. The example assumes that you had reinvested all dividends and that the average annual return was 5%. The pro forma example is for comparison purposes only and is not a representation of Balanced Fund's actual expenses or returns, either past or future. 16
Balanced Fund Class I (PRO FORMA for the year ended 12/31/01) (Assuming reorganization with Independence Balanced Independence Balanced Fund Fund Class I Balanced Fund) Shareholder transaction expenses - ------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a % of purchase none none none price) Maximum sales charge imposed on reinvested dividends none none none Maximum deferred sales charge (load) as a % of purchase or sale price, none none none whichever is less Redemption fee none none none Exchange fee none none none Annual fund operating expenses (as a % of average net assets) - ------------------------------------------------------------------------------------------------------------------------------- Management fee 0.70% 0.60% 0.60% Distribution and service (12b-1) fee none none none Other expenses 0.39% 0.15% 0.15% Total fund operating expenses 1.09% 0.75% 0.75% Expense reduction(1) 0.19% none none Net fund operating expenses 0.90% 0.75% 0.75% Expenses - ------------------------------------------------------------------------------------------------------------------------------- Year 1 $ 102 $ 77 $ 77 Year 3 $ 338 $ 240 $ 240 Year 5 $ 592 $ 417 $ 417 Year 10 $1,321 $ 930 $ 930
(1) The Adviser has agreed to limit Independence Balanced Fund's total operating expenses to 0.90% of the fund's average daily net assets at least until June 30, 2002. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on June 7, 2002, but may occur on any later date before December 31, 2002. Independence Balanced Fund will transfer all of its assets to Balanced Fund. Balanced Fund will assume Independence Balanced Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern Time, on the reorganization date. o Balanced Fund will issue to Independence Balanced Fund Class I shares in an amount equal to the net assets attributable to Independence Balanced Fund's shares. These shares will immediately be distributed to Independence Balanced Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of Independence Balanced Fund will end up as Class I shareholders of Balanced Fund. o After the shares are issued, Independence Balanced Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to the funds. 17 The following diagram shows how the reorganization would be carried out. ---------------- ------------------- Independence Balanced Fund Balanced Fund Independence receives assets & transfers assets Balanced Fund assumes liabilities & liabilities to assets and of Independence Balanced Fund liabilities Balanced Fund ---------------- ------------------- ------------- ------------- Independence Issue Balanced Fund Class I shareholders Shares ------------- ------------- Independence Balanced Fund receives Balanced Fund Class I shares and distributes them to Independence Balanced Fund shareholders Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: - ----------------------------------------------------------------- Fund Asset Breakpoints Independence Balanced Fund - ----------------------------------------------------------------- First $500 Million 0.70% - ----------------------------------------------------------------- Amount over $500 Million 0.65% - ----------------------------------------------------------------- - ----------------------------------------------------------------- Balanced Fund - ----------------------------------------------------------------- Fund Assets 0.60% - ----------------------------------------------------------------- Independence Investment, LLC ("Independence"), a wholly-owned subsidiary of John Hancock Financial Services, Inc., serves as subadviser to Independence Balanced Fund. In this capacity, Independence has primary responsibility for making investment decisions for Independence Balanced Fund's investment portfolio and placing orders with brokers and dealers to implement those decisions. Independence receives its compensation from the Adviser, and Independence Balanced Fund pays no subadvisory fees over and above the management fee it pays to the Adviser. Independence receives subadvisory fees from the Adviser at the following rate: 60% of the advisory fee received by the Adviser. Balanced Fund's management fee rate of 0.60% and its pro forma management fee rate of 0.60% are lower than Independence Balanced Fund's management fee rate of 0.70%. Balanced Fund's other expenses of 0.15% and its pro forma other expenses of 0.15% are lower than Independence Balanced Fund's other expenses of 0.39%. Balanced Fund's current annual expense ratio (equal to 0.75% of average net assets) and its pro forma expense ratio (equal to 0.75% of average net assets) are both lower than Independence Balanced Fund's expense ratio (equal to 0.90% of average net assets) after the expense reduction. Independence Balanced Fund's expense ratio before the expense reduction is 1.09% and there is no guarantee that the expense limitation will be extended beyond June 30, 2002. 18 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table compares the risks affecting each fund.
- ----------------------------------------------------------------------------------------------------------------------------------- Independence Balanced Fund Balanced Fund - ----------------------------------------------------------------------------------------------------------------------------------- Stock market risk The value of securities in the fund may go down in response to overall stock market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the fund concentrates in certain sectors, its performance could be worse than that of the overall stock market. - ----------------------------------------------------------------------------------------------------------------------------------- Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ----------------------------------------------------------------------------------------------------------------------------------- Investment The large capitalization stocks in which the fund The large and medium capitalization stocks in which category risk primarily invests could fall out of favor with the the fund primarily invests could fall out of favor market, causing the fund to underperform funds that with the market, causing the fund to underperform focus on small or medium capitalization stocks. funds that focus on small capitalization stocks. - ----------------------------------------------------------------------------------------------------------------------------------- Medium Not applicable because the fund's stock investments The fund's investments in medium capitalization capitalization are primarily large capitalization companies. companies may be subject to larger and more company risk erratic price movements than investments in large capitalization companies. - ----------------------------------------------------------------------------------------------------------------------------------- Interest When interest rates rise, bond prices usually fall. Generally, an increase in the fund's average maturity rate risk will make it more sensitive to interest rate risk. - ----------------------------------------------------------------------------------------------------------------------------------- Prepayment (call) If interest rate movements cause the fund's mortgage-related and callable securities to be paid off earlier and extension or later than expected, the fund's share price or yield could be hurt. risks - ----------------------------------------------------------------------------------------------------------------------------------- Credit risk The fund could lose money if the credit rating of The fund could lose money if the credit rating any bond in its portfolio is downgraded or if the of any bond in its portfolio is downgraded or if issuer of the bond defaults on its obligations. the issuer of the bond defaults on its obligations. In general, lower-rated bonds involve more credit risk. The prices of lower-rated bonds may also be more volatile and more sensitive to adverse economic developments. - ----------------------------------------------------------------------------------------------------------------------------------- Foreign Foreign investments involve additional risks, including potentially inadequate or inaccurate financial securities risk information and social or political instability. - ----------------------------------------------------------------------------------------------------------------------------------- Foreign Not applicable because the fund invests only in Unfavorable foreign currency exchange rates could currency risk U.S. dollar-denominated securities. reduce the value of securities denominated in foreign currencies. - ----------------------------------------------------------------------------------------------------------------------------------- Derivatives risk Not applicable because the fund does not use Certain derivative instruments can produce derivatives. disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ----------------------------------------------------------------------------------------------------------------------------------- Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - -----------------------------------------------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization You are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: 19 o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on June 7, 2002 but may occur on any later date before December 31, 2002. Independence Balanced Fund will transfer all of its assets to Balanced Fund and Balanced Fund will assume all of Independence Balanced Fund's liabilities. This will result in the addition of Independence Balanced Fund's assets to Balanced Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern Time, on the reorganization date. o Balanced Fund will issue to Independence Balanced Fund Class I shares in an amount equal to the net assets attributable to Independence Balanced Fund's shares. As part of the liquidation of Independence Balanced Fund, these shares will immediately be distributed to shareholders of record of Independence Balanced Fund in proportion to their holdings on the reorganization date. As a result, shareholders of Independence Balanced Fund will end up as Class I shareholders of Balanced Fund. o After the shares are issued, the existence of Independence Balanced Fund will be terminated. Reasons for the Proposed Reorganization The board of trustees of Independence Balanced Fund believes that the proposed reorganization will be advantageous to the shareholders of Independence Balanced Fund for several reasons. The board of trustees considered the following matters, among others, in approving the proposal. First, that Independence Balanced Fund does not have sufficient assets to justify maintaining this fund as a separate investment portfolio (i.e. the fund had $16.9 million in assets as of December 31, 2001). Independence Balanced Fund, which as been in existence for approximately six years, has not grown in asset size and in light of the history of the fund, there is no foreseeable potential for future growth. The investment adviser has subsidized Independence Balanced Fund by absorbing expenses since the inception of the fund. Without these subsidies, Independence Balanced Fund would have had a higher expense ratio and lower performance. Second, that Balanced Fund's total expenses are lower than Independence Balanced Fund's total expenses. As a result of the reorganization, shareholders of Independence Balanced Fund will experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay. Third, that the reorganization would permit Independence Balanced Fund's shareholders to pursue similar investment goals in a larger fund. A larger fund should give the investment adviser greater flexibility and the ability to select a larger number of portfolio securities, resulting in increased diversification. Fourth, that a combined fund offers economies of scale that may lead to lower per share expenses. Both funds incur costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. Many of these expenses are duplicative and there may be an opportunity to reduce Balanced Fund's expense ratio over time because of economies of scale if the funds are combined. The board of trustees of Balanced Fund considered that the reorganization presents an excellent opportunity for Balanced Fund to acquire investment assets without the obligation to pay commissions or other transaction costs that a fund normally incurs when purchasing securities. This opportunity provides an economic benefit to Balanced Fund and its shareholders. The boards of both funds also considered that the adviser and the funds' distributor will benefit from the reorganization. For example, the adviser might realize time savings from a consolidated portfolio management effort and from the need to prepare fewer reports and regulatory filings as well as prospectus disclosure for one fund instead of two. The boards believe, however, that these savings will not amount to a significant economic benefit to the adviser or distributor. Comparative Fees and Expense Ratios. As discussed above, the advisory fee rates paid by your fund are higher than the rates paid by Balanced Fund. Balanced Fund's management fee rate of 0.60% and pro forma management fee rate of 0.60%, are lower than Independence Balanced Fund's management fee rate of 0.70%. Balanced Fund's other expenses of 0.15% and its pro forma other expenses of 0.15% are lower than Independence Balanced Fund's other expenses of 0.39%. Balanced Fund's current annual expense ratio (0.75% of average net assets) and pro forma expense ratio (0.75% of average net assets) are both lower than Independence Balanced Fund's current expense ratio (0.90% of average net assets) after the expense reduction. Independence Balanced Fund's expense ratio before the expense reduction is 1.09% and there is no guarantee that the expense limitation will be extended beyond June 30, 2002. 20 Comparative Performance. The trustees also took into consideration the relative performance of Independence Balanced Fund and Balanced Fund as of December 31, 2001. PROPOSAL 3 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN INTERNATIONAL EQUITY FUND AND INTERNATIONAL FUND A proposal to approve an Agreement and Plan of Reorganization between International Equity Fund and International Fund. Under this Agreement, International Equity Fund would transfer all of its assets to International Fund in exchange for Class I shares of International Fund. These shares would be distributed proportionately to the shareholders of International Equity Fund. International Fund would also assume International Equity Fund's liabilities. International Equity Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of International Equity Fund to International Fund
- ------------------------------------------------------------------------------------------------------------------------------------ International Equity Fund International Fund - ------------------------------------------------------------------------------------------------------------------------------------ Business A diversified series of John Institutional Series A diversified series of John Hancock Investment Trust Trust. The trust is an open-end investment company III. The trust is an open-end investment company organized as a Massachusetts business trust. organized as a Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------------------------ Net assets as of $1.8 million $15.4 million December 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Investment adviser Investment Adviser: Investment Adviser: and subadviser John Hancock Advisers, LLC John Hancock Advisers, LLC Subadviser: Subadviser: Nicholas-Applegate Capital Management Nicholas-Applegate Capital Management -U.S. based team responsible for day-to-day -U.S. based team responsible for day-to-day investment management investment management -Managed fund since December 2000 -Managed fund since December 2000 -Founded in 1984 -Founded in 1984 -Supervised by the adviser -Supervised by the adviser - ------------------------------------------------------------------------------------------------------------------------------------ Investment The fund seeks long-term growth of capital. This The fund seeks long-term growth of capital. This objective objective can be changed without shareholder objective can be changed without shareholder approval. approval. - ------------------------------------------------------------------------------------------------------------------------------------ Primary investments The fund invests at least 80% of assets in stocks of The fund invests at least 80% of assets in stocks of foreign companies. The fund does not maintain a foreign companies. The fund does not maintain a fixed fixed allocation of assets, either with respect to allocation of assets, either with respect to securities type or geography. The managers allocate securities type or geography. The managers allocate the fund's assets among securities of countries that the fund's assets among securities of countries that are expected to provide the best opportunities for are expected to provide the best opportunities for meeting the fund's investment objective. meeting the fund's investment objective. - ------------------------------------------------------------------------------------------------------------------------------------ Other investments Each fund may invest in American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"). - ------------------------------------------------------------------------------------------------------------------------------------ Emerging market Each fund may invest up to 30% of assets in emerging markets. securities - ------------------------------------------------------------------------------------------------------------------------------------ Diversification Each fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total assets in securities of a single issuer. In addition, each fund cannot invest more than 5% of total assets in any one security. - ------------------------------------------------------------------------------------------------------------------------------------ Derivatives Each fund may use of certain derivatives (investments whose value is based on indexes, securities, or currencies). - ------------------------------------------------------------------------------------------------------------------------------------ Temporary In abnormal market conditions, each fund may temporarily invest more than 20% of assets in investment-grade defensive positions short-term securities. In these and other cases, the fund might not achieve its goal. - ------------------------------------------------------------------------------------------------------------------------------------
21
- ------------------------------------------------------------------------------------------------------------------------------------ SHARES - ------------------------------------------------------------------------------------------------------------------------------------ International Equity Fund International Fund -- Class I - ------------------------------------------------------------------------------------------------------------------------------------ Sales charge Shares are offered with no sales charge. - ------------------------------------------------------------------------------------------------------------------------------------ Distribution and Shares are not subject to a 12b-1 distribution fee. Service (12b-1) fee - ------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- BUYING, SELLING AND EXCHANGING SHARES - ----------------------------------------------------------------------------------------------------------------------------------- Both International Equity Fund and International Fund -- Class I - ----------------------------------------------------------------------------------------------------------------------------------- Buying shares Investors may buy shares at their public offering price through a financial representative or the funds' transfer agent, John Hancock Signature Services, Inc. After March 15, 2002, investors will not be allowed to open new accounts in International Equity Fund but can add to existing accounts. - ----------------------------------------------------------------------------------------------------------------------------------- Minimum initial $10,000. No minimum investment for retirement plans with at least 350 eligible employees. investment - ----------------------------------------------------------------------------------------------------------------------------------- Exchanging shares Shareholders may exchange their shares for Class I shares of other John Hancock funds, or for shares of any John Hancock Institutional Fund. - ----------------------------------------------------------------------------------------------------------------------------------- Selling shares Shareholders may sell their shares by submitting a proper written or telephone request to John Hancock Signature Services, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Net asset value All purchases, exchanges and sales are made at a price based on the next determined net asset value per share (NAV) of the fund. Both funds' NAVs are determined at the close of regular trading on the New York Stock Exchange, which is normally 4:00 p.m. Eastern Time. - -----------------------------------------------------------------------------------------------------------------------------------
The Funds' Expenses Shareholders of both funds pay various expenses, either directly or indirectly. The expense table appearing below shows the expenses for the twelve-month period ended October 31, 2001, adjusted to reflect any changes. International Fund's Class I shares have no operational history. As a result, expenses were projected based on expenses incurred by other classes of the Fund. Future expenses may be greater or less. The examples contained in the expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. Pro Forma Expenses The following expense table shows the pro forma expenses of International Fund for the year ended October 31, 2001 assuming that a reorganization with International Equity Fund had occurred November 1, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended October 31, 2001, adjusted to reflect any changes. International Fund's Class I shares have no operational history. As a result, expenses were projected based on expenses incurred by other classes of the Fund. International Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would have paid on a $10,000 investment if the reorganization had occurred on November 1, 2000. The example assumes that you had reinvested all dividends and that the average annual return was 5%. The pro forma example is for comparison purposes only and is not a representation of International Fund's actual expenses or returns, either past or future. 22
International Fund Class I (PRO FORMA for the year ended 10/31/01) (Assuming reorganization with International International International Equity Fund Fund Class I Equity Fund) Shareholder transaction expenses - ------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a % of purchase none none none price) Maximum sales charge imposed on reinvested dividends none none none Maximum deferred sales charge (load) as a % of purchase or sale none none none price, whichever is less Redemption fee none none none Exchange fee none none none Annual fund operating expenses (as a % of average net assets) - ------------------------------------------------------------------------------------------------------------------------------- Management fee 0.90% 1.00% 1.00% Distribution and service (12b-1) fee none none none Other expenses 3.28% 1.55% 1.42% Total fund operating expenses 4.18% 2.55% 2.42% Expense reduction 3.18%(1) 1.60%(2) 1.47%(2) Net fund operating expenses 1.00% 0.95% 0.95% Expenses - ------------------------------------------------------------------------------------------------------------------------------- Year 1 $ 102 $ 97 $ 97 Year 3 $ 979 $ 641 $ 614 Year 5 $1,870 $1,211 $1,157 Year 10 $4,162 $2,765 $2,644
(1) The Adviser has agreed to limit International Equity Fund's operating expenses to 1.00% of the fund's average daily net assets at least until June 30, 2002. (2) The adviser has agreed to limit International Fund's operating expenses, excluding 12b-1 and transfer agent fees, to 0.90% of the fund's average daily net assets at least until February 28, 2003. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on June 7, 2002, but may occur on any later date before December 31, 2002. International Equity Fund will transfer all of its assets to International Fund. International Fund will assume International Equity Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern Time, on the reorganization date. o International Fund will issue to International Equity Fund Class I shares in an amount equal to the net assets attributable to International Equity Fund's shares. These shares will immediately be distributed to International Equity Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of International Equity Fund will end up as Class I shareholders of International Fund. o After the shares are issued, International Equity Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to the funds. 23 The following diagram shows how the reorganization would be carried out. -------------------- ------------------- International Equity International Fund Fund transfers International receives assets & assets & liabilities Equity Fund assumes liabilities to International assets and of International Fund liabilities Equity Fund -------------------- ------------------- ------------- -------------- International Issues Equity Fund Class I shareholders Shares ------------- -------------- International Equity Fund receives Inernational Fund Class I shares and distributes them to International Equity Fund shareholders Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: - ------------------------------------------------------------------------- Fund Asset Breakpoints International Equity Fund - ------------------------------------------------------------------------- First $500 Million 0.900% - ------------------------------------------------------------------------- Amount over $500 Million 0.650% - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Fund Asset Breakpoints International Fund - ------------------------------------------------------------------------- First $250 Million 1.000% - ------------------------------------------------------------------------- Next $250 Million 0.800% - ------------------------------------------------------------------------- Next $250 Million 0.750% - ------------------------------------------------------------------------- Amount over $750 Million 0.625% - ------------------------------------------------------------------------- Nicholas-Applegate Capital Management ("Nicholas-Applegate") serves as subadviser to both the Acquired Fund and the Acquiring Fund. In this capacity, Nicholas-Applegate has primary responsibility for making investment decisions for each Fund's investment portfolio and placing orders with brokers and dealers to implement those decisions. Nicholas-Applegate receives its compensation from the Adviser, and the Funds pay no subadvisory fees over and above the management fee they pay to the Adviser. Nicholas-Applegate receives subadvisory fees from the Adviser at the same rate for the Acquired Fund and the Acquiring Fund: (i) 0.50% of the first $500 Million of the average daily net asset value of the Fund; and (ii) 0.45% of the average daily net asset value of the Fund in excess of $500 Million. International Fund's management fee rate of 1.00% and its pro forma management fee rate of 1.00% are higher than International Equity Fund's management fee rate of 0.90%. International Fund's other expenses of 1.55% and its pro forma other expenses of 1.42% are lower than International Equity Fund's other expenses of 3.28%. International Fund's current annual expense ratio (equal to 0.95% of average net assets) and its pro forma expense ratio (equal to 0.95% of average net assets) are both lower than International Equity Fund's expense ratio (equal to 1.00% of average net assets) after the expense reduction. Your fund's expense ratio before the expense reduction is 4.18%. International Fund's expense ratio before the expense reduction is 2.55%. 24 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table compares the risks affecting each fund.
- ----------------------------------------------------------------------------------------------------------------------------------- International Equity Fund International Fund - ----------------------------------------------------------------------------------------------------------------------------------- Stock The value of securities in the fund may go down in response to overall stock market movements. Markets market risk tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the fund concentrates in certain sectors or geographic regions, its performance could be worse than that of the overall stock market. - ----------------------------------------------------------------------------------------------------------------------------------- Foreign Foreign investments are riskier than investments in U.S. companies. The special risks of foreign investment risk investments include: o Economic, political and social instability o Lack of reliable, publicly available information o Limited or excessive government regulation o Adverse governmental actions ranging from tax law changes to the collapse of governments o Lack of liquidity o Foreign currency exchange rate fluctuations o Restrictions on currency transfers o Foreign ownership limits These risks are more severe in emerging market countries. - ----------------------------------------------------------------------------------------------------------------------------------- Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ----------------------------------------------------------------------------------------------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ----------------------------------------------------------------------------------------------------------------------------------- Liquidity and In a down or unstable market, the fund's investments could become harder to value accurately or to sell at valuation risks a fair price. - ----------------------------------------------------------------------------------------------------------------------------------- Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - -----------------------------------------------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization You are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on June 7, 2002 but may occur on any later date before December 31, 2002. International Equity Fund will transfer all of its assets to International Fund and International Fund will assume all of International Equity Fund's liabilities. This will result in the addition of International Equity Fund's assets to International Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern Time, on the reorganization date. o International Fund will issue to International Equity Fund Class I shares in an amount equal to the net assets attributable to International Equity Fund's shares. As part of the liquidation of International Equity Fund, these shares will immediately be distributed to shareholders of record of International Equity Fund in proportion to their holdings on the reorganization date. As a result, shareholders of International Equity Fund will end up as shareholders of International Fund. o After the shares are issued, the existence of International Equity Fund will be terminated. Reasons for the Proposed Reorganization The board of trustees of International Equity Fund believes that the proposed reorganization will be advantageous to the shareholders of International Equity Fund for several reasons. The board of trustees considered the following matters, among others, in approving the proposal. 25 First, that International Equity Fund does not have sufficient assets to justify maintaining this fund as a separate investment portfolio (i.e. the fund had $1.8 million in assets as of December 31, 2001). International Equity Fund, which as been in existence for approximately seven years, has not grown in asset size and in light of the history of the fund, there is no foreseeable potential for future growth. The investment adviser has subsidized International Equity Fund by absorbing expenses since the inception of the fund. Without these subsidies, International Equity Fund would have had a substantially higher expense ratio and lower performance. Second, that International Fund's total expenses are lower than International Equity Fund's total expenses. As a result of the reorganization, shareholders of International Equity Fund will experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay. Third, that the reorganization would permit International Equity Fund's shareholders to pursue substantially similar investment goals in a larger fund. A larger fund should give the investment adviser greater flexibility and the ability to select a larger number of portfolio securities, resulting in increased diversification. The board of trustees of International Fund considered that the reorganization presents an excellent opportunity for International Fund to acquire substantial investment assets without the obligation to pay commissions or other transaction costs that a fund normally incurs when purchasing securities. This opportunity provides an economic benefit to International Fund and its shareholders. The boards of both funds also considered that the adviser and the funds' distributor will benefit from the reorganization. For example, the adviser might realize time savings from a consolidated portfolio management effort and from the need to prepare fewer reports and regulatory filings as well as prospectus disclosure for one fund instead of two. The boards believe, however, that these savings will not amount to a significant economic benefit to the adviser or distributor. Comparative Fees and Expense Ratios. As discussed above, the advisory fee rates paid by International Equity Fund are higher than the rates paid by International Fund. International Fund's management fee rate of 1.00% and pro forma management fee rate of 1.00% are higher than your fund's management fee rate of 0.90%. International Fund's other expenses of 1.55% and its pro forma other expenses of 1.42% are lower than your fund's other expenses of 3.28%. International Fund's current annual expense ratio (0.95% of average net assets) and pro forma expense ratio (0.95% of average net assets) are both lower than your fund's current expense ratio (1.00% of average net assets) after the expense reductions. Your fund's expense ratio before the expense reduction is 4.18%. International Fund's expense ratio before the expense reduction is 2.55%. Comparative Performance. The trustees also took into consideration the relative performance of International Equity Fund and International Fund as of December 31, 2001. PROPOSAL 4 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN MEDIUM CAPITALIZATION GROWTH FUND AND MID CAP GROWTH FUND A proposal to approve an Agreement and Plan of Reorganization between Medium Capitalization Growth Fund and Mid Cap Growth Fund. Under this Agreement, Medium Capitalization Growth Fund would transfer all of its assets to Mid Cap Growth Fund in exchange for Class I shares of Mid Cap Growth Fund. These shares would be distributed proportionately to the shareholders of Medium Capitalization Growth Fund. Mid Cap Growth Fund would also assume Medium Capitalization Growth Fund's liabilities. Medium Capitalization Growth Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 26 SUMMARY
Comparison of Medium Capitalization Growth Fund to Mid Cap Growth Fund - ----------------------------------------------------------------------------------------------------------------------------------- Medium Capitalization Growth Fund Mid Cap Growth Fund - ----------------------------------------------------------------------------------------------------------------------------------- Business A diversified series of John Hancock Institutional A diversified series of John Hancock Investment Trust Series Trust. The trust is an open-end investment III. The trust is an open-end investment company company organized as a Massachusetts business trust. organized as a Massachusetts business trust. - ----------------------------------------------------------------------------------------------------------------------------------- Net assets as of $5.6 million $208.2 million December 31, 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Investment adviser Investment adviser: Investment adviser: and portfolio John Hancock Advisers, LLC John Hancock Advisers, LLC managers Portfolio Managers: Portfolio Managers: Paul J. Berlinguet Paul J. Berlinguet -Vice president of adviser -Vice president of adviser -Joined fund team in 2001 -Joined fund team in 2001 -Joined adviser in 2001 -Joined adviser in 2001 -U.S. equity investment manager -U.S. equity investment manager at Baring America Asset at Baring America Asset Management (1989-2001) Management (1989-2001) -Began business career in 1986 -Began business career in 1986 Robert J. Uek, CFA Robert J. Uek, CFA -Vice president of adviser -Vice president of adviser -Joined fund team in 2001 -Joined fund team in 2001 -Joined adviser in 1997 -Joined adviser in 1997 -Corporate finance manager -Corporate finance manager at Ernst & Young (1994-1997) at Ernst & Young (1994-1997) -Began business career in 1990 -Began business career in 1990 Timothy N. Manning Timothy N. Manning -Joined fund team in 2000 -Joined fund team in 2000 -Joined adviser in 2000 -Joined adviser in 2000 -Analyst at State Street Research -Analyst at State Street Research (1999-2000) (1999-2000) -Equity research associate at -Equity research associate at State Street Research (1996-1999) State Street Research (1996-1999) -Began business career in 1993 -Began business career in 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Investment objective The fund seeks long-term capital appreciation. This The fund seeks long-term capital appreciation. This objective can be changed without shareholder objective can be changed without shareholder approval. approval. - ----------------------------------------------------------------------------------------------------------------------------------- Primary investments The fund invests at least 80% of assets in stocks The fund invests at least 80% of assets in stocks of of medium-capitalization companies (companies in medium-capitalization companies (companies in the the capitalization range of the Russell Midcap capitalization range of the Russell Midcap Growth Growth Index, which was $_____ million to $_____ Index, which was $_____ million to $_____ billion on billion on February 28, 2002). In managing the February 28, 2002). In managing the portfolio, the portfolio, the managers use quantitative screens to managers seek to identify companies with identify companies with at least 15% annual above-average earnings growth. earnings growth, expanding profit margins, and projected price/earnings ratios below their earnings growth rate. - ----------------------------------------------------------------------------------------------------------------------------------- Foreign securities Each fund may invest up to 10% of assets in foreign securities. - -----------------------------------------------------------------------------------------------------------------------------------
27 - ----------------------------------------------------------------------------------------------------------------------------------- Diversification Each fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total assets in securities of a single issuer. In addition, each fund cannot invest more than 5% of total assets in any one security. - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash Each fund normally has less than 10% of assets in cash and cash equivalents. equivalents - ----------------------------------------------------------------------------------------------------------------------------------- Derivatives Each fund may make limited use of certain derivatives (investments whose value is based on indexes or currencies). - ----------------------------------------------------------------------------------------------------------------------------------- Temporary In abnormal market conditions, each fund may temporarily invest in U.S. government securities with defensive maturities of up to three years, and may also invest more than 10% of assets in cash and/or cash positions equivalents. In these and other cases, a fund might not achieve its goal. - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- SHARES - ----------------------------------------------------------------------------------------------------------------------------------- Medium Capitalization Growth Fund Mid Cap Growth Fund -- Class I - ----------------------------------------------------------------------------------------------------------------------------------- Sales charge Shares are offered with no sales charge. - ----------------------------------------------------------------------------------------------------------------------------------- Distribution and Shares are not subject to a 12b-1 distribution fee. Service (12b-1) fee - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- BUYING, SELLING AND EXCHANGING SHARES - ----------------------------------------------------------------------------------------------------------------------------------- Both Medium Capitalization Growth Fund and Mid Cap Growth Fund - Class I - ----------------------------------------------------------------------------------------------------------------------------------- Buying shares Investors may buy shares at their public offering price through a financial representative or the funds' transfer agent, John Hancock Signature Services, Inc. After March 15, 2002, investors will not be allowed to open new accounts in Medium Capitalization Growth Fund but can add to existing accounts. - ----------------------------------------------------------------------------------------------------------------------------------- Minimum initial $10,000. No minimum investment for retirement plans with at least 350 eligible employees. investment - ----------------------------------------------------------------------------------------------------------------------------------- Exchanging Shareholders may exchange their shares for Class I shares of other John Hancock funds, or for shares of shares any shares John Hancock Institutional Fund. - ----------------------------------------------------------------------------------------------------------------------------------- Selling shares Shareholders may sell their shares by submitting a proper written or telephone request to John Hancock Signature Services, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Net asset value All purchases, exchanges and sales are made at a price based on the next determined net asset value per share (NAV) of the fund. Both funds' NAVs are determined at the close of regular trading on the New York Stock Exchange, which is normally 4:00 p.m. Eastern Time. - -----------------------------------------------------------------------------------------------------------------------------------
The Funds' Expenses Shareholders of both funds pay various expenses, either directly or indirectly. The expense table appearing below shows the expenses for the twelve-month period ended October 31, 2001, adjusted to reflect any changes. Mid Cap Growth Fund's Class I shares have no operational history. As a result, expenses were projected based on expenses incurred by other classes of the Fund. Future expenses may be greater or less. The examples contained in the expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. Pro Forma Expenses The following expense table shows the pro forma expenses of Mid Cap Growth Fund for the year ended October 31, 2001 assuming that a reorganization with Medium Capitalization Growth Fund had occurred November 1, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended October 31, 2001, adjusted to reflect any changes. Mid Cap Growth Fund's Class I shares have no operational history. As a result, expenses were projected based on expenses incurred by other classes of the Fund. Mid Cap Growth Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would have paid on a $10,000 investment if the reorganization had occurred on November 1, 2000. The example assumes that you had reinvested all dividends and that the average annual return was 5%. The pro forma example is for comparison purposes only and is not a representation of Mid Cap Growth Fund's actual expenses or returns, either past or future. 28
Mid Cap Growth Fund Class I (PRO FORMA for the year ended 10/31/01) (Assuming reorganization with Medium Mid Cap Medium Capitalization Growth Fund Capitalization Growth Fund Class I Growth Fund) Shareholder transaction expenses - ------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a % of purchase none none none price) Maximum sales charge imposed on reinvested dividends none none none Maximum deferred sales charge (load) as a % of purchase or sale price, none none none whichever is less Redemption fee none none none Exchange fee none none none Annual fund operating expenses (as a % of average net assets) - ------------------------------------------------------------------------------------------------------------------------------- Management fee 0.80% 0.80% 0.80% Distribution and service (12b-1) fee none none none Other expenses 0.93% 0.14% 0.14% Total fund operating expenses 1.73% 0.94% 0.94% Expense reduction(1) 0.83% none none Net fund operating expenses 0.90% 0.94% 0.94% Expenses - ------------------------------------------------------------------------------------------------------------------------------- Year 1 $ 119 $ 96 $ 96 Year 3 $ 490 $ 300 $ 300 Year 5 $ 886 $ 520 $ 520 Year 10 $1,994 $1,155 $1,155
(1) The Adviser has agreed to limit Medium Capitalization Growth Fund's expenses to 0.90% of the fund's average daily net assets at least until June 30, 2002. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on June 7, 2002, but may occur on any later date before December 31, 2002. Medium Capitalization Growth Fund will transfer all of its assets to Mid Cap Growth Fund. Mid Cap Growth Fund will assume Medium Capitalization Growth Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern Time, on the reorganization date. o Mid Cap Growth Fund will issue to Medium Capitalization Growth Fund Class I shares in an amount equal to the net assets attributable to Medium Capitalization Growth Fund's shares. These shares will immediately be distributed to Medium Capitalization Growth Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of Medium Capitalization Growth Fund will end up as Class I shareholders of Mid Cap Growth Fund. o After the shares are issued, Medium Capitalization Growth Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to the funds. 29 The following diagram shows how the reorganization would be carried out. --------------------- ---------------------- Medium Capitalization Medium Mid Cap Growth Fund Growth Fund transfers Capitalization receives assets & assets & liabilities Growth Fund assumes liabilities of to Mid Cap Growth Fund assets and Medium Capitalization liabilities Growth Fund ---------------------- ---------------------- -------------- -------------- Medium Issues Capitalization Class I Growth Fund Shares shareholders -------------- -------------- Medium Capitalization Growth Fund receives Mid Cap Growth Fund Class I shares and distributes them to Medium Capitalization Growth Fund shareholders Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: - ------------------------------------------------------------------------------ Fund Asset Breakpoints Medium Capitalization Growth Fund - ------------------------------------------------------------------------------ First $500 Million 0.80% - ------------------------------------------------------------------------------ Amount over $500 Million 0.75% - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Fund Asset Breakpoints Mid Cap Growth Fund - ------------------------------------------------------------------------------ First $500 Million 0.80% - ------------------------------------------------------------------------------ Next $500 Million 0.75% - ------------------------------------------------------------------------------ Amount over $1 Billion 0.70% - ------------------------------------------------------------------------------ Mid Cap Growth Fund's management fee rate of 0.80% and its pro forma management fee rate of 0.80% are the same as Medium Capitalization Growth Fund's management fee rate of 0.80%. Mid Cap Growth Fund's other expenses of 0.14% and its pro forma other expenses of 0.14% are lower than Medium Capitalization Growth Fund's other expenses of 0.93%. Mid Cap Growth Fund's current annual expense ratio (equal to 0.94% of average net assets) and its pro forma expense ratio (equal to 0.94% of average net assets) are both slightly higher than Medium Capitalization Growth Fund's expense ratio (equal to 0.90% of average net assets) after the expense reduction. Medium Capitalization Growth Fund's expense ratio before the expense reduction is 1.73% and there is no guarantee that the expense reduction will be extended beyond June 30, 2002. 30 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table compares the risks affecting each fund.
- ----------------------------------------------------------------------------------------------------------------------------------- Medium Capitalization Growth Fund Mid Cap Growth Fund - ----------------------------------------------------------------------------------------------------------------------------------- Stock market risk The value of securities in the fund may go down in response to overall stock market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the fund concentrates in certain sectors, its performance could be worse than that of the overall stock market. - ----------------------------------------------------------------------------------------------------------------------------------- Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ----------------------------------------------------------------------------------------------------------------------------------- Investment The medium capitalization growth stocks in which the fund primarily invests could fall out of favor with category risk the market. This could cause the fund to underperform funds that focus on large or small capitalization stocks or on value stocks. - ----------------------------------------------------------------------------------------------------------------------------------- Medium The fund's investments in small or medium capitalization companies may be subject to larger and more capitalization erratic price movements than investments in large capitalization companies. company risk - ----------------------------------------------------------------------------------------------------------------------------------- Foreign Foreign investments involve additional risks, including potentially unfavorable currency exchange rates, securities risk inadequate or inaccurate financial information and social or political instability. - ----------------------------------------------------------------------------------------------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ----------------------------------------------------------------------------------------------------------------------------------- Liquidity and In a down or unstable market, the fund's investments could become harder to value accurately or to sell at valuation risks a fair price. - ----------------------------------------------------------------------------------------------------------------------------------- Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - -----------------------------------------------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization You are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on June 7, 2002 but may occur on any later date before December 31, 2002. Medium Capitalization Growth Fund will transfer all of its assets to Mid Cap Growth Fund and Mid Cap Growth Fund will assume all of Medium Capitalization Growth Fund's liabilities. This will result in the addition of Medium Capitalization Growth Fund's assets to Mid Cap Growth Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern Time, on the reorganization date. o Mid Cap Growth Fund will issue to Medium Capitalization Growth Fund Class I shares in an amount equal to the net assets attributable to Medium Capitalization Growth Fund's shares. As part of the liquidation of Medium Capitalization Growth Fund, these shares will immediately be distributed to shareholders of record of Medium Capitalization Growth Fund in proportion to their holdings on the reorganization date. As a result, shareholders of Medium Capitalization Growth Fund will end up as shareholders of Mid Cap Growth Fund. o After the shares are issued, the existence of Medium Capitalization Growth Fund will be terminated. Reasons for the Proposed Reorganization The board of trustees of Medium Capitalization Growth Fund believes that the proposed reorganization will be advantageous to the shareholders of Medium Capitalization Growth Fund for several reasons. The board of trustees considered the following matters, among others, in approving the proposal. 31 First, that Medium Capitalization Growth Fund does not have sufficient assets to justify maintaining this fund as a separate investment portfolio (i.e. the fund had $5.6 million in assets as of December 31, 2001). Medium Capitalization Growth Fund, which as been in existence for approximately seven years, has not grown to an acceptable asset size and in light of the history of the fund, there is no foreseeable potential for future growth. The investment adviser has subsidized Medium Capitalization Growth Fund by absorbing expenses since the inception of the fund. Without these subsidies, Medium Capitalization Growth Fund would have had a substantially higher expense ratio and lower performance. Second, that Mid Cap Growth Fund's total expenses are lower than Medium Capitalization Growth Fund's total expenses before taking into account the Adviser's agreement to limit Medium Capitalization Growth Fund's expenses. As a result of the reorganization, shareholders of Medium Capitalization Growth Fund will experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay if the expense reduction is not extended beyond June 30, 2002. Third, that the reorganization would permit Medium Capitalization Growth Fund's shareholders to pursue substantially similar investment goals in a larger fund. A larger fund should give the investment adviser greater flexibility and the ability to select a larger number of portfolio securities, resulting in increased diversification. Fourth, that a combined fund offers economies of scale that may lead to lower per share expenses. Both funds incur costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. Many of these expenses are duplicative and there may be an opportunity to reduce Mid Cap Growth Fund's expense ratio over time because of economies of scale if the funds are combined. The board of trustees of Mid Cap Growth Fund considered that the reorganization presents an excellent opportunity for Mid Cap Growth Fund to acquire investment assets without the obligation to pay commissions or other transaction costs that a fund normally incurs when purchasing securities. This opportunity provides an economic benefit to Mid Cap Growth Fund and its shareholders. The boards of both funds also considered that the adviser and the funds' distributor will benefit from the reorganization. For example, the adviser might realize time savings from a consolidated portfolio management effort and from the need to prepare fewer reports and regulatory filings as well as prospectus disclosure for one fund instead of two. The boards believe, however, that these savings will not amount to a significant economic benefit to the adviser or distributor. Comparative Fees and Expense Ratios. As discussed above, the advisory fee rates paid by Medium Capitalization Growth Fund are the same as the rates paid by Mid Cap Growth Fund. Mid Cap Growth Fund's management fee rate of 0.80%% and pro forma management fee rate of 0.80%, are the same as Medium Capitalization Growth Fund's management fee rate of 0.80%. Mid Cap Growth Fund's other expenses of 0.14% and its pro forma other expenses of 0.14% are lower than Medium Capitalization Growth Fund's other expenses of 0.93%. Mid Cap Growth Fund's current annual expense ratio (0.94% of average net assets) and pro forma expense ratio (0.94% of average net assets) are both slightly higher than Medium Capitalization Growth Fund's current expense ratio (0.90% of average net assets) after the expense reduction. Medium Capitalization Growth Fund's expense ratio before the expense reduction is 1.73% and there is no guarantee that the expense reduction will be extended beyond June 30, 2002. Comparative Performance. The trustees also took into consideration the relative performance of Medium Capitalization Growth Fund and Mid Cap Growth Fund as of December 31, 2001. PROPOSAL 5 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN SMALL CAP EQUITY FUND Y AND SMALL CAP EQUITY FUND A proposal to approve an Agreement and Plan of Reorganization between Small Cap Equity Fund Y and Small Cap Equity Fund. Under this Agreement, Small Cap Equity Fund Y would transfer all of its assets to Small Cap Equity Fund in exchange for Class I shares of Small Cap Equity Fund. These shares would be distributed proportionately to the shareholders of Small Cap Equity Fund Y. Small Cap Equity Fund would also assume Small Cap Equity Fund Y's liabilities. Small Cap Equity Fund Y's Board of Trustees recommends that shareholders vote FOR this proposal. 32 SUMMARY Comparison of Small Cap Equity Fund Y to Small Cap Equity Fund
- ----------------------------------------------------------------------------------------------------------------------------------- Small Cap Equity Fund Y Small Cap Equity Fund - ----------------------------------------------------------------------------------------------------------------------------------- Business A diversified series of John Hancock A diversified series of John Hancock Investment Institutional Series Trust. The Trust is an Trust II. The Trust is an open-end investment open-end investment management company organized management company organized as a Massachusetts as a Massachusetts Business Trust. Business Trust. - ----------------------------------------------------------------------------------------------------------------------------------- Net assets as of $35.1 million $980.7 million December 31, 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Investment adviser and Investment Adviser: Investment Adviser: portfolio managers John Hancock Advisers, LLC John Hancock Advisers, LLC Portfolio Managers: Portfolio Managers: James S. Yu, CFA James S. Yu, CFA -Vice President of adviser -Vice President of adviser -Joined fund team in 2000 -Joined fund team in 2000 -Joined adviser in 2000 -Joined adviser in 2000 -Analyst at Merrill Lynch Asset Management -Analyst at Merrill Lynch Asset Management (1998-2000) (1998-2000) -Analyst at Gabelli & Company (1995-1998) -Analyst at Gabelli & Company (1995-1998) -Began business career in 1990 -Began business career in 1990 Roger C. Hamilton Roger C. Hamilton -Vice President of adviser -Vice President of adviser -Joined fund team in 1999 -Joined fund team in 1999 -Joined adviser in 1994 -Joined adviser in 1994 -Began business career in 1980 -Began business career in 1980 - ----------------------------------------------------------------------------------------------------------------------------------- Investment objective The fund seeks capital appreciation. This The fund seeks capital appreciation. objective can be changed without shareholder approval. - ----------------------------------------------------------------------------------------------------------------------------------- Primary Investments The fund normally invests at least 80% of assets The fund normally invests at least 80% of assets in in stocks of small-capitalization companies stocks of small-capitalization companies (companies (companies in the capitalization range of the in the capitalization range of the Russell 2000 Russell 2000 Index, which was $___ million to Index, which was $___ million to $___ billion as of $___ billion as of February 28, 2002). February 28, 2002). In managing the portfolio, the managers emphasize In managing the portfolio, the managers emphasize a a value-oriented approach to individual stock value-oriented approach to individual stock selection. With the aid of proprietary financial selection. With the aid of proprietary financial models, the management team looks for companies models, the management team looks for U.S. and that are selling at what appear to be substantial foreign companies that are selling at what appear discounts to their long-term value. These to be substantial discounts to their long-term companies often have identifiable catalysts for value. These companies often have identifiable growth, such as new products, business catalysts for growth, such as new products, reorganizations, or mergers. business reorganizations, or mergers. - ----------------------------------------------------------------------------------------------------------------------------------- Foreign Securities Each fund invests primarily in stocks of U.S. companies, but may invest up to 15% of assets in a basket and bonds of foreign securities and bonds rated as low as CC/Ca and their unrated equivalents. (Bonds rated below BBB/Baa are considered junk bonds.) - ----------------------------------------------------------------------------------------------------------------------------------- Diversification Each fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total assets in securities of a single issuer. In addition, each fund cannot invest more than 5% of total assets in any one security. - -----------------------------------------------------------------------------------------------------------------------------------
33 - ----------------------------------------------------------------------------------------------------------------------------------- Derivatives Each fund may make limited use of certain derivatives (investments whose value is based on indexes or currencies). - ----------------------------------------------------------------------------------------------------------------------------------- Temporary defensive In abnormal market conditions, each fund may temporarily invest extensively in investment-grade positions short-term securities. In these and other cases, a fund might not achieve its goal. - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- SHARES - ----------------------------------------------------------------------------------------------------------------------------------- Small Cap Equity Fund Y Small Cap Equity Fund - Class I - ----------------------------------------------------------------------------------------------------------------------------------- Sales charge Shares are offered with no sales charge. - ----------------------------------------------------------------------------------------------------------------------------------- Distribution and Shares are not subject to a 12b-1 distribution fee. Service (12b-1) fee - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- BUYING, SELLING AND EXCHANGING SHARES - ----------------------------------------------------------------------------------------------------------------------------------- Small Cap Equity Fund Y Small Cap Equity Fund - Class I - ----------------------------------------------------------------------------------------------------------------------------------- Buying shares Investors may buy shares at their public offering price through a financial representative or the funds' transfer agent, John Hancock Signature Services, Inc. After March 15, 2002, investors will not be allowed to open new accounts in Small Cap Equity Fund Y but can add to existing accounts. - ----------------------------------------------------------------------------------------------------------------------------------- Minimum initial $10,000. No minimum investment for retirement plans with at least 350 eligible employees. investment - ----------------------------------------------------------------------------------------------------------------------------------- Exchanging shares Shareholders may exchange their shares for Class I shares of other John Hancock funds, or for shares of any John Hancock Institutional Fund. - ----------------------------------------------------------------------------------------------------------------------------------- Selling shares Shareholders may sell their shares by submitting a proper written or telephone request to John Hancock Signature Services, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Net asset value All purchases, exchanges and sales are made at a price based on the next determined net asset value per share (NAV) of the fund. Both funds' NAVs are determined at the close of regular trading on the New York Stock Exchange, which is normally 4:00 p.m. Eastern Time. - -----------------------------------------------------------------------------------------------------------------------------------
The Funds' Expenses Shareholders of both funds pay various expenses, either directly or indirectly. The expense table appearing below shows the expenses for the twelve-month period ended October 31, 2001, adjusted to reflect any changes. Small Cap Equity Fund's Class I shares began operations on August 15, 2001. As a result, expenses were projected as if Class I had been in existence for the entire year. Future expenses may be greater or less. The examples contained in the expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. Pro Forma Expenses The following expense table shows the pro forma expenses of Small Cap Equity Fund for the year ended October 31, 2001 assuming that a reorganization with Small Cap Equity Fund Y had occurred November 1, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended October 31, 2001, adjusted to reflect any changes. Small Cap Equity Fund's Class I shares began operations on August 15, 2001. As a result, expenses were projected as if Class I had been in existence for the entire year. Small Cap Equity Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would have paid on a $10,000 investment if the reorganization had occurred on November 1, 2000. The example assumes that you had reinvested all dividends and that the average annual return was 5%. The pro forma example is for comparison purposes only and is not a representation of Small Cap Equity Fund's actual expenses or returns, either past or future. 34
Small Cap Equity Fund Class I (PRO FORMA for the year ended 10/31/01) (Assuming reorganization Small Cap with Small Cap Equity Fund Small Cap Equity Equity Fund Y Class I Fund Y) Shareholder transaction expenses - ------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases (as a % of purchase none none none price) Maximum sales charge imposed on reinvested dividends none none none Maximum deferred sales charge (load) as a % of purchase or sale price, none none none whichever is less Redemption fee none none none Exchange fee none none none Annual fund operating expenses (as a % of average net assets) - ------------------------------------------------------------------------------------------------------------------------------- Management fee 0.70% 0.70% 0.70% Distribution and service (12b-1) fee none none none Other expenses 0.34% 0.13% 0.13% Total fund operating expenses 1.04% 0.83% 0.83% Expense reduction(1) 0.24% none none Net fund operating expenses 0.80% 0.83% 0.83% Expenses - ------------------------------------------------------------------------------------------------------------------------------- Year 1 $ 90 $ 85 $ 85 Year 3 $ 315 $ 265 $ 265 Year 5 $ 558 $ 460 $ 460 Year 10 $1,257 $1,025 $1,025
(1) The Adviser has agreed to limit Small Cap Equity Fund Y's operating expenses to 0.80% of the fund's average daily net assets at least until June 30, 2002. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on June 7, 2002, but may occur on any later date before December 31, 2002. Small Cap Equity Fund Y will transfer all of its assets to Small Cap Equity Fund. Small Cap Equity Fund will assume Small Cap Equity Fund Y's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern Time, on the reorganization date. o Small Cap Equity Fund will issue to Small Cap Equity Fund Y Class I shares in an amount equal to the net assets attributable to Small Cap Equity Fund Y's shares. These shares will immediately be distributed to Small Cap Equity Fund Y's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of Small Cap Equity Fund Y will end up as Class I shareholders of Small Cap Equity Fund. o After the shares are issued, Small Cap Equity Fund Y will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to the funds. 35 The following diagram shows how the reorganization would be carried out. -------------------- -------------------- Small Cap Equity Small Cap Equiaty Fund Y transfers Small Cap Fund receives assets & liabilities Equity Fund Y assets & assumes to Small Cap Equity assets and liabilities of Small Fund liabilities Cap Equity Fund Y -------------------- -------------------- -------------- -------------- Small Cap Issues Equiaty Fund Y Class I shareholders Shares -------------- -------------- Small Cap Equity Fund Y receives Small Cap Equity Fund Class I shares and distributes them to Small Cap Equity Fund Y shareholders Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: - -------------------------------------------------------------------------------- Fund Asset Breakpoints Small Cap Equity Fund Y - -------------------------------------------------------------------------------- First $500 Million 0.70% - -------------------------------------------------------------------------------- Amount over $500 Million 0.65% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Small Cap Equity Fund - -------------------------------------------------------------------------------- Fund Assets 0.70% - -------------------------------------------------------------------------------- Small Cap Equity Fund's management fee rate of 0.70% and its pro forma management fee rate of 0.70% are the same as your fund's management fee rate of 0.70%. Small Cap Equity Fund's other expenses of 0.13% and its pro forma other expenses of 0.13% are lower than your fund's other expenses of 0.34%. Small Cap Equity Fund's current annual expense ratio (equal to 0.83% of average net assets) and its pro forma expense ratio (equal to 0.83% of average net assets) are both slightly higher than your fund's expense ratio (equal to 0.80% of average net assets) after the expense reduction. Your fund's expense ratio before the expense reduction is 1.04% and there is no guarantee that the expense reduction will be extended beyond June 30, 2002. 36 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table compares the risks affecting each fund.
- ----------------------------------------------------------------------------------------------------------------------------------- Small Cap Equity Fund Y Small Cap Equity Fund - ----------------------------------------------------------------------------------------------------------------------------------- Stock market risk The value of securities in the fund may go down in response to overall stock market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the fund concentrates in certain sectors, its performance could be worse than that of the overall stock market. - ----------------------------------------------------------------------------------------------------------------------------------- Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ----------------------------------------------------------------------------------------------------------------------------------- Investment category risk The small capitalization value stocks in which the fund primarily invests could fall out of favor with the market. This could cause the fund to underperform funds that focus on large or medium capitalization stocks or on growth stocks. - ----------------------------------------------------------------------------------------------------------------------------------- Small and medium The fund's investments in small or medium capitalization companies may be subject to larger and more capitalization company erratic price movements than investments in established large capitalization companies. Many smaller risk companies have short track records, narrow product lines or niche markets, making them highly vulnerable to isolated business setbacks. - ----------------------------------------------------------------------------------------------------------------------------------- Initial public offering A significant part of the fund's return may at times be attributable to investments in IPOs. Many IPO (IPO) risk stocks are issued by, and involve the risks associated with, small and medium capitalization companies. - ----------------------------------------------------------------------------------------------------------------------------------- Bond Risk The credit rating of any bond in the fund's portfolio could be downgraded or the issuer of a bond could default on its obligations. Bond prices generally fall when interest rates rise. This risk is greater for longer maturity bonds. Junk bond prices can fall on bad news about the economy, an industry or a company. - ----------------------------------------------------------------------------------------------------------------------------------- Foreign securities risk Foreign investments involve additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. - ----------------------------------------------------------------------------------------------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ----------------------------------------------------------------------------------------------------------------------------------- Liquidity and valuation In a down or unstable market, the fund's investments could become harder to value accurately or to sell risks at a fair price. - ----------------------------------------------------------------------------------------------------------------------------------- Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - -----------------------------------------------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization You are being asked to approve an Agreement and Plan of Reorganization, a copy of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on June 7, 2002 but may occur on any later date before December 31, 2002. Small Cap Equity Fund Y will transfer all of its assets to Small Cap Equity Fund and Small Cap Equity Fund will assume all of Small Cap Equity Fund Y's liabilities. This will result in the addition of Small Cap Equity Fund Y's assets to Small Cap Equity Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern Time, on the reorganization date. o Small Cap Equity Fund will issue to Small Cap Equity Fund Y Class I shares in an amount equal to the net assets attributable to Small Cap Equity Fund Y's shares. As part of the liquidation of Small Cap Equity Fund Y, these shares will immediately be distributed to shareholders of record of Small Cap Equity Fund Y in proportion to their holdings on the reorganization date. As a result, shareholders of Small Cap Equity Fund Y will end up as shareholders of Small Cap Equity Fund. o After the shares are issued, the existence of Small Cap Equity Fund Y will be terminated. 37 Reasons for the Proposed Reorganization The board of trustees of Small Cap Equity Fund Y believes that the proposed reorganization will be advantageous to the shareholders of Small Cap Equity Fund Y for several reasons. The board of trustees considered the following matters, among others, in approving the proposal. First, that Small Cap Equity Fund Y does not have sufficient assets to justify maintaining this fund as a separate investment portfolio (i.e. the fund had $35.1 million in assets as of December 31, 2001). Small Cap Equity Fund Y, which as been in existence for approximately seven years, has not grown in asset size and in light of the history of the fund, there is no foreseeable potential for future growth. The investment adviser has subsidized Small Cap Equity Fund Y by absorbing expenses since the inception of the fund. Without these subsidies, Small Cap Equity Fund Y would have had a substantially higher expense ratio and lower performance. Second, that Small Cap Equity Fund's total expenses are lower than Small Cap Equity Fund Y's total expenses before taking into account the Adviser's agreement to limit Small Cap Equity Fund Y's expenses. As a result of the reorganization, shareholders of Small Cap Equity Fund Y will experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay if the expense reduction is not extended beyond June 30, 2002. Third, that the reorganization would permit Small Cap Equity Fund Y's shareholders to pursue substantially similar investment goals in a larger fund. A larger fund should give the investment adviser greater flexibility and the ability to select a larger number of portfolio securities, resulting in increased diversification. Fourth, that a combined fund offers economies of scale that may lead to lower per share expenses. Both funds incur costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. Many of these expenses are duplicative and there may be an opportunity to reduce Small Cap Equity Fund's expense ratio over time because of economies of scale if the funds are combined. The board of trustees of Small Cap Equity Fund considered that the reorganization presents an excellent opportunity for Small Cap Equity Fund to acquire investment assets without the obligation to pay commissions or other transaction costs that a fund normally incurs when purchasing securities. This opportunity provides an economic benefit to Small Cap Equity Fund and its shareholders. The boards of both funds also considered that the adviser and the funds' distributor will benefit from the reorganization. For example, the adviser might realize time savings from a consolidated portfolio management effort and from the need to prepare fewer reports and regulatory filings as well as prospectus disclosure for one fund instead of two. The boards believe, however, that these savings will not amount to a significant economic benefit to the adviser or distributor. Comparative Fees and Expense Ratios. As discussed above, the advisory fee rates paid by your fund are the same as the rates paid by Small Cap Equity Fund. Small Cap Equity Fund's management fee rate of 0.70% and pro forma management fee rate of 0.70% are the same as your fund's management fee rate of 0.70%. Small Cap Equity Fund's other expenses of 0.13% and its pro forma other expenses of 0.13% are lower than your fund's other expenses of 0.34%. Small Cap Equity Fund's current annual expense ratio (0.83% of average net assets) and pro forma expense ratio (0.83% of average net assets) are both slightly higher than your fund's current expense ratio (0.80% of average net assets) after the expense reduction. Your fund's expense ratio before the expense reduction is 1.04% and there is no guarantee that the expense reduction will be extended beyond June 30, 2002. Comparative Performance. The trustees also took into consideration the relative performance of your fund and Small Cap Equity Fund as of December 31, 2001. 38 FURTHER INFORMATION ON EACH REORGANIZATION Tax Status of the Reorganization Each reorganization will not result in income, gain or loss for federal income tax purposes and will not take place unless both funds in each respective reorganization receive a satisfactory opinion from Hale and Dorr LLP, counsel to the Acquired Funds, substantially to the effect that the reorganization described above will be a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986 (the "Code"). As a result, for federal income tax purposes: o No gain or loss will be recognized by each Acquired Fund upon (1) the transfer of all of its assets to the respective Acquiring Fund as described above or (2) the distribution by each Acquired Fund of Acquiring Fund shares to Acquired Fund shareholders; o No gain or loss will be recognized by each Acquiring Fund upon the receipt of each respective Acquired Fund's assets solely in exchange for the issuance of Acquiring Fund shares and the assumption of all of Acquired Fund liabilities by each respective Acquiring Fund; o The basis of the assets of each Acquired Fund acquired by each respective Acquiring Fund will be the same as the basis of those assets in the hands of each respective Acquired Fund immediately before the transfer; o The tax holding period of the assets of each Acquired Fund in the hands of each respective Acquiring Fund will include the Acquired Fund's tax holding period for those assets; o The shareholders of each Acquired Fund will not recognize gain or loss upon the exchange of all their shares of the Acquired Funds solely for Acquiring Fund shares as part of the reorganization; o The basis of Acquiring Fund shares received by Acquired Fund shareholders in the reorganization will be the same as the basis of the shares of each Acquired Fund surrendered in exchange; and o The tax holding period of the Acquiring Fund shares that Acquired Fund shareholders receive will include the tax holding period of the shares of the Acquired Fund surrendered in the exchange, provided that the shares of the Acquired Fund were held as capital assets on the reorganization date. You should consult your tax adviser for the particular tax consequences to you of the transaction, including the applicability of any state, local or foreign tax laws. Additional Terms of each Agreement and Plan of Reorganization Surrender of Share Certificates. If your shares are represented by one or more share certificates before the reorganization date, you must either surrender the certificates to your fund(s) or deliver to your fund(s) a lost certificate affidavit, in the form and accompanied by the surety bonds that your fund(s) may require (collectively, an "Affidavit"). On the reorganization date, all certificates that have not been surrendered will be canceled, will no longer evidence ownership of your fund's shares and will evidence ownership of shares of the respective Acquiring Fund. Shareholders may not redeem or transfer Acquiring Fund shares received in the reorganization until they have surrendered their Acquired Fund share certificates or delivered an Affidavit. The Acquiring Funds will not issue share certificates in the reorganization. Conditions to Closing each Reorganization. The obligation of each Acquired Fund to consummate the reorganization is subject to the satisfaction of certain conditions, including the performance by the corresponding Acquiring Fund of all its obligations under the Agreement and the receipt of all consents, orders and permits necessary to consummate the reorganization (see Agreement, paragraph 6). The obligation of each Acquiring Fund to consummate the reorganization is subject to the satisfaction of certain conditions, including each corresponding Acquired Fund's performance of all of its obligations under the Agreement, the receipt of certain documents and financial statements from each respective Acquired Fund and the receipt of all consents, orders and permits necessary to consummate the reorganization (see Agreement, paragraph 7). The obligations of each respective Acquired and Acquiring Fund are subject to approval of the Agreement by the necessary vote of the outstanding shares of the Acquired Fund, in accordance with the provisions of the Acquired Funds' declaration of trust and 39 by-laws. The funds' obligations are also subject to the receipt of a favorable opinion of Hale and Dorr LLP as to the federal income tax consequences of the reorganization (see Agreement, paragraph 8). Termination of Agreement. The board of trustees of each respective Acquired Fund or Acquiring Fund may terminate the Agreement (even if the shareholders of an Acquired Fund have already approved it) at any time before the reorganization date, if that board believes that proceeding with the reorganization would no longer be advisable. Expenses of the Reorganization. John Hancock Advisers, LLC will pay each Acquired Fund's merger costs and International Fund's merger costs, and each other Acquiring Fund will pay its own costs incurred in connection with entering into and carrying out the provisions of the Agreements, whether or not a reorganization occurs. With respect to each proposal, the expenses for each fund are estimated to be approximately $14,600 for Active Bond Fund and $12,200 for Bond Fund; $14,000 for Independence Balanced Fund and $12,000 for Balanced Fund; $14,000 for International Equity Fund and $12,000 for International Fund; $14,000 for Medium Capitalization Growth Fund and $12,000 for Mid Cap Growth Fund; and $14,200 for Small Cap Equity Fund Y and $12,000 for Small Cap Equity Fund. CAPITALIZATION With respect to each Proposal, the following tables set forth the capitalization of each fund as of the date specified for each proposal, and the pro forma combined capitalization of both funds as if each reorganization had occurred on that date. If a reorganization is consummated, the actual exchange ratios on the reorganization date may vary from the exchange ratios indicated. This is due to changes in the market value of the portfolio securities of both funds between the date specified and the reorganization date, changes in the amount of undistributed net investment income and net realized capital gains of both funds during that period resulting from income and distributions, and changes in the accrued liabilities of both funds during the same period. It is impossible to predict how many shares of each Acquiring Fund will actually be received and distributed by each corresponding Acquired Fund on the reorganization date. The tables should not be relied upon to determine the amount of Acquiring Fund shares that will actually be received and distributed. Net assets for each fund are disclosed on the fund level. The Net Asset Value per share and shares outstanding are referenced for each Fund's institutional class. With respect to Balanced Fund, International Fund and Mid Cap Growth Fund, the Net Asset Value per share is referenced for Class A shares, as Class I shares were not operational as of the dates specified in the tables. - -------------------------------------------------------------------------------- Proposal 1* Active Bond Fund Bond Fund Pro Forma - -------------------------------------------------------------------------------- Net Assets (millions) $9.2 $1,452.2 $1,461.4 - -------------------------------------------------------------------------------- Net Asset Value Per Share $8.73 $14.95 $14.95 - -------------------------------------------------------------------------------- Shares Outstanding 1,055,248 668 616,933 - -------------------------------------------------------------------------------- *If the reorganization had taken place on November 30, 2001. The table reflects pro forma exchange ratios of approximately 0.584 Class I shares of Bond Fund being issued for each share of Active Bond Fund - -------------------------------------------------------------------------------- Proposal 2* Independence Balanced Fund Pro Forma Balanced Fund - -------------------------------------------------------------------------------- Net Assets (millions) $16.9 $184.4 $201.3 - -------------------------------------------------------------------------------- Net Asset Value Per Share $9.25 $12.02 $12.02 - -------------------------------------------------------------------------------- Shares Outstanding 1,828,918 -- 1,406,438 - -------------------------------------------------------------------------------- *If the reorganization had taken place on December 31, 2001. The table reflects pro forma exchange ratios of approximately 0.769 Class I shares of Balanced Fund being issued for each share of Independence Balanced Fund - -------------------------------------------------------------------------------- Proposal 3* International International Fund Pro Forma Equity Fund - -------------------------------------------------------------------------------- Net Assets (millions) $4.1 $15.0 $19.1 - -------------------------------------------------------------------------------- Net Asset Value Per Share $6.42 $6.18 $6.18 - -------------------------------------------------------------------------------- Shares Outstanding 641,104 -- 666,715 - -------------------------------------------------------------------------------- *If the reorganization had taken place on October 31, 2001. 40 The table reflects pro forma exchange ratios of approximately 1.039 Class I shares of International Fund being issued for each share of International Equity Fund - -------------------------------------------------------------------------------- Proposal 4* Medium Mid Cap Growth Fund Pro Forma Capitalization Growth Fund - -------------------------------------------------------------------------------- Net Assets (millions) $5.2 $189.3 $194.5 - -------------------------------------------------------------------------------- Net Asset Value Per Share $7.23 $7.66 $7.66 - -------------------------------------------------------------------------------- Shares Outstanding 712,450 -- 672,553 - -------------------------------------------------------------------------------- *If the reorganization had taken place on October 31, 2001. The table reflects pro forma exchange ratios of approximately 0.944 Class I shares of Mid Cap Growth Fund shares being issued for each share of Medium Capitalization Growth Fund - -------------------------------------------------------------------------------- Proposal 5* Small Cap Equity Small Cap Equity Fund Pro Forma Fund Y - -------------------------------------------------------------------------------- Net Assets (millions) $27.1 $732.8 $764.9 - -------------------------------------------------------------------------------- Net Asset Value Per Share $10.39 $16.61 $16.61 - -------------------------------------------------------------------------------- Shares Outstanding 2,609,663 489 1,631,528 - -------------------------------------------------------------------------------- *If the reorganization had taken place on October 31, 2001. The table reflects pro forma exchange ratios of approximately 0.625 Class I shares of Small Cap Equity Fund being issued for each share of Small Cap Equity Fund Y. ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES The following table shows where in each fund's prospectus you can find additional information about the business of each fund. - -------------------------------------------------------------------------------- Type of Information Headings in Each Prospectus - -------------------------------------------------------------------------------- Investment objective and Goal and Strategy / Main Risks policies - -------------------------------------------------------------------------------- Portfolio management Portfolio Management - -------------------------------------------------------------------------------- Expenses Your Expenses - -------------------------------------------------------------------------------- Eligible Investors Who Can Buy Shares - -------------------------------------------------------------------------------- Purchase of shares Your Account: Opening an Account, Buying Shares, Transaction Policies - -------------------------------------------------------------------------------- Redemption or sale of Your Account: Selling shares, Transaction Policies shares - -------------------------------------------------------------------------------- Custodian Business Structure - -------------------------------------------------------------------------------- Dividends, distributions Dividends and Account Policies and taxes - -------------------------------------------------------------------------------- 41 BOARDS' EVALUATION AND RECOMMENDATION For the reasons described above, the board of trustees of each Acquired Fund, including the trustees who are not "interested persons" of either fund in each proposed reorganization or the adviser ("independent trustees"), approved the reorganizations. In particular, the trustees determined that each reorganization is in the best interests of the Acquired Funds and that the interests of Acquired Fund shareholders would not be diluted as a result of the reorganization. Similarly, the board of trustees of each Acquiring Fund, including the independent trustees, approved the reorganizations. They also determined that each reorganization is in the best interests of the Acquiring Funds and that the interests of Acquiring Fund shareholders would not be diluted as a result of the reorganization. The trustees of each Acquired Fund recommend that shareholders of each Acquired Fund vote for the proposal to approve the appropriate Agreement and Plan of Reorganization. VOTING RIGHTS AND REQUIRED VOTE Each Acquired Fund share is entitled to one vote. Approval of each proposal described above requires the affirmative vote of a majority of the shares of each Acquired Fund outstanding and entitled to vote on each respective proposal. For this purpose, a majority of the outstanding shares of your fund means the vote of the lesser of : (1) 67% or more of the shares present at the meeting, if the holders of more than 50% of the shares of the fund are present or represented by proxy, or (2) more than 50% of the outstanding shares of the fund.
- ----------------------------------------------------------------------------------------------------------------------------------- Shares Quorum Voting - ----------------------------------------------------------------------------------------------------------------------------------- In General All shares "present" in Shares "present" in person will be voted in person at the meeting. person or by proxy are Shares present by proxy will be voted in accordance with counted towards a quorum. instructions. - ----------------------------------------------------------------------------------------------------------------------------------- Proxy with No Voting Considered "present" at Voted "for" a proposal. Instruction (other than meeting. Broker Non-Vote) - ----------------------------------------------------------------------------------------------------------------------------------- Broker Non-Vote Considered "present" at Not voted. Same effect as a vote "against" a proposal. meeting. - ----------------------------------------------------------------------------------------------------------------------------------- Vote to Abstain Considered "present" at Not voted. Same effect as a vote "against" a proposal. meeting. - -----------------------------------------------------------------------------------------------------------------------------------
If the required approval of shareholders is not obtained with respect to a proposal, the Acquired Fund subject to the proposal will continue to engage in business as a separate mutual fund and the board of trustees will consider what further action may be appropriate. This action could include, among other things, terminating a fund's expense limitation or closing the fund. INFORMATION CONCERNING THE MEETING Solicitation of Proxies In addition to the mailing of these proxy materials, proxies may be solicited by telephone, by e-mail, by fax or in person by the trustees, officers and employees of your fund; by personnel of your fund's investment adviser, John Hancock Advisers, LLC and its transfer agent, John Hancock Signature Services, Inc.; or by broker-dealer firms. Signature Services, together with a third party solicitation firm, has agreed to provide proxy solicitation services to each Acquired Fund at a cost of approximately $____ per fund. Revoking Proxies Each Acquired Fund shareholder signing and returning a proxy has the power to revoke it at any time before it is exercised: o By filing a written notice of revocation with the Acquired Funds' transfer agent, John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston, Massachusetts 02217-1001, or o By returning a duly executed proxy with a later date before the time of the meeting, or 42 o If a shareholder has executed a proxy but is present at the meeting and wishes to vote in person, by notifying the secretary of your fund (without complying with any formalities) at any time before it is voted. Being present at the meeting alone does not revoke a previously executed and returned proxy. Outstanding Shares and Quorum As of March 15, 2002 (the "record date"), the number of shares of beneficial interest of each Acquired Fund outstanding were as follows: ------------------------------------------------------------ FUND SHARES OUTSTANDING ------------------------------------------------------------ Active Bond Fund ------------------------------------------------------------ Independence Balanced Fund ------------------------------------------------------------ International Equity Fund ------------------------------------------------------------ Medium Capitalization Growth Fund ------------------------------------------------------------ Small Cap Equity Fund Y ------------------------------------------------------------ Only shareholders of record on the record date are entitled to notice of and to vote at the meeting. A majority of the outstanding shares of each Acquired Fund that are entitled to vote will be considered a quorum for the transaction of business. Other Business Each Acquired Fund's board of trustees knows of no business to be presented for consideration at the meeting other than the proposals. If other business is properly brought before the meeting, proxies will be voted according to the best judgment of the persons named as proxies. Adjournments If a quorum is not present in person or by proxy at the time any session of the meeting is called to order, the persons named as proxies may vote those proxies that have been received to adjourn the meeting to a later date. If a quorum is present but there are not sufficient votes in favor of a proposal, the persons named as proxies may propose one or more adjournments of the meeting to permit further solicitation of proxies concerning the proposal. Any adjournment will require the affirmative vote of a majority of an Acquired Fund's shares at the session of the meeting to be adjourned. If an adjournment of the meeting is proposed because there are not sufficient votes in favor of a proposal, the persons named as proxies will vote those proxies favoring the proposal in favor of adjournment, and will vote those proxies against the reorganization against adjournment. Telephone Voting In addition to soliciting proxies by mail, by fax or in person, your fund(s) may also arrange to have votes recorded by telephone by officers and employees of your fund(s) or by personnel of the adviser or transfer agent or a third party solicitation firm. The telephone voting procedure is designed to verify a shareholder's identity, to allow a shareholder to authorize the voting of shares in accordance with the shareholder's instructions and to confirm that the voting instructions have been properly recorded. If these procedures were subject to a successful legal challenge, these telephone votes would not be counted at the meeting. Your fund has not obtained an opinion of counsel about telephone voting, but is currently not aware of any challenge. o A shareholder will be called on a recorded line at the telephone number in a fund's account records and will be asked to provide the shareholder's social security number or other identifying information. o The shareholder will then be given an opportunity to authorize proxies to vote his or her shares at the meeting in accordance with the shareholder's instructions. o To ensure that the shareholder's instructions have been recorded correctly, the shareholder will also receive a confirmation of the voting instructions by mail. o A toll-free number will be available in case the voting information contained in the confirmation is incorrect. o If the shareholder decides after voting by telephone to attend the meeting, the shareholder can revoke the proxy at that time and vote the shares at the meeting. 43 Internet Voting You will also have the opportunity to submit your voting instructions via the internet by utilizing a program provided through a vendor. Voting via the internet will not affect your right to vote in person if you decide to attend the meting. Do not mail the proxy card if you are voting via the internet. To vote via the internet , you will need the "control number" that appears on your proxy card. These Internet voting procedures are designed to authenticate shareholder identities, to allow shareholders give their voting instructions, and to confirm that shareholders instructions have been recorded properly. If you are voting via the internet you should understand that there may be costs associated with electronic access, such as usage charges from internet access providers and telephone companies, that must be borne to you. o Read the proxy statement and have your proxy card(s) at hand. o Go to the Web site www.jhfunds.com. o Select the shareholder entryway. o Select the proxy-voting link for your Fund(s). o Enter the "control number" found on your proxy card. o Follow the instructions on the Web site. Please call us at 1-800-225-5291 if you have any problems. o To insure that your instructions have been recorded correctly, you will receive a confirmation of your voting instructions immediately after your submission and also by email if chosen. Shareholders' Proposals The Funds are not required, and do not intend, to hold meetings of shareholders each year. Instead, meetings will be held only when and if required. Any shareholders desiring to present a proposal for consideration at the next meeting for shareholders of their respective Funds must submit the proposal in writing, so that it is received by the appropriate Fund at 101 Huntington Avenue, Boston, Massachusetts 02199 within a reasonable time before any meeting. OWNERSHIP OF SHARES OF THE FUNDS To the knowledge of each fund, as of March 15, 2002, the following persons owned of record or beneficially 5% or more of the outstanding shares of each fund, respectively:
- ----------------------------------------------------------------------------------------------------------------------------------- Names and Addresses of Owners of More Than 5% of Shares - ----------------------------------------------------------------------------------------------------------------------------------- Proposal 1 Active Bond Fund - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Bond Fund - ----------------------------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class I - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Proposal 2 Independence Balanced Fund - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Balanced Fund - ----------------------------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class I - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
44
- ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Proposal 3 International Equity Fund - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- International Fund - ----------------------------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class I - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Proposal 4 Medium Capitalization Growth Fund - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund - ----------------------------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class I - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Proposal 5 Small Cap Equity Fund Y - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Small Cap Equity Fund - ----------------------------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class I - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
As of March 15, 2002, the trustees and officers of each fund owned in the aggregate less than 1% of the outstanding shares of their respective funds. EXPERTS The financial statements and the financial highlights of the Acquiring Funds for the period ended October 31, 2001 for International Fund, Mid Cap Growth Fund and Small Cap Equity Fund, November 30, 2001 for Bond Fund, and December 31, 2001 for Balanced Fund and the financial statements and financial highlights for each Acquired Fund for the period ended August 31, 2001 are incorporated by reference into this proxy statement and prospectus. The financial statements and financial highlights for each Acquired Fund have been independently audited by Deloitte & Touche LLP, for Balanced Fund, Bond Fund, and Small Cap Equity Fund by Ernst & Young, LLP and for International Fund and Mid Cap Growth Fund, by PricewaterhouseCoopers, LLP as stated in their reports appearing in the statement of additional information. These financial statements and financial highlights have been included in reliance on their reports given on their authority as experts in accounting and auditing. 45 AVAILABLE INFORMATION Each fund is subject to the informational requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 and files reports, proxy statements and other information with the SEC. These reports, proxy statements and other information filed by the funds can be inspected and copied (for a duplication fee) at the public reference facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C., and at the Midwest Regional Office (500 West Madison Street, Suite 1400, Chicago, Illinois). Copies of these materials can also be obtained by mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, copies of these documents may be viewed on-screen or downloaded from the SEC's Internet site at http://www.sec.gov. 46 Exhibit A FORM OF AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 1st day of March, 2002, by and between ______________________ (the "Acquiring Fund"), a series of _________________________, a Massachusetts business trust (the "Trust"), and _________________________ (the "Acquired Fund"), a series of John Hancock Institutional Series Trust, a Massachusetts business trust (the "Trust II"), each with their principal place of business at 101 Huntington Avenue, Boston, Massachusetts 02199. The Acquiring Fund and the Acquired Fund are sometimes referred to collectively herein as the "Funds" and individually as a "Fund." This Agreement is intended to be and is adopted as a plan of "reorganization," as such term is used in Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The reorganization will consist of the transfer of all of the assets of the Acquired Fund to the Acquiring Fund in exchange solely for the issuance of Class I Shares of beneficial interest of the Acquiring Fund (the "Acquiring Fund Shares") to the Acquired Fund and the assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund, followed by the distribution by the Acquired Fund, on or promptly after the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the shareholders of the Acquired Fund in liquidation and termination of the Acquired Fund as provided herein, all upon the terms and conditions set forth in this Agreement. In consideration of the premises of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows: 1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE ACQUIRED FUND 1.1 The Acquired Fund will transfer all of its assets (consisting, without limitation, of portfolio securities and instruments, dividends and interest receivables, cash and other assets), as set forth in the statement of assets and liabilities referred to in Paragraph 7.2 hereof (the "Statement of Assets and Liabilities"), to the Acquiring Fund free and clear of all liens and encumbrances, except as otherwise provided herein, in exchange for (i) the assumption by the Acquiring Fund of the known and unknown liabilities of the Acquired Fund, including the liabilities set forth in the Statement of Assets and Liabilities (the "Acquired Fund Liabilities"), which shall be assigned and transferred to the Acquiring Fund by the Acquired Fund and assumed by the Acquiring Fund, and (ii) delivery by the Acquiring Fund to the Acquired Fund, for distribution pro rata by the Acquired Fund to its shareholders in proportion to their respective ownership of shares of beneficial interest of the Acquired Fund, as of the close of business on June 7, 2002 (the "Closing Date"), of a number of the Acquiring Fund Shares having an aggregate net asset value equal to the value of the assets, less such liabilities (herein referred to as the "net value of the assets") assumed, assigned and delivered, all determined as provided in Paragraph 2.1 hereof and as of a date and time as specified therein. Such transactions shall take place at the closing provided for in Paragraph 3.1 hereof (the "Closing"). All computations shall be provided by The Bank of New York (the "Custodian"), as custodian and pricing agent for the Acquiring Fund and the Acquired Fund. 1.2 The Acquired Fund has provided the Acquiring Fund with a list of the current securities holdings of the Acquired Fund as of the date of execution of this Agreement. The Acquired Fund reserves the right to sell any of these securities (except to the extent sales may be limited by representations made in connection with issuance of the tax opinion provided for in paragraph 8.6 hereof) but will not, without the prior approval of the Acquiring Fund, acquire any additional securities other than securities of the type in which the Acquiring Fund is permitted to invest. 1.3 The Acquiring Fund and the Acquired Fund shall each bear its own expenses in connection with the transactions contemplated by this Agreement. 1.4 On or as soon after the Closing Date as is conveniently practicable (the "Liquidation Date"), the Acquired Fund will liquidate and distribute pro rata to shareholders of record (the "Acquired Fund shareholders"), determined as of the close of regular trading on the New York Stock Exchange on the Closing Date, the Acquiring Fund Shares received by the Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation and distribution will be accomplished by the transfer of the Acquiring Fund Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund, to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund shareholders and representing the respective pro rata number of Acquiring Fund Shares due such shareholders. The Acquiring Fund shall not issue certificates representing Acquiring Fund Shares in connection with such exchange. 1.5 The Acquired Fund shareholders holding certificates representing their ownership of shares of beneficial interest of the Acquired Fund shall surrender such certificates or deliver an affidavit with respect to lost certificates in such form and accompanied by such surety bonds as the Acquired Fund may require (collectively, an "Affidavit"), to John Hancock Signature Services, Inc. prior to the Closing Date. Any Acquired Fund share certificate which remains outstanding on the 47 Closing Date shall be deemed to be canceled, shall no longer evidence ownership of shares of beneficial interest of the Acquired Fund and shall evidence ownership of Acquiring Fund Shares. Unless and until any such certificate shall be so surrendered or an Affidavit relating thereto shall be delivered, dividends and other distributions payable by the Acquiring Fund subsequent to the Liquidation Date with respect to Acquiring Fund Shares shall be paid to the holder of such certificate(s), but such shareholders may not redeem or transfer Acquiring Fund Shares received in the Reorganization. The Acquiring Fund will not issue share certificates in the Reorganization. 1.6 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a name other than the registered holder of the Acquired Fund Shares on the books of the Acquired Fund as of that time shall, as a condition of such issuance and transfer, be paid by the person to whom such Acquiring Fund Shares are to be issued and transferred. 1.7 The existence of the Acquired Fund shall be terminated as promptly as practicable following the Liquidation Date. 1.8 Any reporting responsibility of the Acquired Fund, including, but not limited to, the responsibility for filing of regulatory reports, tax returns, or other documents with the Securities and Exchange Commission (the "Commission"), any state securities commissions, and any federal, state or local tax authorities or any other relevant regulatory authority, is and shall remain the responsibility of the Acquired Fund. 2. VALUATION 2.1 The net asset values of the Acquiring Fund Shares and the net values of the assets and liabilities of the Acquired Fund to be transferred shall, in each case, be determined as of the close of business (4:00 p.m. Boston time) on the Closing Date. The net asset values of the Acquiring Fund Shares shall be computed by the Custodian in the manner set forth in the Acquiring Fund's Declaration of Trust as amended and restated (the "Declaration"), or By-Laws and the Acquiring Fund's then-current prospectus and statement of additional information and shall be computed in each case to not fewer than four decimal places. The net values of the assets of the Acquired Fund to be transferred shall be computed by the Custodian by calculating the value of the assets transferred by the Acquired Fund and by subtracting therefrom the amount of the liabilities assigned and transferred to and assumed by the Acquiring Fund on the Closing Date, said assets and liabilities to be valued in the manner set forth in the Acquired Fund's then current prospectus and statement of additional information and shall be computed in each case to not fewer than four decimal places. 2.2 The number of Acquiring Fund Shares to be issued (including fractional shares, if any) in exchange for the Acquired Fund's assets shall be determined by dividing the value of the Acquired Fund's assets less the liabilities assumed by the Acquiring Fund, by the Acquiring Fund's net asset value per share, all as determined in accordance with Paragraph 2.1 hereof. 2.3 All computations of value shall be made by the Custodian in accordance with its regular practice as pricing agent for the Funds. 3. CLOSING AND CLOSING DATE 3.1 The Closing Date shall be June 7, 2002 or such other date on or before December 31, 2002 as the parties may agree. The Closing shall be held as of 5:00 p.m. at the offices of the Trust and the Trust II, 101 Huntington Avenue, Boston, Massachusetts 02199, or at such other time and/or place as the parties may agree. 3.2 Portfolio securities that are not held in book-entry form in the name of the Custodian as record holder for the Acquired Fund shall be presented by the Acquired Fund to the Custodian for examination no later than three business days preceding the Closing Date. Portfolio securities which are not held in book-entry form shall be delivered by the Acquired Fund to the Custodian for the account of the Acquiring Fund on the Closing Date, duly endorsed in proper form for transfer, in such condition as to constitute good delivery thereof in accordance with the custom of brokers, and shall be accompanied by all necessary federal and state stock transfer stamps or a check for the appropriate purchase price thereof. Portfolio securities held of record by the Custodian in book-entry form on behalf of the Acquired Fund shall be delivered to the Acquiring Fund by the Custodian by recording the transfer of beneficial ownership thereof on its records. The cash delivered shall be in the form of currency or by the Custodian crediting the Acquiring Fund's account maintained with the Custodian with immediately available funds. 3.3 In the event that on the Closing Date (a) the New York Stock Exchange shall be closed to trading or trading thereon shall be restricted or (b) trading or the reporting of trading on said Exchange or elsewhere shall be disrupted so that accurate appraisal of the value of the net assets of the Acquiring Fund or the Acquired Fund is impracticable, the Closing Date shall be postponed until the first business day after the day when trading shall have been fully resumed and reporting shall have been restored; provided that if trading shall not be fully resumed and reporting restored on or before December 31, 2002, 48 this Agreement may be terminated by the Acquiring Fund or by the Acquired Fund upon the giving of written notice to the other party. 3.4 The Acquired Fund shall deliver at the Closing a list of the names, addresses, federal taxpayer identification numbers and backup withholding and nonresident alien withholding status of the Acquired Fund shareholders and the number of outstanding shares of beneficial interest of the Acquired Fund owned by each such shareholder, all as of the close of business on the Closing Date, certified by its Treasurer, Secretary or other authorized officer (the "Shareholder List"). The Acquiring Fund shall issue and deliver to the Acquired Fund a confirmation evidencing the Acquiring Fund Shares to be credited on the Closing Date, or provide evidence satisfactory to the Acquired Fund that such Acquiring Fund Shares have been credited to the Acquired Fund's account on the books of the Acquiring Fund. At the Closing, each party shall deliver to the other such bills of sale, checks, assignments, stock certificates, receipts or other documents as such other party or its counsel may reasonably request. 4. REPRESENTATIONS AND WARRANTIES 4.1 The Trust II on behalf of the Acquired Fund represents, warrants and covenants to the Acquiring Fund as follows: (a) The Trust II is a business trust, duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has the power to own all of its properties and assets and, subject to approval by the shareholders of the Acquired Fund, to carry out the transactions contemplated by this Agreement. Neither the Trust II nor the Acquired Fund is required to qualify to do business in any jurisdiction in which it is not so qualified or where failure to qualify would subject it to any material liability or disability. The Trust II has all necessary federal, state and local authorizations to own all of its properties and assets and to carry on its business as now being conducted; (b) The Trust II is a registered investment company classified as a management company and its registration with the Commission as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), is in full force and effect. The Acquired Fund is a diversified series of the Trust II; (c) The Trust II and the Acquired Fund are not, and the execution, delivery and performance of their obligations under this Agreement will not result, in violation of any provision of the Trust II's Declaration of Trust, as amended and restated (the "Trust II's Declaration") or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Trust II or the Acquired Fund is a party or by which it is bound; (d) Except as otherwise disclosed in writing and accepted by the Acquiring Fund, no material litigation or administrative proceeding or investigation of or before any court or governmental body is currently pending or threatened against the Trust II or the Acquired Fund or any of the Acquired Fund's properties or assets. The Trust II knows of no facts which might form the basis for the institution of such proceedings, and neither the Trust II nor the Acquired Fund is a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects the Acquired Fund's business or its ability to consummate the transactions herein contemplated; (e) The Acquired Fund has no material contracts or other commitments (other than this Agreement or agreements for the purchase of securities entered into in the ordinary course of business and consistent with its obligations under this Agreement) which will not be terminated without liability to the Acquired Fund at or prior to the Closing Date; (f) The audited statement of assets and liabilities, including the schedule of investments, of the Acquired Fund as of _________________ and the related statement of operations (copies of which have been furnished to the Acquiring Fund) and the unaudited statements as of ___________________, present fairly in all material respects the financial condition of the Acquired Fund as of ________________ and ________________ and the results of its operations for the period then ended in accordance with generally accepted accounting principles consistently applied, and there were no known actual or contingent liabilities of the Acquired Fund as of the respective dates thereof not disclosed therein; (g) Since ________________, there has not been any material adverse change in the Acquired Fund's financial condition, assets, liabilities, or business other than changes occurring in the ordinary course of business, or any incurring by the Acquired Fund of indebtedness maturing more than one year from the date such indebtedness was incurred, except as otherwise disclosed to and accepted by the Acquiring Fund; (h) At the date hereof and by the Closing Date, all federal, state and other tax returns and reports, including information returns and payee statements, of the Acquired Fund required by law to have been filed or furnished by such dates shall have been filed or furnished, and all federal, state and other taxes, interest and penalties shall have been paid so far as due, or provision shall have been made for the payment thereof, and to the best of the Acquired Fund's knowledge no such return is currently under audit and no assessment has been asserted with respect to such returns or reports; 49 (i) The Acquired Fund has qualified as a regulated investment company for each taxable year of its operation and the Acquired Fund will qualify as such as of the Closing Date with respect to its taxable year ending on the Closing Date; (j) The authorized capital of the Acquired Fund consists of an unlimited number of shares of beneficial interest, no par value. All issued and outstanding shares of beneficial interest of the Acquired Fund are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and nonassessable by the Trust II. All of the issued and outstanding shares of beneficial interest of the Acquired Fund will, at the time of Closing, be held by the persons and in the amounts set forth in the Shareholder List submitted to the Acquiring Fund pursuant to Paragraph 3.4 hereof. The Acquired Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares of beneficial interest, nor is there outstanding any security convertible into any of its shares of beneficial interest; (k) At the Closing Date, the Acquired Fund will have good and marketable title to the assets to be transferred to the Acquiring Fund pursuant to Paragraph 1.1 hereof, and full right, power and authority to sell, assign, transfer and deliver such assets hereunder, and upon delivery and payment for such assets, the Acquiring Fund will acquire good and marketable title thereto subject to no restrictions on the full transfer thereof, including such restrictions as might arise under the Securities Act of 1933, as amended (the "1933 Act"); (l) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of the Trust II on behalf of the Acquired Fund, and this Agreement constitutes a valid and binding obligation of the Acquired Fund enforceable in accordance with its terms, subject to the approval of the Acquired Fund's shareholders; (m) The information to be furnished by the Acquired Fund to the Acquiring Fund for use in applications for orders, registration statements, proxy materials and other documents which may be necessary in connection with the transactions contemplated hereby shall be accurate and complete and shall comply in all material respects with federal securities and other laws and regulations thereunder applicable thereto; (n) The proxy statement of the Acquired Fund (the "Proxy Statement") to be included in the Registration Statement referred to in Paragraph 5.7 hereof (other than written information furnished by the Acquiring Fund for inclusion therein, as covered by the Acquiring Fund's warranty in Paragraph 4.2(m) hereof), on the effective date of the Registration Statement, on the date of the meeting of the Acquired Fund shareholders and on the Closing Date, shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading; (o) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Acquired Fund of the transactions contemplated by this Agreement; (p) All of the issued and outstanding shares of beneficial interest of the Acquired Fund have been offered for sale and sold in conformity with all applicable federal and state securities laws; (q) The prospectus of the Acquired Fund, dated ______________ (the "Acquired Fund Prospectus"), furnished to the Acquiring Fund, does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; and (r) The Acquired Fund Tax Representation Certificate to be delivered by the Acquired Fund to the Acquiring Fund at Closing pursuant to Section 7.5 (the "Acquired Fund Tax Representation Certificate") will not on the Closing Date contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. 4.2 The Trust on behalf of the Acquiring Fund represents, warrants and covenants to the Acquired Fund as follows: (a) The Trust is a business trust duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts and has the power to own all of its properties and assets and to carry out the Agreement. Neither the Trust nor the Acquiring Fund is required to qualify to do business in any jurisdiction in which it is not so qualified or where failure to qualify would subject it to any material liability or disability. The Trust has all necessary federal, state and local authorizations to own all of its properties and assets and to carry on its business as now being conducted; (b) The Trust is a registered investment company classified as a management company and its registration with the Commission as an investment company under the 1940 Act is in full force and effect. The Acquiring Fund is a diversified series of the Trust; (c) The prospectus (the "Acquiring Fund Prospectus") and statement of additional information of the Acquiring Fund, each dated ______________, and any amendments or supplements thereto on or prior to the Closing Date, and the Registration 50 Statement on Form N-14 filed in connection with this Agreement (the "Registration Statement") (other than written information furnished by the Acquired Fund for inclusion therein, as covered by the Acquired Fund's warranty in Paragraph 4.1(m) hereof) will conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder, the Acquiring Fund Prospectus does not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and the Registration Statement will not include any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (d) At the Closing Date, the Trust on behalf of the Acquiring Fund will have good and marketable title to the assets of the Acquiring Fund; (e) The Trust and the Acquiring Fund are not, and the execution, delivery and performance of their obligations under this Agreement will not result in a violation of any provisions of the Trust's Declaration, or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Trust or the Acquiring Fund is a party or by which the Trust or the Acquiring Fund is bound; (f) Except as otherwise disclosed in writing and accepted by the Acquired Fund, no material litigation or administrative proceeding or investigation of or before any court or governmental body is currently pending or threatened against the Trust or the Acquiring Fund or any of the Acquiring Fund's properties or assets. The Trust knows of no facts which might form the basis for the institution of such proceedings, and neither the Trust nor the Acquiring Fund is a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects the Acquiring Fund's business or its ability to consummate the transactions herein contemplated; (g) The audited statement of assets and liabilities, including the schedule of investments, of the Acquiring Fund as of ______________ and the related statement of operations (copies of which have been furnished to the Acquired Fund) and the unaudited statements as of ________________, present fairly in all material respects the financial condition of the Acquiring Fund as of _______________ and _______________ and the results of its operations for the period then ended in accordance with generally accepted accounting principles consistently applied, and there were no known actual or contingent liabilities of the Acquiring Fund as of the respective dates thereof not disclosed therein; (h) Since _______________, there has not been any material adverse change in the Acquiring Fund's financial condition, assets, liabilities or business other than changes occurring in the ordinary course of business, or any incurrence by the Trust on behalf of the Acquiring Fund of indebtedness maturing more than one year from the date such indebtedness was incurred, except as disclosed to and accepted by the Acquired Fund; (i) Each of the Acquiring Fund and its predecessors has qualified as a regulated investment company for each taxable year of its operation and the Acquiring Fund will qualify as such as of the Closing Date; (j) The authorized capital of the Trust consists of an unlimited number of shares of beneficial interest, no par value per share. All issued and outstanding shares of beneficial interest of the Acquiring Fund are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and nonassessable by the Trust. The Acquiring Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares of beneficial interest, nor is there outstanding any security convertible into any of its shares of beneficial interest; (k) The execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of the Trust on behalf of the Acquiring Fund, and this Agreement constitutes a valid and binding obligation of the Acquiring Fund enforceable in accordance with its terms; (l) The Acquiring Fund Shares to be issued and delivered to the Acquired Fund pursuant to the terms of this Agreement, when so issued and delivered, will be duly and validly issued shares of beneficial interest of the Acquiring Fund and will be fully paid and nonassessable by the Trust; (m) The information to be furnished by the Acquiring Fund for use in applications for orders, registration statements, proxy materials and other documents which may be necessary in connection with the transactions contemplated hereby shall be accurate and complete and shall comply in all material respects with federal securities and other laws and regulations applicable thereto; (n) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Acquiring Fund of the transactions contemplated by the Agreement, except for the registration of the Acquiring Fund Shares under the 1933 Act and the 1940 Act; and 51 (o) The Acquiring Fund Tax Representation Certificate to be delivered by the Acquiring Fund to the Acquired Fund at Closing pursuant to Section 6.3 (the "Acquiring Fund Tax Representation Certificate") will not on the Closing Date contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. 5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND 5.1 Except as expressly contemplated herein to the contrary, the Trust II on behalf of the Acquired Fund and the Trust on behalf of the Acquiring Fund, will operate their respective businesses in the ordinary course between the date hereof and the Closing Date, it being understood that such ordinary course of business will include customary dividends and distributions and any other distributions necessary or desirable to avoid federal income or excise taxes. 5.2 The Trust II will call a meeting of the Acquired Fund shareholders to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein. 5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be issued hereunder are not being acquired by the Acquired Fund for the purpose of making any distribution thereof other than in accordance with the terms of this Agreement. 5.4 The Trust II on behalf of the Acquired Fund will provide such information within its possession or reasonably obtainable as the Trust on behalf of the Acquiring Fund requests concerning the beneficial ownership of the Acquired Fund's shares of beneficial interest. 5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the Acquired Fund each shall take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate the transactions contemplated by this Agreement. 5.6 The Trust II on behalf of the Acquired Fund shall furnish to the Trust on behalf of the Acquiring Fund on the Closing Date the Statement of Assets and Liabilities of the Acquired Fund as of the Closing Date, which statement shall be prepared in accordance with generally accepted accounting principles consistently applied and shall be certified by the Acquired Fund's Treasurer or Assistant Treasurer. As promptly as practicable but in any case within 60 days after the Closing Date, the Acquired Fund shall furnish to the Acquiring Fund, in such form as is reasonably satisfactory to the Trust, a statement of the earnings and profits of the Acquired Fund for federal income tax purposes and of any capital loss carryovers and other items that will be carried over to the Acquiring Fund as a result of Section 381 of the Code, and which statement will be certified by the President of the Acquired Fund. 5.7 The Trust on behalf of the Acquiring Fund will prepare and file with the Commission the Registration Statement in compliance with the 1933 Act and the 1940 Act in connection with the issuance of the Acquiring Fund Shares as contemplated herein. 5.8 The Trust II on behalf of the Acquired Fund will prepare a Proxy Statement, to be included in the Registration Statement in compliance with the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act and the rules and regulations thereunder (collectively, the "Acts") in connection with the special meeting of shareholders of the Acquired Fund to consider approval of this Agreement. 5.9 Neither the Acquired Fund nor the Acquiring Fund shall take any action that is inconsistent with the representations set forth in, with respect to the Acquired Fund, the Acquired Fund Tax Representation Certificate, and with respect to the Acquiring Fund, the Acquiring Fund Tax Representation Certificate, to the extent such action would prevent the reorganization from qualifying as a "reorganization" under Section 368(a) of the Code. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST II ON BEHALF OF THE ACQUIRED FUND The obligations of the Trust II on behalf of the Acquired Fund to complete the transactions provided for herein shall be, at its election, subject to the performance by the Trust on behalf of the Acquiring Fund of all the obligations to be performed by it hereunder on or before the Closing Date, and, in addition thereto, the following further conditions: 6.1 All representations and warranties of the Trust on behalf of the Acquiring Fund contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date with the same force and effect as if made on and as of the Closing Date; 52 6.2 The Trust on behalf of the Acquiring Fund shall have delivered to the Trust II on behalf of the Acquired Fund a certificate executed in its name by the Trust's President or Vice President and its Treasurer or Assistant Treasurer, in form and substance satisfactory to the Trust II on behalf of the Acquired Fund and dated as of the Closing Date, to the effect that the representations and warranties of the Trust on behalf of the Acquiring Fund made in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as the Trust II on behalf of the Acquired Fund shall reasonably request; and 6.3 The Acquiring Fund shall have delivered to the Acquired Fund an Acquiring Fund Tax Representation Certificate substantially in the form attached to this Agreement as Annex A concerning certain tax-related matters with respect to the Acquiring Fund. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST ON BEHALF OF THE ACQUIRING FUND The obligations of the Trust on behalf of the Acquiring Fund to complete the transactions provided for herein shall be, at its election, subject to the performance by the Trust II on behalf of the Acquired Fund of all the obligations to be performed by it hereunder on or before the Closing Date and, in addition thereto, the following conditions: 7.1 All representations and warranties of the Trust II on behalf of the Acquired Fund contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date with the same force and effect as if made on and as of the Closing Date; 7.2 The Trust II on behalf of the Acquired Fund shall have delivered to the Trust on behalf of the Acquiring Fund the Statement of Assets and Liabilities of the Acquired Fund, together with a list of its portfolio securities showing the federal income tax bases and holding periods of such securities, as of the Closing Date, certified by the Treasurer or Assistant Treasurer of the Acquired Fund; 7.3 The Trust II on behalf of the Acquired Fund shall have delivered to the Trust on behalf of the Acquiring Fund on the Closing Date a certificate executed in the name of the Acquired Fund by a President or Vice President and a Treasurer or Assistant Treasurer of the Acquired Fund, in form and substance satisfactory to the Trust on behalf of the Acquiring Fund and dated as of the Closing Date, to the effect that the representations and warranties of the Acquired Fund in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as the Trust on behalf of the Acquiring Fund shall reasonably request; 7.4 At or prior to the Closing Date, the Acquired Fund's investment adviser, or an affiliate thereof, shall have made all payments, or applied all credits, to the Acquired Fund required by any applicable contractual expense limitation; and 7.5 The Acquired Fund shall have delivered to the Acquiring Fund an Acquired Fund Tax Representation Certificate substantially in the form attached to this Agreement as Annex B concerning certain tax-related matters with respect to the Acquired Fund. 8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST II ON BEHALF OF THE ACQUIRED FUND AND THE TRUST ON BEHALF OF THE ACQUIRING FUND The obligations hereunder of the Trust II on behalf of the Acquired Fund and the Trust on behalf of the Acquiring Fund are each subject to the further conditions that on or before the Closing Date: 8.1 The Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of beneficial interest of the Acquired Fund in accordance with the provisions of the Trust II's Declaration and By-Laws, and certified copies of the resolutions evidencing such approval by the Acquired Fund's shareholders shall have been delivered by the Acquired Fund to the Trust on behalf of the Acquiring Fund; 8.2 On the Closing Date no action, suit or other proceeding shall be pending before any court or governmental agency in which it is sought to restrain or prohibit, or obtain changes or other relief in connection with, this Agreement or the transactions contemplated herein; 8.3 All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities (including those of the Commission and their "no-action" positions) deemed necessary by the Trust II or the Trust to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain any such consent, order or permit would not involve a risk of a material adverse effect on the assets or 53 properties of the Acquiring Fund or the Acquired Fund, provided that either party hereto may waive any such conditions for itself; 8.4 The Registration Statement shall have become effective under the 1933 Act and the 1940 Act and no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act or the 1940 Act; 8.5 The Acquired Fund shall have distributed to its shareholders, in a distribution or distributions qualifying for the deduction for dividends paid under Section 561 of the Code, all of its investment company taxable income (as defined in Section 852(b)(2) of the Code determined without regard to Section 852(b)(2)(D) of the Code) for its taxable year ending on the Closing Date, all of the excess of (i) its interest income excludable from gross income under Section 103(a) of the Code over (ii) its deductions disallowed under Sections 265 and 171(a)(2) of the Code for its taxable year ending on the Closing Date, and all of its net capital gain (as such term is used in Sections 852(b)(3)(A) and (C) of the Code), after reduction by any available capital loss carryforward, for its taxable year ending on the Closing Date; and 8.6 The parties shall have received an opinion of Hale and Dorr LLP, satisfactory to the Trust II on behalf of the Acquired Fund and the Trust on behalf of the Acquiring Fund, substantially to the effect that for federal income tax purposes the acquisition by the Acquiring Fund of all of the assets of the Acquired Fund solely in exchange for the issuance of Acquiring Fund Shares to the Acquired Fund and the assumption of all of the Acquired Fund Liabilities by the Acquiring Fund, followed by the distribution by the Acquired Fund, in liquidation of the Acquired Fund, of Acquiring Fund Shares to the shareholders of the Acquired Fund in exchange for their shares of beneficial interest of the Acquired Fund and the termination of the Acquired Fund, will constitute a "reorganization" within the meaning of Section 368(a) of the Code. Notwithstanding anything herein to the contrary, neither the Trust II nor the Trust may waive the conditions set forth in this Paragraph 8.6. 9. BROKERAGE FEES AND EXPENSES 9.1 The Trust on behalf of the Acquiring Fund and the Trust II on behalf of the Acquired Fund each represent and warrant to the other that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein. 9.2 The Acquiring Fund and the Acquired Fund shall each be liable solely for its own expenses incurred in connection with entering into and carrying out the provisions of this Agreement whether or not the transactions contemplated hereby are consummated. 54 10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES 10.1 The Trust on behalf of the Acquiring Fund and the Trust II on behalf of the Acquired Fund agree that neither party has made any representation, warranty or covenant not set forth herein or referred to in Paragraph 4 hereof and that this Agreement constitutes the entire agreement between the parties. 10.2 The representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall survive the consummation of the transactions contemplated hereunder. 11. TERMINATION 11.1 This Agreement may be terminated by the mutual agreement of the Trust on behalf of the Acquiring Fund and the Trust II on behalf of the Acquired Fund. In addition, either party may at its option terminate this Agreement at or prior to the Closing Date: (a) because of a material breach by the other of any representation, warranty, covenant or agreement contained herein to be performed at or prior to the Closing Date; (b) because of a condition herein expressed to be precedent to the obligations of the terminating party which has not been met and which reasonably appears will not or cannot be met; (c) by resolution of the Trust's Board of Trustees if circumstances should develop that, in the good faith opinion of such Board, make proceeding with the Agreement not in the best interests of the Acquiring Fund's shareholders; or (d) by resolution of the Trust II's Board of Trustees if circumstances should develop that, in the good faith opinion of such Board, make proceeding with the Agreement not in the best interests of the Acquired Fund's shareholders. 11.2 In the event of any such termination, there shall be no liability for damages on the part of the Trust, the Acquiring Fund, the Trust II, or the Acquired Fund, or the Trustees or officers of the Trust or the Trust II, but each party shall bear the expenses incurred by it incidental to the preparation and carrying out of this Agreement. 12. AMENDMENTS This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon by the authorized officers of the Trust and the Trust II. However, following the meeting of shareholders of the Acquired Fund held pursuant to Paragraph 5.2 of this Agreement, no such amendment may have the effect of changing the provisions regarding the method for determining the number of Acquiring Fund Shares to be received by the Acquired Fund shareholders under this Agreement to the detriment of such shareholders without their further approval; provided that nothing contained in this Article 12 shall be construed to prohibit the parties from amending this Agreement to change the Closing Date. 13. NOTICES Any notice, report, statement or demand required or permitted by any provisions of this Agreement shall be in writing and shall be given by prepaid telegraph, telecopy or certified mail addressed to the Acquiring Fund or to the Acquired Fund, each at 101 Huntington Avenue, Boston, Massachusetts 02199, Attention: President, and, in either case, with copies to Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, Attention: Pamela J. Wilson, Esq. 14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT 14.1 The article and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 14.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 14.3 This Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. 14.4 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the prior written consent of the other party. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. 55 14.5 All persons dealing with the Trust or the Trust II must look solely to the property of the Trust or the Trust II, respectively, for the enforcement of any claims against the Trust or the Trust II as the Trustees, officers, agents and shareholders of the Trust or the Trust II assume no personal liability for obligations entered into on behalf of the Trust or the Trust II, respectively. None of the other series of the Trust or the Trust II shall be responsible for any obligations assumed by on or behalf of the Acquiring Fund or the Acquired Fund under this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the date first set forth above by its President or Vice President and has caused its corporate seal to be affixed hereto. on behalf of ---------------------------------------------- ---------------------------------------------- By: ---------------------------------------------- Maureen R. Ford Chairman, President and Chief Executive Officer JOHN HANCOCK INSTITUTIONAL SERIES TRUST on behalf of ---------------------------------------------- By: ---------------------------------------------- Susan S. Newton Senior Vice President and Secretary 56 Thank You for mailing your proxy card promptly! [LOGO] 57 JOHN HANCOCK - -------------------------------------------------------------------------------- Prospectus 3.1.02 Bond Fund INSTITUTIONAL CLASS I [LOGO](R) As with all mutual funds, the Securities and Exchange - ------------------ Commission has not approved or disapproved this fund or JOHN HANCOCK FUNDS determined whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. Contents - -------------------------------------------------------------------------------- A summary of the fund's Bond Fund 4 goals, strategies, risks, performance and expenses. Policies and instructions for Your account opening, maintaining and closing an account. Who can buy shares 6 Opening an account 6 Buying shares 7 Selling shares 8 Transaction policies 10 Dividends and account policies 10 Further information on Fund details the fund. Business structure 11 Financial highlights 12 For more information back cover Bond Fund GOAL AND STRATEGY [Clip Art] The fund seeks to generate a high level of current income consistent with prudent investment risk. In pursuing this goal, the fund normally invests at least 80% of its assets in a diversified portfolio of bonds and other debt securities. These include corporate bonds and debentures as well as U.S. government and agency securities. Most of these securities are investment grade, although the fund may invest up to 25% of assets in high yield bonds rated as low as CC/Ca and their unrated equivalents. There is no limit on the fund's average maturity. In managing the fund's portfolio, the managers concentrate on sector allocation, industry allocation and securities selection: deciding which types of bonds and industries to emphasize at a given time, and then which individual bonds to buy. When making sector and industry allocations, the managers try to anticipate shifts in the business cycle, using top-down analysis to determine which sectors and industries may benefit over the next 12 months. In choosing individual securities, the managers use bottom-up research to find securities that appear comparatively undervalued. The managers look at bonds of all quality levels and maturities from many different issuers, potentially including U.S. dollar-denominated securities of foreign governments and corporations. The fund intends to keep its exposure to interest rate movements generally in line with those of its peers. The fund may invest in mortgage-related securities and certain other derivatives (investments whose value is based on indexes, securities or currencies). Under normal circumstances, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal circumstances, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS James K. Ho, CFA - ------------------------------------ Executive vice president of adviser Joined fund team in 1988 Joined adviser in 1985 Began business career in 1977 Benjamin A. Matthews - ------------------------------------ Vice president of adviser Joined fund team in 1995 Joined adviser in 1995 Began business career in 1970 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. Since Class I shares have existed for less than a full calendar year, the year-by-year and average annual figures are for Class A shares, which are offered in a separate prospectus. Annual returns should be substantially similar since all classes invest in the same portfolio. Class I shares have no sales charges and lower expenses than Class A shares. The average annual figures reflect sales charges; the year-by-year and index figures do not, and would be lower if they did. All figures assume dividend reinvestment. Past performance does not indicate future results. - -------------------------------------------------------------------------------- Class A year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 8.19% 11.69% -2.77% 19.45% 4.09% 9.66% 7.50% -1.36% 10.39% 7.15% Best quarter: Q2 '95, 6.57% Worst quarter: Q1 '94, -2.71% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- 1 year 5 year 10 year Class A 2.33% 5.60% 6.73% Class I (began 9-1-01) -- -- -- Index 10.40% 7.22% 7.68% Index: Lehman Brothers Credit Bond Index, an unmanaged index of U.S. corporate bonds and Yankee bonds. 4 MAIN RISKS [Clip Art] The major factors in this fund's performance are interest rates and credit risk. When interest rates rise, bond prices generally fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. The fund could lose money if any bonds it owns are downgraded in credit rating or go into default. In general, high yield bonds (also known as "junk bonds") have higher credit risks. If certain sectors or investments do not perform as the fund expects, it could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Junk bonds and foreign securities may make the fund more sensitive to market or economic shifts in the U.S. and abroad. o If interest rate movements cause the fund's mortgage-related and callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses. Any U.S. government guarantees on portfolio securities do not apply to these securities' market value or current yield, or to fund shares. The fund may trade securities actively, which could increase its transaction costs (thus lowering performance) and increase your taxable distributions. Investments in the fund are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. You could lose money by investing in this fund. ================================================================================ YOUR EXPENSES [Clip Art] Operating expenses are paid from the fund's assets, and therefore are paid by shareholders indirectly. Because Class I is new, its expenses are based on Class A expenses, adjusted to reflect any changes. - -------------------------------------------------------------------------------- Annual operating expenses - -------------------------------------------------------------------------------- Management fee 0.50% Other expenses 0.14% Total fund operating expenses 0.64% The hypothetical example below shows what your expenses would be if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions and that the average annual return was 5%. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future. - -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10 - -------------------------------------------------------------------------------- Class I $65 $205 $357 $798 FUND CODES Class I - ---------------------------- Ticker -- CUSIP 410223408 Newspaper -- SEC number 811-2402 JH fund number 431 5 Your account - -------------------------------------------------------------------------------- WHO CAN BUY SHARES Class I shares are offered without any sales charge to certain types of investors, as noted below: o Retirement and other benefit plans and their participants o Rollover assets for participants whose plans are invested in the fund o Certain trusts, endowment funds and foundations o Any state, county or city, or its instrumentality, department, authority or agency o Insurance companies, trust companies and bank trust departments buying shares for their own account o Investment companies not affiliated with the adviser o Clients of service agents and broker-dealers who have entered into an agreement with John Hancock Funds o Investors who participate in fee-based, wrap and other investment platform programs o Any entity that is considered a corporation for tax purposes o Fund trustees and other individuals who are affiliated with this fund or other John Hancock funds - -------------------------------------------------------------------------------- OPENING AN ACCOUNT 1 Read this prospectus carefully. 2 Determine if you are eligible, by referring to "Who can buy shares" on the left. 3 Determine how much you want to invest. The minimum initial investment is $10,000. There is no minimum investment for retirement plans with at least 350 eligible employees. 4 Complete the appropriate parts of the account application, carefully following the instructions. By applying for privileges now, you can avoid the delay and inconvenience of having to file an additional application if you want to add privileges later. You must submit additional documentation when opening trust, corporate or power of attorney accounts. 5 Make your initial investment using the table on the next page. 6 If you have questions or need more information, please contact your financial representative or call Signature Services at 1-888-972-8696. John Hancock Funds may pay significant compensation out of its own resources to your financial representative. Your broker or agent may charge you a fee to effect transactions in fund shares. 6 YOUR ACCOUNT - -------------------------------------------------------------------------------- Buying shares - -------------------------------------------------------------------------------- Opening an account Adding to an account By check [Clip Art] o Make out a check for o Make out a check for the the investment amount, investment amount payable payable to "John Hancock to "John Hancock Signature Signature Services, Inc." Services, Inc." o Deliver the check and o Fill out the detachable your completed application investment slip from an to your financial account statement. If no representative, or mail slip is available, them to Signature include a note specifying Services (address below). the fund name(s), your share class, your account number and the name(s) in which the account is registered. o Deliver the check and investment slip or note to your financial representative, or mail them to Signature Services (address below). By exchange [Clip Art] o Call your financial o Call your financial representative or representative or Signature Services to Signature Services to request an exchange. request an exchange. o You may only exchange o You may only exchange for shares of other for shares of other institutional funds or institutional Class I shares. funds or Class I shares. By wire [Clip Art] o Deliver your completed o Instruct your bank to wire application to your the amount of your financial representative investment to: or mail it to Signature First Signature Bank & Trust Services. Account # 900022260 Routing # 211475000 o Obtain your account number by calling your Specify the fund name(s), your financial representative share class, your account number or Signature Services. and the name(s) in which the account is registered. Your bank o Instruct your bank to wire may charge a fee to wire funds. the amount of your investment to: First Signature Bank & Trust Account # 900022260 Routing # 211475000 Specify the fund name(s), the share class, the new account number and the name(s) in which the account is registered. Your bank may charge a fee to wire funds. By phone [Clip Art] See "By exchange" and "By o Verify that your bank or wire." credit union is a member of the Automated Clearing House (ACH) system. o Complete the "To Purchase, Exchange or Redeem Shares via Telephone" and "Bank Information" sections on your account application. o Call Signature Services to verify that these features are in place on your account. o Call your financial representative or Signature Services with the fund name(s), your share class, your account number, the name(s) in which the account is registered and the amount of your investment. - ----------------------------------------------- Address: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1001 Boston, MA 02217-1001 Phone Number: 1-888-972-8696 Or contact your financial representative for instructions and assistance. - ----------------------------------------------- YOUR ACCOUNT 7 - -------------------------------------------------------------------------------- Selling shares - -------------------------------------------------------------------------------- Designed for To sell some or all of your shares By letter [Clip Art] o Sales of any amount; o Write a letter of instruction however, sales of $5 indicating the fund name, million or more must your account number, your be made by letter. share class, the name(s) in which the account is o Certain requests will registered and the dollar require a Medallion value or number of shares you signature guarantee. wish to sell. Please refer to "Selling shares in writing." o Include all signatures and any additional documents that may be required (see next page). o Mail the materials to Signature Services. o A check or wire will be sent according to your letter of instruction. By phone [Clip Art] o Sales of up to $5 million. o To place your request with a representative at John Hancock Funds, call Signature Services between 8 A.M. and 4 P.M. Eastern Time on most business days. o Redemption proceeds of up to $100,000 may be sent by wire or by check. A check will be mailed to the exact name(s) and address on the account. Redemption proceeds exceeding $100,000 must be wired to your designated bank account. By wire or electronic funds transfer (EFT) [Clip Art] o Requests by letter to o To verify that the telephone sell any amount. redemption privilege is in place on an account, or to o Requests by phone to sell request the forms to add it up to $5 million (accounts to an existing account, call with telephone redemption Signature Services. privileges). o Amounts of $5 million or more will be wired on the next business day. o Amounts up to $100,000 may be sent by EFT or by check. Funds from EFT transactions are generally available by the second business day. Your bank may charge a fee for this service. By exchange [Clip Art] o Sales of any amount. o Obtain a current prospectus for the fund into which you are exchanging by calling your financial representative or Signature Services. o You may only exchange for shares of other institutional funds or Class I shares. o Call your financial representative or Signature Services to request an exchange. 8 YOUR ACCOUNT Selling shares in writing In certain circumstances, you will need to make your request to sell shares in writing. You may need to include additional items with your request, as shown in the table below, unless they were previously provided to Signature Services and are still accurate. You may also need to include a Medallion signature guarantee, which protects you against fraudulent orders. You will need a signature guarantee if: o your address of record has changed within the past 30 days o you are selling more than $100,000 worth of shares and are requesting payment by check o you are selling more than $5 million worth of shares You will need to obtain your Medallion signature guarantee from a member of the Signature Guarantee Medallion Program. Most brokers and securities dealers are members of this program. A notary public CANNOT provide a signature guarantee. - -------------------------------------------------------------------------------- Seller Requirements for written requests - -------------------------------------------------------------------------------- [Clip Art] Owners of individual, joint or o Letter of instruction. UGMA/UTMA accounts (custodial accounts for minors). o On the letter, the signatures of all persons authorized to sign for the account, exactly as the account is registered. o Medallion signature guarantee if applicable (see above). Owners of corporate, sole o Letter of instruction. proprietorship, general partner or association accounts. o Corporate business/organization resolution, certified within the past 12 months, or a John Hancock Funds business/organization certification form. o On the letter and the resolution, the signature of the person(s) authorized to sign for the account. o Medallion signature guarantee if applicable (see above). Owners or trustees of retirement o Letter of instruction. plan, pension trust and trust accounts. o On the letter, the signature(s) of the trustee(s). o Copy of the trust document certified within the past 12 months or a John Hancock Funds trust certification form. o Medallion signature guarantee if applicable (see above). Joint tenancy shareholders with o Letter of instruction signed by rights of survivorship whose surviving tenant. co-tenants are deceased. o Copy of death certificate. o Medallion signature guarantee if applicable (see above). Executors of shareholder estates. o Letter of instruction signed by executor. o Copy of order appointing executor, certified within the past 12 months. o Medallion signature guarantee if applicable (see above). Administrators, conservators, o Call 1-888-972-8696 for guardians and other sellers or instructions. account types not listed above. - ---------------------------------------------- Address: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1001 Boston, MA 02217-1001 Phone Number: 1-888-972-8696 Or contact your financial representative for instructions and assistance. - ---------------------------------------------- YOUR ACCOUNT 9 - -------------------------------------------------------------------------------- TRANSACTION POLICIES Valuation of shares The net asset value (NAV) per share for the fund is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4 P.M. Eastern Time). The fund uses market prices in valui ng portfolio securities, but may use fair-value estimates if reliable market prices are unavailable. The fund may also value securities at fair value if the value of these securities has been materially affected by events occurring after the close of a foreign market. The fund may trade foreign stock or other portfolio securities on U.S. holidays and weekends, even though the fund's shares will not be priced on those days. This may change a fund's NAV on days when you cannot buy or sell shares. Buy and sell prices When you buy shares, you pay the NAV. When you sell shares, you receive the NAV. Execution of requests The fund is open on those days when the New York Stock Exchange is open, typically Monday through Friday. Buy and sell requests are executed at the next NAV to be calculated after Signature Services receives your request in good order. At times of peak activity, it may be difficult to place requests by phone. During these times, consider sending your request in writing. In unusual circumstances, the fund may temporarily suspend the processing of sell requests, or may postpone payment of proceeds for up to three business days or longer, as allowed by federal securities laws. Telephone transactions For your protection, telephone requests may be recorded in order to verify their accuracy. Also for your protection, telephone transactions are not permitted on accounts whose names or addresses have changed within the past 30 days. Proceeds from telephone transactions can only be mailed to the address of record. Exchanges You may exchange Class Ishares for shares of any institutional fund or Class I shares. The registration for both accounts involved must be identical. To protect the interests of other investors in the fund, a fund may cancel the exchange privileges of any parties who, in the opinion of the fund, are using market timing strategies or making more than seven exchanges per owner or controlling party per calendar year. The fund reserves the right to require that previously exchanged shares and reinvested dividends be in the fund for 90 days before a shareholder is permitted a new exchange. The fund may also refuse any exchange order. A fund may change or cancel its exchange policies at any time, upon 60 days' notice to its shareholders. Certificated shares The fund no longer issues share certificates. Shares are electronically recorded. Any existing certificated shares can only be sold by returning the certificated shares to Signature Services, along with a letter of instruction or a stock power and a signature guarantee. Sales in advance of purchase payments When you place a request to sell shares for which the purchase money has not yet been collected, the request will be executed in a timely fashion, but the fund will not release the proceeds to you until your purchase payment clears. This may take up to ten business days after the purchase. - -------------------------------------------------------------------------------- DIVIDENDS AND ACCOUNT POLICIES Account statements In general, you will receive account statements as follows: o after every transaction (except a dividend reinvestment) that affects your account balance o after any changes of name or address of the registered owner(s) o in all other circumstances, at least quarterly Every year you should also receive, if applicable, a Form 1099 tax information statement, mailed by January 31. Dividends The funds generally declare income dividends daily and pay them monthly. Your income dividends begin accruing the day after payment is received by a fund and continue through the day your shares are actually sold. Capital gains, if any, are distributed annually, typically after the end of a fund's fiscal year. Dividend reinvestments Dividends will be reinvested automatically in additional shares of the same fund on the dividend record date. Alternatively, you can choose to have your dividends and capital gains sent directly to your bank account or a check will be sent in the amount of more than $10. However, if the check is not deliverable or the combined dividend and capital gains amount is $10 or less, your proceeds will be reinvested. If five or more of your dividend or capital gains checks remain uncashed after 180 days, all subsequent dividends and capital gains will be reinvested. 10 YOUR ACCOUNT Taxability of dividends For investors who are not exempt from federal income taxes, dividends you receive from a fund, whether reinvested or taken as cash, are generally considered taxable. Dividends from a fund's short-term capital gains are taxable as ordinary income. Dividends from a fund's long-term capital gains are taxable at a lower rate. Whether gains are short-term or long-term depends on the fund's holding period. Some dividends paid in January may be taxable as if they had been paid the previous December. The Form 1099 that is mailed to you every January details your dividends and their federal tax category, although you should verify your tax liability with your tax professional. Taxability of transactions Any time you sell or exchange shares, it is considered a taxable event for you if you are not exempt from federal income taxes. Depending on the purchase price and the sale price of the shares you sell or exchange, you may have a gain or a loss on the transaction. You are responsible for any tax liabilities generated by your transactions. - -------------------------------------------------------------------------------- BUSINESS STRUCTURE The fund's board of trustees oversees the fund's business activities and retains the services of the various firms that carry out the fund's operations. The trustees of the fund have the power to change the focus of the fund's 80% investment policy without shareholder approval. The fund will provide written notice to shareholders at least 60 days prior to a change in its 80% investment policy. The investment adviser The fund is managed by John Hancock Advisers, LLC, 101 Huntington Avenue, Boston, MA 02199-7603. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial Services, Inc. and manages approximately $30 billion in assets. Management fees For the period ended May 31, 2001, the fund paid the investment adviser management fees at a rate of 0.50% of average net assets. YOUR ACCOUNT 11 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS This table details the performance of the fund, including total return information showing how much an investment in the fund has increased or decreased each year. Since Class I shares of Bond Fund have no operational history, financial highlights are provided for the fund's Class A shares, which are offered in a separate prospectus. Bond Fund Figures audited by Ernst & Young LLP.
CLASS A SHARES -- PERIOD ENDED 12-31-96 5-31-97(1) 5-31-98 5-31-99 5-31-00 5-31-01 - ----------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANC - ----------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $15.40 $14.90 $14.78 $15.25 $14.76 $13.93 Net investment income 1.09 0.44 1.05(2) 0.97(2) 0.96(2) 0.92(2) Net realized and unrealized gain (loss) on investments (0.50) (0.12) 0.47 (0.49) (0.83) 0.76 Total from investment operations 0.59 0.32 1.52 0.48 0.13 1.68 Less distributions From net investment income (1.09) (0.44) (1.05) (0.97) (0.96) (0.92) Net asset value, end of period $14.90 $14.78 $15.25 $14.76 $13.93 $14.69 Total return(3)(%) 4.11 2.22(4) 10.54 3.11 0.97 12.38 - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS AND SUPPLEMENTAL DATA - ----------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $1,416 $1,362 $1,328 $1,279 $1,098 $1,140 Ratio of expenses to average net assets (%) 1.14 1.11(5) 1.08 1.07 1.11 1.12 Ratio of net investment income to average net assets (%) 7.32 7.38(5) 6.90 6.35 6.69 6.38 Portfolio turnover (%) 123 58 198 228 162 235
(1) Effective May 31, 1997, the fiscal year end changed from December 31 to May 31. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment and does not reflect the effect of sales charges. (4) Not annualized. (5) Annualized. 12 For more information Two documents are available that offer further information on the John Hancock Bond Fund: Annual/Semiannual Report to Shareholders Includes financial statements, a discussion of the market conditions and investment strategies that significantly affected performance, as well as the auditors' report (in annual report only). Statement of Additional Information (SAI) The SAI contains more detailed information on all aspects of the fund. The current annual report is included in the SAI. A current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into (is legally a part of) this prospectus. To request a free copy of the current annual/semiannual report or the SAI, please contact John Hancock: By mail: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1001 Boston, MA 02217-1001 By phone: 1-888-972-8696 By EASI-Line: 1-800-597-1897 By TDD: 1-800-462-0825 On the Internet: www.jhfunds.com Or you may view or obtain these documents from the SEC: In person: at the SEC's Public Reference Room in Washington, DC. For access to the Reference Room call 1-202-942-8090 By mail: Public Reference Section Securities and Exchange Commission Washington, DC 20549-0102 (duplicating fee required) By electronic request: publicinfo@sec.gov (duplicating fee required) On the Internet: www.sec.gov [LOGO](R) [OLYMPIC LOGO] WORLDWIDE SPONSER John Hancock Funds, LLC MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans (C)2002 JOHN HANCOCK FUNDS, LLC 21IPN 3/02 John Hancock Bond Fund ANNUAL REPORT 5.31.01 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."] [A photo of Maureen R. Ford, Chairman and Chief Executive Officer, in upper left-hand corner.] WELCOME Table of contents Your fund at a glance page 1 Managers' report page 2 A look at performance page 6 Growth of $10,000 page 7 Fund's investments page 8 Financial statements page 21 For your information page 37 Dear Fellow Shareholders, The stock market had a rough start to 2001, as last year's downward spiral continued, due to growing concern over the slowing economy and a parade of disappointing earnings announcements. But as the Federal Reserve aggressively attacked the slowdown with five interest-rate cuts between January and May, the market began to rebound in April on the belief that the worst might be over. Bonds wound up outperforming stocks, producing mostly positive returns, while the Standard & Poor's 500 Index returned -4% through May. Bonds were the beneficiaries of both the rate cuts and investors' search for safety. Even with the spring upturn, the market remains indecisive, as investors try to get a clearer sense of the timetable for economic and corporate recovery. As always, we will continue to update you on these developments and anything that specifically relates to your fund and its performance. In fact, this newly designed shareholder report is our latest offering in that regard, and is part of our ongoing effort to better serve our shareholders. Based on your feedback, we set out to create a more inviting report that you could easily navigate and that would provide you with more information on your fund. In addition to the new overall look, there are several prominent changes, including a table of contents, additional charts and a new summary page opposite this one. The most obvious difference is the report's size. By changing it to a standard mailing format we hope to deliver it to you in an even more timely fashion. These twice-yearly shareholder reports are your best way to better understand your fund and what has been driving its performance. We encourage you to read them, and hope that our new version will make the task easier and more meaningful. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer YOUR FUND AT A GLANCE The Fund seeks a high level of current income consistent with prudent investment risk by investing in a diversified portfolio of debt securities, including corporate bonds and U.S. government and agency securities. Over the last twelve months * The economy slowed rapidly, hurting corporate profits and the stock market. * Bond funds surpassed stock funds; U.S. Treasuries dominated the first half and then corporate bonds rallied as the Federal Reserve cut rates. * The Fund reduced its U.S. Treasury position and increased stakes in high-yield and emerging-market debt. [Bar chart with heading "John Hancock Bond Fund." Under the heading is a note that reads "Fund performance for the year ended May 31, 2001." The chart is scaled in increments of 5% with 0% at the bottom and 15% at the top. The first bar represents the 12.38% total return for Class A. The second bar represents the 11.64% total return for Class B. The third bar represents the 11.60% total return for Class C. A note below the chart reads "Total returns are at net asset value with all distributions reinvested."] Top holdings 13.5% United States Treasury 7.4% Federal National Mortgage Assn. 4.9% Government National Mortgage Assn. 1.4% GMAC Commercial Mortgage Securities 1.2% Iberdrola International 1.0% Hydro-Quebec 1.0% New York Life Insurance Co. 0.9% Morgan Stanley Capital I 0.9% RBSG Capital 0.8% Scotland International Finance No. 2 As a percentage of net assets on May 31, 2001. BY JAMES K. HO, CFA, PORTFOLIO MANAGEMENT TEAM LEADER AND BENJAMIN A. MATTHEWS, PORTFOLIO MANAGER John Hancock Bond Fund MANAGERS' REPORT The investment environment in the second half of fiscal 2001 proved to be beneficial to all the fixed-income sectors in which the John Hancock Bond Fund invests. This was a welcome change from the unease that plagued several sectors in the period's first half -- high-yield and investment-grade corporate bonds in particular. We took advantage of the portfolio's flexibility, tapping into the opportunities the changing market conditions offered. STRONG RESULTS With this backdrop, John Hancock Bond Fund produced double-digit returns for the year ended May 31, 2001. The Fund's Class A, Class B and Class C shares posted total returns of 12.38%, 11.64% and 11.60%, respectively, at net asset value. By comparison, the average corporate debt A-rated fund returned 12.09%, according to Lipper, Inc.1 Keep in mind that your net asset value return will be different from the Fund's performance if you were not invested in the Fund for the entire period and did not reinvest all distributions. Longer-term performance information can be found on pages six and seven. "...the second half of fiscal 2001 proved to be beneficial to all the fixed- income sectors in which the...Fund invests." THE FED'S ACT I In June 2000, the Fund's fiscal year began on the heels of several interest-rate increases by the Federal Reserve Board, which succeeded in slowing economic growth, but to such a degree that fears of recession set in. By November, corporate bonds were suffering severe price declines as a result. Credit spreads (the difference in yield between bonds of different credit quality) had widened to levels last seen in 1990--1991. When corporations missed their earnings projections, investors feared the profit outlook would only get worse. Quality was the key to weathering the market's volatility. In this first half of the fiscal year, we had emphasized U.S. Treasury issues, mortgage-backed securities and higher-quality corporate bonds, all of which proved to be the better-performing sectors. [A photo of Team leader Jim Ho flush right next to first paragraph.] THE FED'S ACT II By the end of the Fund's fiscal year in May 2001, the Fed was in the midst of an aggressive campaign to ease monetary policy, which has improved the outlook for an economic recovery -- if not presently, at least at some point in the foreseeable future. Between January and the end of May, the Fed had enacted five interest-rate cuts, totaling 2.50%. Though these cuts have caused only short bursts of optimism for stock investors, they have lifted the broad fixed-income market, in particular credit-sensitive sectors, which are in a constant forward-looking mode. The lower interest rates have reduced the borrowing costs for companies and consumers. As a result, corporate new-issuance supply has increased and has been met with strong demand. More confident in taking on risk, bond investors are returning to sectors that offer attractive risk premiums, such as lower-tier investment-grade and high-yield debt, as well as emerging-market issues. "We continue to maintain fair representation in recession-resistant industries..." ECONOMICALLY SENSITIVE ISSUES BOOSTED The recently passed tax-cut legislation lends further support to a brighter economic outlook, and we have selectively bolstered the Fund's stake in high-yield bonds and lower-quality investment-grade securities. Though the default rate is relatively high, history tells us that defaults are backward indicators -- the cumulative result of a series of prior financial events or disappointments. The Fed's commitment to boost economic growth gives us reason to believe that defaults should stabilize and perhaps decline. Furthermore, our intense credit research capabilities have enabled us to steer clear of many problem credits or provided us with enough information to move out of problem issues before conditions got worse. [Table at top left-hand side of page entitled "Top five sectors." The first listing is U.S. government 14%, the second is U.S. government agencies 13%, the third Utilities 13%, the fourth Finance 6%, and the fifth Media 5%.] We added to economically sensitive issues -- such as those in the airline, mining, paper and retail industries -- as well as select telecommunication, cable/media and financial issues. We bought or added to holdings such as Northwest Airlines, Newmont Mining, Phelps Dodge, Georgia-Pacific, Federated Department Stores, AOL Time Warner, Viacom and Bank One. We also increased the Fund's weighting in emerging-market bonds, purchasing BBVA Bancomer (a Mexican corporate bond that we later sold for profits), Brazil C-bonds and Colombia sovereign debt. [Pie chart at bottom of page with heading "Types of investments in the Fund As of May 31, 2001." The chart is divided into six sections (from top to left): Corporate bonds 56%, Government bonds 26%, Foreign corporate bonds 8%, Foreign government bonds 2%, Preferred stock 1% and Short-term investments & other 7%.] We continue to maintain fair representation in recession-resistant industries such as defense, utilities, health care, media and energy. Noteworthy performers in these areas included BellSouth, Qwest Capital Funding, Progress Energy, HealthSouth and Cox Communications. YIELD CURVE STEEPENS Long-term U.S. Treasury bonds dominated fixed-income performance last summer. As they rallied, the Fund benefited from its substantial exposure. The price strength of long-term Treasury bonds created an inverted yield curve, an unusual occurrence wherein rates on long-term securities are lower than those offered by shorter-term issues. The yield curve modified in the fall and then in response to the Fed's easing reverted to its normally steep shape this past spring. Consequently, Treasury securities stepped out of the performance limelight. In the period's second half, we reduced the Fund's exposure to Treasury bonds as well as mortgage-backed and agency issues, redeploying those assets into corporate bonds and emerging-market debt. [Table at top of page entitled "SCORECARD." The header for the left column is "INVESTMENT" and the header for the right column is "RECENT PERFORMANCE...AND WHAT'S BEHIND THE NUMBERS." The first listing is AT&T Wireless followed by an up arrow with the phrase "Rebound in telecommunications." The second listing is Bank of America followed by an up arrow with the phrase "Decline in interest rates." The third listing is Brazil C-Bonds followed by a sideways arrow with the phrase "Uncertainty in Argentina."] "...we shall watch the markets carefully and rely on intense credit research..." Our duration, or interest-rate sensitivity, and our yield-curve strategy remained relatively neutral throughout most of the year. More recently, we have shortened duration slightly, believing that Treasury yields do not have much more room to fall. Should the Fed's actions succeed in stimulating economic growth as we anticipate, the yield curve may begin to flatten and a shorter-duration stance would prove beneficial. OUTLOOK Though fiscal 2002 is shaping up to offer corporate bonds a more benign investment environment, we are very aware that the economy may not respond as favorably to the Fed's easing as we hope, or could even deteriorate further. Experience tells us the latter scenario, though possible, is doubtful, given the Fed's resolve. Nevertheless, we shall watch the markets carefully and rely on intense credit research to guide our investment decisions. This commentary reflects the views of the portfolio managers through the end of the Fund's period discussed in this report. Of course, the managers' views are subject to change as market and other conditions warrant. 1 Figures from Lipper, Inc. include reinvested dividends and do not take into account sales charges. Actual load-adjusted performance is lower. A LOOK AT PERFORMANCE For the year ended May 31, 2001. The index used for comparison is the Lehman Brothers Corporate Bond Index, an unman aged index that mirrors the invest ment objectives and characteristics of the Fund. It is not possible to invest in an index. Class A Class B Class C Index Inception date 11-9-73 11-23-93 10-1-98 -- Average annual returns with maximum sales charge (POP) One year 7.30% 6.64% 9.50% 13.76% Five years 6.13% 6.07% -- 7.40% Ten years 7.32% -- -- 7.92% Since inception -- 5.81% 3.15% -- Cumulative total returns with maximum sales charge (POP) One year 7.30% 6.64% 9.50% 13.76% Five years 34.63% 34.24% -- 42.89% Ten years 102.60% -- -- 114.39% Since inception -- 52.86% 8.61% -- SEC 30-day yield as of May 31, 2001 7.23% 6.87% 6.79% -- Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 4.5% and Class C shares of 1%, and the applicable contingent deferred sales charge (CDSC) on Class B and Class C shares. The Class B shares' CDSC declines annually between years 1-6 according to the following schedule: 5, 4, 3, 3, 2, 1%. No sales charge will be assessed after the sixth year. Class C shares held for less than one year are subject to a 1% CDSC. The return and principal value of an investment in the Fund will fluctuate, so that shares, when redeemed, may be worth more or less than the original cost. Index figures do not reflect sales charges and would be lower if they did. The returns reflect past results and should not be considered indicative of future performance. The performance table above and the chart on the next page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. GROWTH OF $10,000 This chart shows what happened to a hypothetical $10,000 investment in Class A shares for the period indicated. For comparison, we've shown the same investment in the Lehman Brothers Corporate Bond Index. Line chart with the heading "GROWTH OF $10,000." Within the chart are three lines. The first line represents the Index and is equal to $21,439 as of May 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Bond Fund, before sales charge, and is equal to $21,204 as of May 31, 2001. The third bar represents the same hypothetical $10,000 investment made in the John Hancock Bond Fund, after sales charge, and is equal to $20,251 as of May 31, 2001. Class B 1 Class C 1 Inception date 11-23-93 10-1-98 Without sales charge $15,286 $10,973 With maximum sales charge -- $10,863 Index $16,301 $11,510 Assuming all distributions were reinvested for the period indicated, the chart above shows the value of a $10,000 investment in the Fund's Class B and Class C shares, respectively, as of May 31, 2001. Performance of the classes will vary based on the difference in sales charges paid by shareholders investing in the different classes and the fee structure of those classes. 1 No contingent deferred sales charge applicable. FINANCIAL STATEMENTS FUND'S INVESTMENTS Securities owned by the Fund on May 31, 2001. This schedule is divided into three main categories: bonds, preferred stocks and warrants, and short-term investments. The bonds are further broken down by industry group. Short-term investments, which represent the Fund's cash position, are listed last.
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE BONDS 92.08% $1,274,705,116 (Cost $1,273,419,554) Aerospace 0.79% $10,919,732 Jet Equipment Trust, Equipment Trust Cert Ser 95B2 08-15-14 (R) 10.910% BBB $5,800 6,293,000 Lockheed Martin Corp., Bond 12-01-29 8.500 BBB- 4,145 4,626,732 Agricultural Operations 0.55% 7,612,044 Cargill, Inc., Note 05-01-06 (R) 6.250 A+ 3,050 3,016,175 Potash Corp., Note (Canada) 05-31-11 (Y) 7.750 BBB+ 4,485 4,595,869 Automobiles/Trucks 2.09% 28,890,826 DaimlerChrysler Auto Trust, Pass Thru Ctf Ser 2001-A Class A-4 03-06-06 5.400 AAA 6,380 6,377,863 ERAC USA Finance Co., Note 02-15-05 (R) 6.625 BBB+ 1,440 1,404,706 Note 12-15-09 (R) 7.950 BBB+ 2,675 2,674,171 Ford Credit Auto Owner Trust, Pass Thru Ctf Ser 2000-F Class A-3 11-15-04 6.580 AAA 7,985 8,200,196 Ford Motor Co., Note 07-16-31 7.450 A 4,245 4,088,190 Toyota Auto Receivables Owner Trust, Asset Backed Note Ser 2000-B Class A-4 04-15-07 6.800 AAA 5,920 6,145,700 Banks -- Foreign 3.60% 49,853,765 Abbey National First Capital, B.V., Sub Note (United Kingdom) 10-15-04 (Y) 8.200 AA- 10,000 10,789,600 African Development Bank, Sub Note (Supra National) 12-15-03 (Y) 9.750 AA- 8,000 8,824,000 Barclays Bank Plc, Sub Note (United Kingdom) 06-15-49 (R) (Y) 7.375 A+ 3,455 3,473,899 International Bank for Reconstruction & Development, Deb (Supra National) 09-01-16 (Y) 8.250 AAA 5,000 5,909,900 Royal Bank of Scotland Group Plc, Bond (United Kingdom) 03-31-49 (Y) 8.817 A- 3,130 3,366,878 Scotland International Finance No. 2, B.V., Gtd Sub Note (Netherlands) 11-01-06 (R) (Y) 8.850 A 10,335 11,382,452 Standard Chartered Bank, Sub Note (United Kingdom) 05-30-31 (R) (Y) 8.000 A- 2,815 2,901,533 UBS PFD Funding Trust I, Gtd Bond 10-01-49 8.622 AA- 2,870 3,205,503 Banks -- United States 3.12% 43,165,543 Bank of New York, Cap Security 12-01-26 (R) 7.780 A- 5,750 5,803,072 Bank One Corp., Sub Note 08-01-10 7.875 A- 2,585 2,761,943 BNP Paribas Capital Trust, Sub Note 12-27-49 (R) 9.003 A 2,615 2,875,611 Capital One Bank, Sr Note 02-01-06 6.875 BBB- 3,075 3,016,590 Colonial Bank, Sub Note 06-01-11 9.375 BBB- 2,595 2,632,212 HSBC Holding Plc, Sub Note (United Kingdom) 07-15-09 (Y) 7.500 A 3,430 3,593,988 RBSG Capital Corp., Gtd Cap Note 03-01-04 10.125 A 10,605 11,752,991 Skandinaviska Enskilda, Jr Sub Note 12-29-49 (R) 6.500 BBB 3,150 3,161,529 Wells Fargo Bank N.A., Sub Note 02-01-11 6.450 A+ 3,855 3,801,377 Zions Financial Corp., Note 05-15-11 (R) 6.950 BBB- 3,770 3,766,230 Beverages 0.30% 4,202,100 Canandaigua Brands, Inc., Sr Sub Note Ser C 12-15-03 8.750 B+ 4,140 4,202,100 Broker Services 0.75% 10,449,649 Goldman Sachs Group, Inc., Bond 01-15-11 6.875 A+ 3,880 3,836,544 Radian Group, Inc., Note 06-01-11 (R) 7.750 A 4,145 4,132,980 Salomon Smith Barney Holdings, Inc., Note 03-15-06 5.875 A 2,500 2,480,125 Building 0.44% 6,056,183 Black & Decker Holdings, Note 06-01-11 (R)*** 7.125 BBB 4,135 4,124,663 Vulcan Materials Co., Note 02-01-06 6.400 A+ 1,920 1,931,520 Chemicals 0.51% 7,062,328 Akzo Nobel, Inc., Bond 11-15-03 (R) 6.000 A- 2,860 2,895,750 Nova Chemicals Corp., Note 05-15-06 7.000 BBB 4,190 4,166,578 Containers 0.17% 2,288,288 Stone Container Corp., Sr Note 02-01-11 (R) 9.750 B 2,195 2,288,288 Cosmetics & Personal Care 0.23% 3,250,183 International Flavors & Fragrances, Inc., Note 05-15-06 (R) 6.450 BBB+ 3,255 3,250,183 Energy 1.12% 15,516,770 Enron Corp., Note 08-15-05 (R) 8.000 BBB+ 3,990 4,098,328 MidAmerican Energy Holdings, Sr Bond 09-15-28 8.480 BBB- 4,275 4,551,079 P&L Coal Holdings Corp., Sr Sub Note Ser B 05-15-08 9.625 B 4,065 4,329,225 Progress Energy, Inc., Sr Note 03-01-11 7.100 BBB 2,515 2,538,138 Finance 5.76% 79,682,166 American Express Credit Account Master Trust, Pass Thru Ctf Ser 2000-1 Class A 09-17-07 7.200 AAA 5,985 6,342,185 Bombardier Capital, Inc., Note 01-15-02 (R) 6.000 A- 4,675 4,711,465 Citigroup, Inc., Note 01-18-11 6.500 AA- 2,665 2,644,906 Ford Motor Credit Co., Note 04-28-03 6.125 A 5,540 5,613,904 General Motors Acceptance Corp., Note 07-15-05 7.500 A 4,025 4,212,726 Heller Financial, Inc., Bond 01-15-03 6.400 A- 3,815 3,862,687 Household Finance Corp., Note 05-09-05 8.000 A 5,165 5,528,203 Note 01-24-06 6.500 A 2,600 2,628,080 Note 07-15-10 8.000 A 2,680 2,879,178 Humpuss Funding Corp., Gtd Note 12-15-09 (R) 7.720 B3 1,868 1,335,392 ING Capital Funding Trust III, Gtd Note 12-31-49 8.439 A 2,850 3,018,862 Marlin Water Trust/Marlin Water Capital Corp., Sr Sec Note 12-15-01 (R) 7.090 BBB 4,460 4,510,755 MBNA Master Credit Card Trust, Pass Thru Ctf Ser 1999-G Class A 12-15-06 6.350 AAA 6,320 6,509,600 MMCA Auto Owner Trust, Pass Thru Ctf Ser 2000-2 Class A-4 06-15-05 6.860 AAA 6,500 6,759,935 Pemex Project Funding Master Trust, Gtd Note 10-13-10 (R)** 9.125 BB+ 4,175 4,295,031 Standard Credit Master Trust, Ser 1995-1 Class A 01-07-07 8.250 AAA 7,372 8,005,476 Takefuji Corp., Sr Note (Japan) 04-15-11 (R) (Y) 9.200 A- 3,470 3,618,828 Yanacocha Receivables Master Trust, Pass Thru Cert Ser 1997-A 06-15-04 (R) 8.400 BBB- 3,304 3,204,953 Food 0.30% 4,212,860 Earthgrains Co., Sr Note 08-01-03 8.375 BBB 4,085 4,212,860 Government -- Foreign 1.99% 27,497,285 Brazil, Federal Republic of, Bond (Brazil) 04-15-14 (Y) 8.000 BB- 6,933 5,108,601 Colombia, Republic of, Gtd Note (Colombia) 04-09-11 (Y) 9.750 BBB 3,750 3,731,250 Nova Scotia, Province of, Deb (Canada) 04-01-22 (Y) 8.750 A- 7,500 9,052,500 Quebec, Province of, Deb (Canada) 09-15-29 (Y) 7.500 A+ 3,215 3,414,234 Saskatchewan, Province of, Deb (Canada) 12-15-20 (Y) 9.375 A+ 5,000 6,190,700 Government -- U.S. 13.54% 187,400,492 United States Treasury, Bond 08-15-17 8.875 AAA 25,342 33,285,196 Bond 05-15-18 9.125 AAA 17,990 24,224,614 Bond 05-15-30 6.250 AAA 20,090 21,210,620 Note 08-15-03 5.750 AAA 13,600 13,986,784 Note 02-15-05 7.500 AAA 31,574 34,435,236 Note 07-15-06 7.000 AAA 30,140 32,744,397 Note 01-15-07 3.375 AAA 5,769 5,831,785 Note 05-15-08 5.625 AAA 3,770 3,847,737 Note 08-15-10 5.750 AAA 17,455 17,834,123 Government -- U.S. Agencies 12.92% 178,803,067 Federal Home Loan Mortgage Corp., 30 Yr Pass Thru Ctf 01-01-16 11.250 AAA 357 399,817 Federal National Mortgage Assn., 15 Yr Pass Thru Ctf 02-01-08 7.500 AAA 869 901,585 15 Yr Pass Thru Ctf 09-01-10 to 11-01-14 7.000 AAA 8,951 9,153,642 15 Yr Pass Thru Ctf 12-01-12 6.500 AAA 6,973 7,036,180 15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 15,972 15,529,627 15 Yr Pass Thru Ctf 06-01-16 6.000 AAA 5,536 5,482,633 30 Yr Pass Thru Ctf 10-01-23 to 06-01-31** 7.000 AAA 8,001 8,096,005 30 Yr Pass Thru Ctf 11-01-28 6.500 AAA 3,138 3,109,430 Federal National Mortgage Assn., 30 Yr Pass Thru Ctf 06-01-29 to 06-01-31** 7.500 AAA 6,422 6,570,887 30 Yr Pass Thru Ctf 03-01-31 to 04-01-31 6.000 AAA 21,320 20,564,663 Note 01-15-30 7.125 AAA 21,080 22,621,370 Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 6.940 AAA 2,982 3,121,886 Financing Corp., Bond 02-08-18 9.400 AAA 7,000 9,072,630 Government National Mortgage Assn., 30 Yr Pass Thru Ctf 01-15-16 10.500 AAA 54 59,594 30 Yr Pass Thru Ctf 01-15-16 11.000 AAA 104 115,500 30 Yr Pass Thru Ctf 07-15-16 to 01-15-25 9.000 AAA 5,100 5,482,211 30 Yr Pass Thru Ctf 11-15-19 to 05-15-21 9.500 AAA 1,354 1,457,986 30 Yr Pass Thru Ctf 06-15-20 to 03-15-25 10.000 AAA 537 584,313 30 Yr Pass Thru Ctf 11-15-22 8.000 AAA 2,198 2,311,810 30 Yr Pass Thru Ctf 08-15-28 to 06-01-31** 7.000 AAA 21,247 21,536,768 30 Yr Pass Thru Ctf 01-15-29 to 07-15-29 6.500 AAA 24,745 24,602,154 30 Yr Pass Thru Ctf 05-15-30 7.500 AAA 10,685 10,992,376 Insurance 2.98% 41,271,930 AXA, Sub Note (France) 12-15-30 (Y) 8.600 A- 4,080 4,470,342 Equitable Life Assurance Society of the United States, Surplus Note 12-01-05 (R) 6.950 A+ 3,700 3,794,054 Hartford Life, Inc., Sr Note 03-01-31 7.375 A 2,680 2,688,254 Massachusetts Mutual Life Insurance Co., Surplus Note 11-15-23 (R) 7.625 AA 3,970 3,954,120 MONY Group, Inc. (The), Sr Note 12-15-05 7.450 A- 1,860 1,900,083 New York Life Insurance Co., Surplus Note 12-15-23 (R) 7.500 AA- 15,000 13,800,000 Sun Canada Financial Co., Gtd Sub Note 12-15-07 (R) 6.625 AA- 7,250 7,344,250 URC Holdings Corp., Sr Note 06-30-06 (R) 7.875 AA+ 3,110 3,320,827 Leisure 0.78% 10,778,053 Harrah's Operating Co., Inc., Gtd Sr Sub Note 12-15-05 7.875 BB+ 2,055 2,080,687 HMH Properties, Inc., Gtd Sr Sec Note Ser A 08-01-05 7.875 BB 3,455 3,403,175 MGM Mirage, Inc., Gtd Sr Note 09-15-10 8.500 BBB- 2,295 2,343,103 Station Casinos, Inc., Sr Note 02-15-08 8.375 BB- 1,095 1,108,688 Waterford Gaming LLC/Waterford Gaming Finance Corp., Sr Note 03-15-10 (R) 9.500 B+ 1,880 1,842,400 Media 4.90% 67,822,434 Adelphia Communications Corp., Sr Note Ser B 10-01-02 9.250 B+ 4,750 4,750,000 Sr Note Ser B 07-15-03 8.125 B+ 2,250 2,193,750 AOL Time Warner, Inc., Bond 04-15-31 7.625 BBB+ 4,155 4,183,046 British Sky Broadcasting Group Plc, Gtd Sr Note (United Kingdom) 07-15-09 (Y) 8.200 BB+ 2,940 2,913,217 Century Communications Corp., Sr Note 03-01-05 9.500 B+ 1,720 1,616,800 Charter Communications Holdings LLC/Charter Communications Capital Corp., Sr Note 01-15-11 11.125 B+ 980 1,043,700 Sr Note 05-15-11 (R) 10.000 B+ 1,065 1,067,662 Clear Channel Communications, Inc., Sr Note 06-15-05 7.875 BBB- 5,170 5,429,948 Continental Cablevision, Inc., Sr Note 05-15-06 8.300 A 3,820 4,114,102 CSC Holdings, Inc., Sr Note 04-01-11 (R) 7.625 BB+ 4,605 4,471,547 Sr Sub Deb 05-15-16 10.500 BB- 2,910 3,215,550 EchoStar DBS Corp., Sr Note 02-01-09 9.375 B+ 1,570 1,585,700 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 B+ 2,485 2,385,600 Lenfest Communications, Inc., Sr Note 11-01-05 8.375 BBB 2,685 2,874,830 Mediacom LLC/Mediacom Capital Corp., Sr Note Ser B 04-15-08 8.500 B+ 1,435 1,345,313 News America Holdings, Inc., Gtd Sr Deb 08-10-18 8.250 BBB- 1,805 1,829,873 News America, Inc., Gtd Note 04-30-28 7.300 BBB- 2,575 2,325,122 Rogers Cablesystems Ltd., Sr Note Ser B (Canada) 03-15-05 (Y) 10.000 BB+ 4,880 5,233,800 TCI Communications, Inc., Sr Deb 02-15-26 7.875 A 2,830 2,863,790 Time Warner, Inc., Deb 01-15-13 9.125 BBB+ 3,420 3,974,690 Viacom, Inc., Gtd Note 01-30-06 (R) 6.400 A- 2,090 2,109,897 Gtd Sr Note 01-30-06 6.400 A- 2,095 2,115,070 Gtd Sr Deb 07-30-30 7.875 A- 3,965 4,179,427 Medical 1.68% 23,237,580 Athena Neuro Finance LLC, Gtd Sr Note 02-21-08 7.250 BBB 2,655 2,696,312 Dynacare, Inc., Sr Note (Canada) 01-15-06 (Y) 10.750 B+ 3,465 3,534,300 Fresenius Medical Care Capital Trust II, Gtd Trust Preferred Security 02-01-08 7.875 B+ 3,480 3,393,000 HCA -- The Healthcare Co., Note 06-01-06 7.125 BB+ 3,930 3,881,268 Note 09-01-10 8.750 BB+ 1,845 1,951,087 HealthSouth Corp., Note 02-01-08 (R) 8.500 BBB- 2,035 2,045,175 Quest Diagnostics, Inc., Sr Sub Note 12-15-06 10.750 B+ 3,205 3,389,288 Tenet Healthcare Corp., Sr Note 01-15-05 8.000 BB+ 890 918,925 Triad Hospitals, Inc., Gtd Sr Note 05-01-09 (R) 8.750 B- 1,390 1,428,225 Metal 0.42% 5,864,864 Newmont Mining Corp., Note 05-15-11 8.625 BBB 2,600 2,570,724 Phelps Dodge Corp., Sr Note 06-01-11 8.750 BBB 3,355 3,294,140 Mortgage Banking 5.21% 72,090,252 Commercial Mortgage Acceptance Corp., Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-08 6.790 Aaa 5,403 5,532,897 ContiMortgage Home Equity Loan Trust, Pass Thru Ctf Ser 1995-2 Class A-5 08-15-25 8.100 AAA 3,452 3,498,660 Credit Suisse First Boston Mortgage Securities Corp., Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class A-1A 12-17-07 6.260 AAA 4,341 4,387,475 Deutsche Mortgage & Asset Receiving Corp., Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class C 03-15-08 6.861 A2 3,585 3,563,714 FirstPlus Home Loan Trust, Pass Thru Ctf Ser 1998-4 Class A-5 01-10-18 6.380 AAA 6,220 6,272,435 GMAC Commercial Mortgage Securities, Inc., Pass Thru Ctf Ser 1997-C2 Class A-3 11-15-07 6.566 Aaa 6,025 5,995,816 Pass Thru Ctf Ser 1998-C1 Class A-1 11-15-07 6.411 Aaa 12,820 13,039,899 LB Commercial Conduit Mortgage Trust, Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-07 6.410 Aaa 5,531 5,617,601 Morgan Stanley Capital I, Inc., Pass Thru Ctf Ser 1999-CAM1 Class A-3 11-15-08 6.920 AAA 12,480 12,772,988 Salomon Brothers Mortgage Securities VII, Inc., Mtg Pass Thru Ctf Ser 1997-HUD2 Class A-2 07-25-24 6.750 Aaa 3,940 3,958,991 UCFC Home Equity Loan Trust, Pass Thru Ctf Ser 1996-D1 Class A6 02-15-25 7.180 AAA 7,260 7,449,776 Oil & Gas 2.43% 33,571,782 Alberta Energy Co., Ltd., Note (Canada) 09-15-30 (Y) 8.125 BBB+ 2,850 3,096,154 Chesapeake Energy Corp., Sr Note 04-01-11 (R) 8.125 B+ 1,505 1,467,375 El Paso Energy Corp., Med Term Note 10-15-30 8.050 BBB 4,245 4,332,362 Louis Dreyfus Natural Gas Corp., Note 12-01-07 6.875 BBB 2,685 2,646,605 Occidental Petroleum Corp., Sr Deb 09-15-09 10.125 BBB- 1,080 1,292,576 Ocean Energy, Inc., Gtd Sr Sub Note Ser B 07-15-07 8.875 BB+ 2,220 2,355,797 Petroleum Geo-Services ASA, Sr Note (Norway) 03-30-28 (Y) 7.125 BBB- 3,445 2,780,770 Santa Fe Snyder Corp., Sr Sub Note 06-15-07 8.750 BBB+ 2,575 2,744,306 Tosco Corp., Note 02-15-30 8.125 BBB 4,335 4,704,342 Transocean Sedco Forex, Inc., Note 04-15-31 (R) 7.500 A- 4,015 4,010,543 Union Pacific Resources Group, Inc., Deb 05-15-28 7.150 BBB+ 4,330 4,140,952 Paper & Paper Products 0.92% 12,777,080 Georgia-Pacific Corp., Note 05-15-31 8.875 BBB- 4,150 4,053,346 International Paper Co., Note 07-08-05 8.125 BBB+ 4,165 4,444,055 Stora Enso Oyj, Sr Note 05-15-11 7.375 BBB+ 4,255 4,279,679 Real Estate Investment Trust 1.56% 21,640,277 American Health Properties, Inc., Note 01-15-07 7.500 BBB+ 2,350 2,305,937 Cabot Industrial Properties, L.P., Note 05-01-04 7.125 BBB 3,455 3,502,057 Camden Property Trust, Note 04-15-04 7.000 BBB 3,800 3,863,992 Healthcare Realty Trust, Inc., Sr Note 05-01-11 8.125 BBB- 2,600 2,580,500 Liberty Property, L.P., Med Term Note 06-05-02 6.600 BBB 3,030 3,108,568 Mack-Cali Realty, L.P., Note 02-15-11 7.750 BBB 2,655 2,680,674 ProLogis Trust, Sr Note 04-15-04 6.700 BBB+ 3,555 3,598,549 Real Estate Operations 0.12% 1,596,400 EOP Operating, L.P., Sr Note 02-15-05 6.625 BBB+ 1,580 1,596,400 Retail 0.82% 11,348,769 Archer-Daniels-Midland Co., Deb 02-01-31 7.000 A+ 3,580 3,450,010 Delhaize America Inc., Note 04-15-11 (R) 8.125 BBB- 3,835 3,936,551 Federated Department Stores, Inc., Sr Note 04-01-11 6.625 BBB+ 4,155 3,962,208 Telecommunications 4.85% 67,194,070 American Tower Corp., Sr Note 02-01-09 (R) 9.375 B 505 494,900 AT&T Wireless Group, Sr Note 03-01-31 (R) 8.750 BBB 2,470 2,586,732 BellSouth Capital Funding Corp., Deb 02-15-30 7.875 AA- 4,210 4,506,931 Citizens Communications Co., Note 05-15-06 8.500 BBB 2,600 2,613,026 Note 05-15-11 9.250 BBB 2,600 2,609,282 Clearnet Communications, Inc., Sr Disc Note, Step Coupon (10.125%, 05-01-04) (Canada) 05-01-09 (A) (Y) Zero B3 2,500 2,156,250 Cox Communications, Inc., Note 11-01-10 7.750 BBB 2,825 2,977,635 Crown Castle International Corp., Sr Note 05-15-11 9.000 B 1,325 1,272,000 Sr Note 08-01-11 (R) 9.375 B 780 768,300 Deutsche Telekom International Finance B.V., Gtd Bond (Netherlands) 06-15-05 (Y) 7.750 A- 2,375 2,490,021 Dominion Resources, Inc., Sr Note Ser A 06-15-10 8.125 BBB+ 4,255 4,616,675 LCI International, Inc., Sr Note 06-15-07 7.250 BBB+ 3,860 3,852,627 MetroNet Communications Corp., Sr Note (Canada) 08-15-07 (Y) 12.000 BBB 2,430 2,648,700 NTL Communications Corp., Sr Note Ser B 10-01-08 11.500 B 1,770 1,433,700 Qwest Capital Funding, Inc., Bond 02-15-31 (R) 7.750 BBB+ 5,425 5,258,995 Telefonos de Mexico S.A. de C.V., Sr Note (Mexico) 01-26-06 (R) (Y) 8.250 BB+ 5,590 5,649,394 Telus Corp., Note 06-01-11 8.000 BBB+ 5,575 5,622,388 Time Warner Telecom, Inc., Sr Note 02-01-11 10.125 B- 480 465,600 Tritel PCS, Inc., Sr Sub Note 01-15-11 (R) 10.375 B3 675 651,375 Triton PCS, Inc., Sr Sub Note 02-01-11 (R) 9.375 CCC+ 1,585 1,573,113 Verizon Global Funding Corp., Bond 12-01-30 (R) 7.750 A+ 5,640 5,859,396 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 A- 2,640 3,049,200 WorldCom, Inc., Note 05-15-06 8.000 BBB+ 3,860 4,037,830 Transportation 4.22% 58,468,555 America West Airlines, Inc., Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 A- 3,313 3,243,010 Burlington Northern & Santa Fe Railway Co., Deb 08-15-30 7.950 BBB+ 4,255 4,480,855 Continental Airlines, Inc., Pass Thru Ctf Ser 1996-C 10-15-13 9.500 BBB+ 4,188 4,641,837 Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA+ 5,307 5,163,865 Delphi Auto Systems Corp., Note 06-15-06 6.550 BBB 2,720 2,726,283 Delta Air Lines, Inc., Note 12-15-05 7.700 BBB- 3,150 3,116,515 Northwest Airlines, Inc., Gtd Note 03-15-04 8.375 BB 2,175 2,137,025 Gtd Note 06-01-06 8.875 BB 2,605 2,578,950 Pass Thru Ctf Ser 1996-1C 01-02-05 10.150 BBB- 1,873 1,933,549 Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BBB- 3,376 3,471,449 NWA Trust, Sr Note Ser A 12-21-12 9.250 AA 4,878 5,337,137 Railcar Trust No. 1992-1, Pass Thru Ser 1992-1 Class A 06-01-04 7.750 AAA 8,642 8,959,438 US Airways, Inc., Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 BB- 4,349 4,479,946 United Air Lines, Inc., Pass Thru Ctf Ser 2000-2 Class A-1 10-01-10 7.032 AAA 3,760 3,764,596 Wisconsin Central Transportation Corp., Note 04-15-08 6.625 BBB- 2,525 2,434,100 Utilities 12.91% 178,762,242 AES Corp., Sr Note 06-01-09 9.500 BB 2,620 2,682,225 Sr Note 09-15-10 9.375 BB 1,110 1,159,950 Sr Sub Note 07-15-06 10.250 B+ 3,570 3,712,800 AES Eastern Energy, Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 3,700 3,732,042 Beaver Valley Funding Corp., Sec Lease Oblig Bond 06-01-17 9.000 BB- 3,960 4,143,150 BVPS II Funding Corp., Collateralized Lease Bond 06-01-17 8.890 BB- 6,600 6,930,000 Calpine Canada Energy Finance ULC, Gtd Sr Note 05-01-08 8.500 BB+ 2,610 2,559,635 Calpine Corp., Sr Note 08-15-05 8.250 BB+ 1,685 1,677,628 Sr Note 05-15-06 10.500 BB+ 4,650 4,882,500 Sr Note 02-15-11 8.500 BB+ 2,585 2,563,622 Cleveland Electric Illuminating Co., 1st Mtg Ser B 05-15-05 9.500 BB+ 10,220 10,539,375 CMS Energy Corp., Sr Note 10-15-07 9.875 BB 1,160 1,223,800 Sr Note 04-15-11 8.500 BB 550 551,501 Sr Note Ser B 01-15-04 6.750 BB 3,595 3,451,200 EIP Funding-PNM, Sec Fac Bond 10-01-12 10.250 BBB- 8,473 9,256,752 GG1B Funding Corp., Deb 01-15-11 7.430 BBB- 3,288 3,346,022 HQI Tanselec Chile SA, Sr Note (Chile) 04-15-11 (R) (Y) 7.875 A- 4,075 3,986,491 Hydro-Quebec, Gtd Deb Ser FU (Canada) 02-01-12 (Y) 11.750 A+ 5,000 6,931,250 Gtd Deb Ser IF (Canada) 02-01-03 (Y) 7.375 A+ 7,185 7,486,986 Iberdrola International B.V., Note 10-01-02 7.500 AA- 8,000 8,278,240 Sr Note (Netherlands) 06-01-03 (R) (Y) 7.125 AA- 8,629 8,946,547 KeySpan Corp., Sr Note 11-15-30 8.000 A 2,695 2,905,372 Long Island Lighting Co., Deb 03-15-23 8.200 A- 5,615 5,720,281 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 BB+ 7,545 8,374,950 Deb Ser B 07-23-06 13.250 BB+ 1,900 2,223,000 Mirant Americas Generation, Inc., Sr Note 05-01-11 (R) 8.300 BBB- 3,160 3,175,768 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 BB+ 1,191 1,197,016 Niagara Mohawk Power Corp., Sec Fac Deb Bond 01-01-18 8.770 BBB 6,847 7,113,485 NiSource Finance Corp., Gtd Note 11-15-10 7.875 BBB 3,180 3,357,508 North Atlantic Energy Corp., 1st Mtg Ser A 06-01-02 9.050 BBB 2,351 2,416,993 Northeast Utilities, Note Ser A 12-01-06 8.580 BBB 911 942,106 NRG Energy, Inc., Sr Note 04-01-11 7.750 BBB- 2,725 2,747,972 PECO Energy Transition Trust, Pass Thru Ctf Ser 1999-A Class A-6 03-01-09 6.050 AAA 4,511 4,527,646 Pinnacle Partners, Sr Note 08-15-04 (R) 8.830 BBB- 3,830 3,858,422 Pinnacle West Capital Corp., Sr Note 04-01-06 6.400 BBB 3,810 3,726,828 PNPP II Funding Corp., Deb 05-30-16 9.120 BB- 4,120 4,346,806 PSEG Energy Holdings, Inc., Sr Note 02-15-08 (R) 8.625 BBB- 2,685 2,626,252 Sierra Pacific Resources, Note 05-15-05 8.750 BBB- 1,835 1,838,633 System Energy Resources, Inc., 1st Mtg 08-01-01 7.710 BBB- 5,525 5,541,907 TXU Electric Capital V, Gtd Note 01-01-37 8.175 BBB- 2,930 2,855,812 Waterford 3 Funding Corp., Sec Lease Oblig Bond 01-02-17 8.090 BBB- 7,133 7,302,529 Xcel Energy, Inc., Sr Note 12-01-10 7.000 BBB+ 3,985 3,921,240 Waste Disposal Service & Equipment 0.10% 1,417,547 Waste Management, Inc., Sr Note 08-01-10 7.375 BBB 1,415 1,417,547 NUMBER OF SHARES OR WARRANTS VALUE PREFERRED STOCKS AND WARRANTS 1.15% $15,955,782 (Cost $15,155,138) California Federal Preferred Capital Corp., 9.125%, Ser A, Preferred Stock 327,190 8,294,267 CSC Holdings, Inc., 11.125% Ser M, Preferred Stock 56,373 6,179,890 CSC Holdings, Inc., 11.750%, Ser H, Preferred Stock 9,475 1,042,250 MetroNet Communications Corp., Warrant (Canada) (R) (Y) 4,625 439,375 INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE SHORT-TERM INVESTMENTS 6.85% $94,836,000 (Cost $94,836,000) Joint Repurchase Agreement 6.85% Investment in a joint repurchase agreement transaction with Barclays Capital, Inc. -- Dated 05-31-01, due 06-01-01 (Secured by U.S. Treasury Note 3.625%, due 01-15-08) 4.060% $94,836 94,836,000 TOTAL INVESTMENTS 100.08% $1,385,496,898 OTHER ASSETS AND LIABILITIES, NET (0.08%) ($1,202,978) TOTAL NET ASSETS 100.00% $1,384,293,920
(A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $190,883,696, or 13.79% of net assets as of 5-31-01. (Y) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. * Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investor Services or John Hancock Advisers, Inc. where Standard & Poor's ratings are not available. ** A portion of these securities having an aggregate value of $16,594,500, or 1.20% of the Fund's net assets, has been purchased as forward commitments -- that is, the Fund has agreed on trade date to take delivery of and to make payment for this security on a delayed basis subsequent to the date of this schedule. The purchase price and interest rate of these securities are fixed at trade date, although the Fund does not earn any interest on these securities until settlement date. The Fund has instructed its Custodian Bank to segregate assets with a current value at least equal to the amount of the forward commitments. Accordingly, the market value of $17,011,491 of United States Treasury Note, 7.500%, 2-15-05, has been segregated to cover the forward commitment. *** A portion of this security having an aggregate value of $4,124,663, or 0.30% of the Fund's net assets, has been purchased on a when-issued basis. The purchase price and the interest rate of this security is fixed at trade date, although the Fund does not earn any interest on this security until settlement date. The Fund has instructed its custodian bank to segregate assets with a current value at least equal to the amount of its when-issued commitment. Accordingly, the market value of $4,185,800 of United States Treasury Note, 7.500%, 02-15-05, has been segregated to cover the when-issued commitment. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. ASSETS AND LIABILITIES May 31, 2001. This Statement of Assets and Liabilities is the Fund's balance sheet. It shows the value of what the Fund owns, is due and owes. You'll also find the net asset value and the maximum offering price per share. ASSETS Investments at value (cost $1,383,410,692) $1,385,496,898 Cash 110 Receivable for investments sold 20,747,741 Receivable for shares sold 1,164,330 Dividends and interest receivable 21,586,776 Other assets 164,389 Total assets 1,429,160,244 LIABILITIES Payable for investments purchased 43,420,826 Payable for shares repurchased 178,354 Payable to affiliates 995,835 Other payables and accrued expenses 271,309 Total liabilities 44,866,324 NET ASSETS Capital paid-in 1,443,711,478 Accumulated net realized loss on investments (61,396,037) Net unrealized appreciation of investments 2,057,637 Distributions in excess of net investment income (79,158) Net assets $1,384,293,920 NET ASSET VALUE PER SHARE Based on net asset values and shares outstanding Class A ($1,140,440,995 [DIV] 77,625,186 shares) $14.69 Class B ($217,972,871 [DIV] 14,836,528 shares) $14.69 Class C ($25,880,054 [DIV] 1,761,550 shares) $14.69 MAXIMUM OFFERING PRICE PER SHARE Class A1 ($14.69 [DIV] 95.5%) $15.38 Class C ($14.69 [DIV] 99%) $14.84 1 On single retail sales of less than $100,000. On sales of $100,000 or more and on group sales the offering price is reduced. See notes to financial statements. OPERATIONS For the year ended May 31, 2001. This Statement of Operations summarizes the Fund's investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated. INVESTMENT INCOME Interest (including income on securities loaned of $192,917) $99,845,218 Dividends 1,459,094 Total investment income 101,304,312 EXPENSES Investment management fee 6,760,696 Class A distribution and service fee 3,378,701 Class B distribution and service fee 1,971,426 Class C distribution and service fee 212,760 Transfer agent fee 3,406,505 Custodian fee 275,486 Accounting and legal services fee 262,846 Trustees' fees 87,329 Registration and filing fees 78,425 Miscellaneous 73,403 Printing 61,525 Auditing fee 42,039 Legal fees 9,173 Total expenses 16,620,314 Net investment income 84,683,998 REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on Investments 5,040,798 Financial futures contracts (8,795) Change in unrealized appreciation on investments 65,332,336 Net realized and unrealized gain 70,364,339 Increase in net assets from operations $155,048,337 See notes to financial statements. CHANGES IN NET ASSETS This Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous period. The difference reflects earnings less expenses, any investment gains and losses, distributions paid to shareholders and any increase or decrease in money shareholders invested in the Fund. YEAR YEAR ENDED ENDED 5-31-00 5-31-01 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income $94,785,969 $84,683,998 Net realized gain (loss) (41,120,589) 5,032,003 Change in net unrealized appreciation (depreciation) (42,640,839) 65,332,336 Increase in net assets resulting from operations 11,024,541 155,048,337 Distributions to shareholders From net investment income Class A (80,052,771) (71,799,469) Class B (13,337,325) (11,680,442) Class C (1,395,873) (1,204,086) (94,785,969) (84,683,997) From fund share transactions (135,698,460) (5,151,356) NET ASSETS Beginning of period 1,538,540,824 1,319,080,936 End of period 1 $1,319,080,936 $1,384,293,920 1 Includes distributions in excess of net investment income of $91,031 and $79,158, respectively. See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS A SHARES The Financial Highlights show how the Fund's net asset value for a share has changed since the end of the previous period. PERIOD ENDED 12-31-96 5-31-97 1 5-31-98 5-31-99 5-31-00 5-31-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $15.40 $14.90 $14.78 $15.25 $14.76 $13.93 Net investment income 1.09 0.44 1.05 2 0.97 2 0.96 2 0.92 2 Net realized and unrealized gain (loss) on investments (0.50) (0.12) 0.47 (0.49) (0.83) 0.76 Total from investment operations 0.59 0.32 1.52 0.48 0.13 1.68 Less distributions From net investment income (1.09) (0.44) (1.05) (0.97) (0.96) (0.92) Net asset value, end of period $14.90 $14.78 $15.25 $14.76 $13.93 $14.69 Total return 3 (%) 4.11 2.224 10.54 3.11 0.97 12.38 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $1,416 $1,362 $1,328 $1,279 $1,098 $1,140 Ratio of expenses to average net assets (%) 1.14 1.11 5 1.08 1.07 1.11 1.12 Ratio of net investment income to average net assets (%) 7.32 7.38 5 6.90 6.35 6.69 6.38 Portfolio turnover (%) 123 58 198 228 162 235
See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS B SHARES PERIOD ENDED 12-31-96 5-31-97 1 5-31-98 5-31-99 5-31-00 5-31-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $15.40 $14.90 $14.78 $15.25 $14.76 $13.93 Net investment income 0.98 0.40 0.95 2 0.86 2 0.86 2 0.83 2 Net realized and unrealized gain (loss) on investments (0.50) (0.12) 0.47 (0.49) (0.83) 0.76 Total from investment operations 0.48 0.28 1.42 0.37 0.03 1.59 Less distributions From net investment income (0.98) (0.40) (0.95) (0.86) (0.86) (0.83) Net asset value, end of period $14.90 $14.78 $15.25 $14.76 $13.93 $14.69 Total return 3 (%) 3.38 1.93 4 9.78 2.39 0.27 11.64 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $134 $133 $166 $239 $197 $218 Ratio of expenses to average net assets (%) 1.84 1.81 5 1.78 1.77 1.81 1.78 Ratio of net investment income to average net assets (%) 6.62 6.68 5 6.18 5.65 6.00 5.71 Portfolio turnover (%) 123 58 198 228 162 235
See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS C SHARES PERIOD ENDED 5-31-99 6 5-31-00 5-31-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $15.61 $14.76 $13.93 Net investment income 2 0.55 0.85 0.82 Net realized and unrealized gain (loss) on investments (0.85) (0.83) 0.76 Total from investment operations (0.30) 0.02 1.58 Less distributions From net investment income (0.55) (0.85) (0.82) Net asset value, end of period $14.76 $13.93 $14.69 Total return 3 (%) 1.95 4 0.28 11.60 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $21 $24 $26 Ratio of expenses to average net assets (%) 1.77 5 1.80 1.82 Ratio of net investment income to average net assets (%) 5.65 5 6.01 5.66 Portfolio turnover (%) 228 162 235
1 Effective 5-31-97, the fiscal year end changed from December 31 to May 31. 2 Based on the average of the shares outstanding at the end of each month. 3 Assumes dividend reinvestment and does not reflect the effect of sales charges. 4 Not annualized. 5 Annualized. 6 Class C shares began operations on 10-1-98. See notes to financial statements. NOTES TO STATEMENTS NOTE A Accounting policies John Hancock Bond Fund (the "Fund") is a diversified series of John Hancock Sovereign Bond Fund, an open-end management investment company registered under the Investment Company Act of 1940. The investment objective of the Fund is to generate a high level of current income, consistent with prudent investment risk, through investment in a diversified portfolio of freely marketable debt securities. The Trustees have authorized the issuance of multiple classes of shares of the Fund, designated as Class A, Class B and Class C shares. The shares of each class represent an interest in the same portfolio of investments of the Fund and have equal rights to voting, redemptions, dividends and liquidation, except that certain expenses, subject to the approval of the Trustees, may be applied differently to each class of shares in accordance with current regulations of the Securities and Exchange Commission and the Internal Revenue Service. Shareholders of a class which bears distribution and service expenses under terms of a distribution plan have exclusive voting rights to that distribution plan. Significant accounting policies of the Fund are as follows: Valuation of investments Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. Joint repurchase agreement Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, Inc., may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for the joint account on the Fund's behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. Investment transactions Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Some securities may be purchased on a "when-issued" or "forward delivery" basis, which means that the securities will be delivered to the Fund at a future date, usually beyond customary settlement date. Discount on securities The Fund accretes discount from par value on securities from either the date of issue or the date of purchase over the life of the security. Class allocations Income, common expenses and realized and unrealized gains (losses) are determined at the fund level and allocated daily to each class of shares based on the appropriate net assets of the respective classes. Distribution and service fees, if any, are calculated daily at the class level based on the appropriate net assets of each class and the specific expense rate(s) applicable to each class. Expenses The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. Bank borrowings The Fund is permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating funds. The Fund had no borrowing activity under the line of credit during the year ended May 31, 2001. Securities lending The Fund may lend its securities to certain qualified brokers who pay the Fund negotiated lender fees. These fees are included in interest income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At May 31, 2001, the Fund loaned securities having a market value of $236,200,000, collateralized by securities in the amount of $240,993,626. Financial futures contracts The Fund may buy and sell financial futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. At the time the Fund enters into a financial futures contract, it is required to deposit with its custodian a specified amount of cash or U.S. government securities, known as "initial margin," equal to a certain percentage of the value of the financial futures contract being traded. Each day, the futures contract is valued at the official settlement price of the board of trade or U.S. commodities exchange on which it trades. Subsequent payments to and from the broker, known as "variation margin," are made on a daily basis as the market price of the financial futures contract fluctuates. Daily variation margin adjustments, arising from this "mark to market," are recorded by the Fund as unrealized gains or losses. When the contracts are closed, the Fund recognizes a gain or loss. Risks of entering into futures contracts include the possibility that there may be an illiquid market and/or that a change in the value of the contracts may not correlate with changes in the value of the underlying securities. In addition, the Fund could be prevented from opening or realizing the benefits of closing out futures positions because of position limits or limits on daily price fluctuation imposed by an exchange. For federal income tax purposes, the amount, character and timing of the Fund's gains and/or losses can be affected as a result of futures contracts. The Fund had no open financial futures contracts at May 31, 2001. Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the Fund has $55,393,254 of capital loss carryforwards available, to the extent provided by regulations, to offset future net realized capital gains. To the extent such carryforwards are used by the Fund, no capital gain distribution will be made. The Fund's carryforwards expire as follows: May 31, 2002 -- $9,347,493, May 31, 2004 -- $8,402,805, May 31, 2005 -- $1,183,431, May 31, 2007 -- $619,870, May 31, 2008 -- $15,467,220 and May 31, 2009 -- $20,372,435. Availability of a certain amount of loss carryforwards, which were acquired on September 15, 1995 in a merger, may be limited in a given year. Additionally, net capital losses of $5,279,008 are attributable to security transactions incurred after October 31, 2000 are treated as arising on the first day (June 1, 2001) of the Fund's next taxable year. Dividends, interest and distributions Dividend income on investment securities is recorded on the ex-dividend date. Interest income on investment securities is recorded on the accrual basis. The Fund records distributions to shareholders from net investment income and realized gains on the ex- dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from generally accepted accounting principles. Distributions paid by the Fund with respect to each class of shares will be calculated in the same manner, at the same time and will be in the same amount, except for the effect of expenses that may be applied differently to each class. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. NOTE B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser equivalent, on an annual basis, to the sum of: (a) 0.50% of the first $1,500,000,000 of the Fund's average daily net asset value, (b) 0.45% of the next $500,000,000, (c) 0.40% of the next $500,000,000 and (d) 0.35% of the Fund's average daily net asset value in excess of $2,500,000,000. The Fund has Distribution Plans with John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the Adviser. The Fund has adopted Distribution Plans with respect to Class A, Class B and Class C pursuant to Rule 12b-1 under the Investment Company Act of 1940 to reimburse JH Funds for the services it provides as distributor of shares of the Fund. Accordingly, the Fund makes payments to JH Funds at an annual rate not to exceed 0.30% of Class A average daily net assets and 1.00% of Class B and Class C average daily net assets, to reimburse JH Funds for its distribution and service costs. A maximum of 0.25% of such payments may be service fees as defined by the Conduct Rules of the National Association of Securities Dealers. Under the Conduct Rules, curtailment of a portion of the Fund's 12b-1 payments could occur under certain circumstances. Class A and Class C shares are assessed up-front sales charges. During the year ended May 31, 2001, JH Funds received net up-front sales charges of $1,043,537 with regard to sales of Class A shares. Of this amount, $105,641 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $479,481 was paid as sales commissions to unrelated broker-dealers and $458,415 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. The Adviser's indirect parent, John Hancock Life Insurance Company ("JHLICo"), is the indirect sole shareholder of Signator Investors. During the year ended May 31, 2001, JH Funds received net up-front sales charges of $167,416 with regard to sales of Class C shares. Of this amount, $163,582 was paid as sales commissions to unrelated broker-dealers and $3,834 was paid as sales commissions to sales personnel of Signator Investors. Class B shares which are redeemed within six years of purchase are subject to a contingent deferred sales charge ("CDSC") at declining rates, beginning at 5.00% of the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Class C shares which are redeemed within one year of purchase are subject to a CDSC at a rate of 1.00% of the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Proceeds from the CDSCs are paid to JH Funds and are used in whole or in part to defray its expenses for providing distribution-related services to the Fund in connection with the sale of Class B and Class C shares. For the year ended May 31, 2001, CDSCs received by JH Funds amounted to $527,296 for Class B shares and $8,555 for Class C shares. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc., an indirect subsidiary of JHLICo. The Fund pays monthly transfer agent fees based on the number of shareholder accounts and certain out-of-pocket expenses. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the year was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and officers of the Adviser and its affiliates, as well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Fund's deferred compensation liability are recorded on the Fund's books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. The Deferred Compen-sation Plan investments had no impact on the operations of the Fund. NOTE C Investment transactions Purchases and proceeds from sales of securities, other than short-term securities and obligations of the U.S. government, during the year ended May 31, 2001, aggregated $2,047,870,666 and $1,957,083,829, respectively. Purchases and proceeds from sales of obligations of the U.S. government, during the year ended May 31, 2001, aggregated $962,006,177 and $1,074,143,371, respectively. The cost of investments owned at May 31, 2001 (including short-term investments) for federal income tax purposes was $1,384,094,460. Gross unrealized appreciation and depreciation of investments aggregated $22,816,165 and $21,413,727, respectively, resulting in net unrealized appreciation of $1,402,438. NOTE D Fund share transactions This listing illustrates the number of Fund shares sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value. The Fund has an unlimited number of shares authorized with no par value.
YEAR ENDED 5-31-00 YEAR ENDED 5-31-01 SHARES AMOUNT SHARES AMOUNT CLASS A SHARES Sold 16,180,316 $230,911,081 20,329,913 $292,695,235 Distributions reinvested 4,427,262 63,104,859 3,885,469 56,285,950 Repurchased (28,432,224) (405,098,642) (25,386,067) (365,444,508) Net decrease (7,824,646) ($111,082,702) (1,170,685) ($16,463,323) CLASS B SHARES Sold 3,416,464 $49,024,555 4,030,445 $58,808,128 Distributions reinvested 554,800 7,907,679 438,799 6,362,603 Repurchased (5,984,221) (85,404,315) (3,783,675) (54,786,515) Net increase (decrease) (2,012,957) ($28,472,081) 685,569 $10,384,216 CLASS C SHARES Sold 586,098 $8,361,864 1,373,262 $19,986,436 Distributions reinvested 78,808 1,122,359 43,807 633,249 Repurchased (397,387) (5,627,900) (1,370,639) (19,691,934) Net increase 267,519 $3,856,323 46,430 $927,751 NET DECREASE (9,570,084) ($135,698,460) (438,686) ($5,151,356)
NOTE E Reclassification of accounts During the year ended May 31, 2001, the Fund has reclassified amounts to reflect a decrease in net realized loss on investments of $4,066,817, a decrease in distributions in excess of net investment income of $11,872, and a decrease in capital paid-in of $4,078,689. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary difference, as of May 31, 2001. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to certain differences in computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income (loss) per share in the financial highlights excludes these adjustments. NOTE F Change in accounting principle The Fund will adopt the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, effective for fiscal years beginning after December 15, 2000. As required, the Fund will begin amortizing premiums on debt securities effective June 1, 2001. Prior to this date, the Fund did not amortize premiums on debt securities. The cumulative effect of this accounting change will have no impact on the total net assets of the Fund but will result in a reduction in the cost of the investments and a corresponding increase in unrealized appreciation on investments, estimated at $8,529,110 based on securities held as of May 31, 2001. AUDITORS' REPORT Report of Ernst & Young LLP, Independent Auditors To the Board of Trustees and Shareholders of John Hancock Bond Fund of John Hancock Sovereign Bond Fund We have audited the accompanying statement of assets and liabilities of the John Hancock Bond Fund (the "Fund"), one of the portfolios constituting the John Hancock Sovereign Bond Fund, including the schedule of investments, as of May 31, 2001, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2001, by correspondence with the custodian and brokers, or other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the John Hancock Bond Fund of the John Hancock Sovereign Bond Fund at May 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the indicated periods, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Boston, Massachusetts July 9, 2001 TAX INFORMATION Unaudited. For federal income tax purposes, the following information is furnished with respect to the dividends of the Fund paid during its taxable year ended May 31, 2001. With respect to the ordinary dividends paid by the Fund for the fiscal year ended May 31, 2001, 1.72% of the dividends qualify for the dividends received deduction. Shareholders will be mailed a 2001 U.S. Treasury Department Form 1099-DIV in January 2001. This will reflect the total of all distributions which are taxable for calendar year 2001. FOR YOUR INFORMATION TRUSTEES Dennis S. Aronowitz* Richard P. Chapman, Jr. William J. Cosgrove* John M. DeCiccio Richard A. Farrell* Maureen R. Ford Gail D. Fosler William F. Glavin Dr. John A. Moore Patti McGill Peterson John W. Pratt* *Members of the Audit Committee OFFICERS Maureen R. Ford Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer INVESTMENT ADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 PRINCIPAL DISTRIBUTOR John Hancock Funds, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 CUSTODIAN Investors Bank & Trust Company 200 Clarendon Street Boston, Massachusetts 02116 TRANSFER AGENT John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, Massachusetts 02217-1000 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116-5072 HOW TO CONTACT US On the Internet www.jhfunds.com By regular mail John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 By express mail John Hancock Signature Services, Inc. Attn: Mutual Fund Image Operations 529 Main Street Charlestown, MA 02129 Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 TDD line 1-800-544-6713 [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner. A tag line below reads "JOHN HANCOCK FUNDS."] 1-800-225-5291 1-800-544-6713 (TDD) 1-800-338-8080 EASI-Line www.jhfunds.com This report is for the information of the shareholders of the John Hancock Bond Fund. 2100A 5/01 7/01 John Hancock Bond Fund SEMI ANNUAL REPORT 11.30.01 Sign up for electronic delivery at www.jhancock.com/funds/edelivery [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."] [A photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush left next to first paragraph.] WELCOME Table of contents Your fund at a glance page 1 Managers' report page 2 A look at performance page 6 Growth of $10,000 page 7 Fund's investments page 8 Financial statements page 20 For your information page 33 Dear Fellow Shareholders, The U.S. stock market has had a very difficult time in 2001, as the economy has slowed to a standstill and the parade of corporate earnings disappointments has continued. The Federal Reserve aggressively began to attack the economic slowdown, cutting short-term interest rates throughout the year. However, the moves had little effect and the market remained in turmoil as investors tried to get a clearer timetable for economic and corporate recovery. Then on September 11, 2001, a terrorist attack of unspeakable magnitude was launched on the United States, shocking the world, sending markets worldwide into a short-term free fall and pushing the already fragile U.S. economy into recession. As a result, the Standard & Poor's 500 Index, a leading benchmark of large-cap stocks, lost 12.64% year-to-date through November. Bonds have outperformed stocks overall, producing mostly positive results, as they were the beneficiaries of the rate cuts and investors' search for safety. Apart from the immediate impact of devastating human loss, the tragic events of September 11 have understandably raised concerns about the broader repercussions on our country's economy and financial markets. We have great confidence in the United States economy, its financial systems and, above all, its people. Throughout history, they have withstood a range of challenges -- from the Great Depression, to wars, natural disasters and global financial turmoil -- and have emerged stronger thereafter. We encourage shareholders to keep this longer-term perspective, difficult as it may seem, when making investment decisions in the coming days. Today, we are seeing the full resources of industry and the U.S. government working to bolster and sustain our systems. Although we expect market volatility in the near term, what remains certain is that the U.S. economic and financial systems are working and resilient. "The American economy is open for business," said Deputy Treasury Secretary Ken Dam the day after the attack. We never had any doubts. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer YOUR FUND AT A GLANCE The Fund seeks a high level of current income consistent with prudent invest ment risk by investing in a diversified portfolio of bonds and other debt securities, includ ing corporate bonds and U.S. government and agency securities. Over the last six months * The September 11 attacks adversely affected the economy, investor confidence and corporate bonds. * The Federal Reserve Board continued to aggressively cut rates. * Bonds outperformed stocks, producing positive results as rates fell and investors looked for safer havens. [Bar chart with heading "John Hancock Bond Fund." Under the heading is a note that reads "Fund performance for the six months ended November 30, 2001." The chart is scaled in increments of 1% with 0% at the bottom and 5% at the top. The first bar represents the 4.80% total return for Class A. The second bar represents the 4.44% total return for Class B. The third bar represents the 4.43% total return for Class C. The fourth bar represents the 1.51%* total return for Class I. A note below the chart reads "Total returns for the Fund are at net asset value with all distributions reinvested. * From inception September 4, 2001 to November 30, 2001."] Top 10 issuers 17.5% United States Treasury 8.1% Government National Mortgage Assn. 5.5% Federal National Mortgage Assn. 1.2% Iberdrola International B.V. 1.0% Hydro-Quebec 0.9% Morgan Stanley Capital I, Inc. 0.9% Morgan Stanley Dean Witter Capital I Trust 0.8% Scotland International Finance No. 2, B.V. 0.8% RBSG Capital Corp. 0.8% GMAC Commercial Mortgage Securities, Inc. As a percentage of net assets on November 30, 2001. MANAGERS' REPORT BY JAMES K. HO, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND BENJAMIN A. MATTHEWS, PORTFOLIO MANAGER John Hancock Bond Fund During the past six months the broad fixed-income market and John Hancock Bond Fund enjoyed positive results. A souring economy and aggressive interest-rate cuts by the Federal Reserve Board helped domestic bond sectors, especially ultra-safe Treasury bonds, outperform stocks. There did, however, exist pockets of pressure within the corporate sector overall, particularly within the high-yield arena in the telecommunications and technology sectors, especially in the aftermath of the September 11 tragedy. FUND PERFORMANCE For the six months ended November 30, 2001, John Hancock Bond Fund posted total returns of 4.80%, 4.44%, and 4.43% at net asset value for Class A, Class B and Class C shares, respectively. By comparison, the average corporate debt A-rated fund returned 5.10%, according to Lipper, Inc.1 Class I shares, which were launched on September 4, 2001, returned 1.51% at net asset value from inception through November 30, 2001. Keep in mind that your net asset value return will be different from the Fund's performance if you were not invested in the Fund for the entire period and did not reinvest all distributions. Longer-term performance information can be found on pages six and seven. "...the broad fixed-income market and John Hancock Bond Fund enjoyed positive results." THE INVESTMENT ENVIRONMENT PRIOR TO 9/11 The Fund began the period in June in the midst of the corporate earnings announcement season, which caused credit spreads to widen, as investors worried about the impact of the slowing economy on corporate earnings. (A credit spread is the difference in yield between bonds of different credit quality.) As a result, higher-quality issues outperformed lower-quality securities. When the second quarter's numbers were finalized, the risk factor diminished, as investors' worst fears were somewhat allayed, and corporate bonds in general began outperforming Treasury bonds. However, many companies, particularly those in the telecommunications, technology and so-called "new economy" sectors were experiencing financial distress. This, in turn, caused defaults to rise and several companies to shutter their operations, casting a shadow across the high-yield sector, dragging overall high-yield bond prices down. [A photo of Team leader Jim Ho flush right next to first paragraph.] In order to jump-start the faltering economy, the Federal Reserve Board remained aggressive in cutting interest rates -- so much so that we believed yields on Treasury securities did not have much more room to fall. Thus, in the spring and summer we kept the Fund's interest-rate sensitivity, or duration, relatively short. The shorter the duration, the less price volatility a portfolio experiences when interest rates rise and prices fall. "By applying in-depth credit analysis, we were able to avoid many of the credit blowups over the period." In this difficult environment, we trimmed the Fund's overall high-yield exposure because of the uncertainty in that sector, while simultaneously and selectively targeting more cyclically oriented issuers that stand to perform well once the economy gathers steam. We also increased the Fund's stake in investment-grade corporate bonds, adding to or newly purchasing issues on price dips. These include Deutsche Telekom, Verizon, BellSouth, Burlington Northern and Ford. THE EFFECTS OF THE TRAGEDIES Immediately following the events of September 11, corporate bonds swooned and prospects for economic recovery were pushed back, as the economy slipped into recession. The Fed intervened aggressively to provide liquidity and investors fled to the relative safety of Treasury and agency securities, pushing their yields even lower and their prices higher. By late October, however, the negative sentiment appeared a bit overdone and corporate bond prices rose. By November's end, the Fed had cut interest rates ten times in 2001, bringing the fed funds rate that banks charge each other for overnight loans to 2.0% -- a 40-year low. At this time last year, the rate stood at 6.5%. [Table at top left-hand side of page entitled "Top five sectors." The first listing is U.S. government 17%, the second is U.S. government agencies 14%, the third Utilities 12%, the fourth Finance 7%, and the fifth Mortgage banking 6%.] FUND POSITIONING POST SEPTEMBER 11 Certain sectors were hit harder than others in the immediate aftermath of the attacks. The airline, transportation, travel and leisure industries suffered the most. Inasmuch as we could, we decreased the Fund's exposure to such areas as unsecured airline debt. We also lengthened the portfolio's average duration a bit and emphasized intermediate-term government securities, which involved increasing the Fund's exposure to mortgage-backed issues. We also further added to, or initiated purchases in, such higher-grade holdings as Ford, AT&T Wireless, Singapore Telephone, Amerada Hess and Apache Corp. And we moved out of some cyclical issues, such as Georgia Pacific, when prices bounced in November. [Pie chart at bottom of page with heading "Portfolio diversification as a percentage of net assets on 11-30-01." The chart is divided into five sections (from top to left): Corporate bonds 62%, U.S. government bonds 32%, Short-term investments & other 3%, Foreign government bonds 2% and Preferred stock 1%.] [Table at top of page entitled "SCORECARD." The header for the left column is "INVESTMENT" and the header for the right column is "RECENT PERFORMANCE...AND WHAT'S BEHIND THE NUMBERS." The first listing is El Paso Corporation followed by a down arrow with the phrase "Adversely affected by fallout from Enron." The second listing is AT&T Wireless followed by an up arrow with the phrase "Increased demand for wireless technology." The third listing is Lockheed Martin followed by an up arrow with the phrase "Increase in defense spending."] DISCIPLINED RESEARCH PAYS OFF The economic downturn posed problems for many issuers. By applying in-depth credit analysis, we were able to avoid many of the credit blowups over the period. For example, while many investors suffered losses from collateralized debt obligations, we avoided this volatile, esoteric subsector altogether. We also paid attention to early warning signs within the utility industry and reduced exposure to issuers that would suffer price losses in sympathy with Enron. We were able to pare or eliminate such holdings as Enron, Mirant Americas Generation, NRG and other generating companies before the brunt of their price declines was realized. Research also prompted us to increase exposure to defense issuer Lockheed Martin. The firm recently was awarded a Pentagon contract to build the next generation of fighter jets. "Currently, corporate bonds represent good value and cyclically oriented issues may garner our increased attention..." OUTLOOK The Fed's commitment to jump-starting the economy, plus the fiscal stimulus package being discussed in Washington, should help boost economic growth some time next year. In turn, corporate credit quality should improve. Currently, corporate bonds represent good value and cyclically oriented issues may garner our increased attention in the months ahead. This commentary reflects the views of the portfolio managers through the end of the Fund's period discussed in this report. Of course, the managers' views are subject to change as market and other conditions warrant. 1 Figures from Lipper, Inc. include reinvested dividends and do not take into account sales charges. Actual load-adjusted performance is lower. A LOOK AT PERFORMANCE For the period ended November 30, 2001 The index used for comparison is the Lehman Brothers Credit Bond Index, an unmanaged index that mirrors the investment objectives and charac- teristics of the Fund. It is not possible to invest in an index.
Class A Class B Class C Class I 1 Index Inception date 11-9-73 11-23-93 10-1-98 9-4-01 -- Average annual returns with maximum sales charge (POP) One year 5.22% 4.43% 7.30% -- 12.64% Five years 5.60% 5.53% -- -- 7.07% Ten years 7.07% -- -- -- 7.75% Since inception -- 6.01% 4.06% 1.51% 2 -- Cumulative total returns with maximum sales charge (POP) Six months 0.10% --0.56% 2.39% -- 5.66% One year 5.22% 4.43% 7.30% -- 12.64% Five years 31.35% 30.89% -- -- 40.73% Ten years 98.09% -- -- -- 110.94% Since inception -- 59.64% 13.43% 1.51% -- SEC 30-day yield as of November 30, 2001 4.84% 4.36% 4.31% 5.60% --
Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 4.5% and Class C shares of 1%, and the applicable contingent deferred sales charge (CDSC) on Class B and Class C shares. The Class B shares' CDSC declines annually between years 1-6 according to the following schedule: 5, 4, 3, 3, 2, 1%. No sales charge will be assessed after the sixth year. Class C shares held for one year or less are subject to a 1% CDSC. The return and principal value of an investment in the Fund will fluctuate, so that shares, when redeemed, may be worth more or less than the original cost. Index figures do not reflect sales charges and would be lower if they did. The returns reflect past results and should not be considered indicative of future performance. The performance table above and the chart on the next page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 1 For certain types of investors as described in the Fund's prospectus for Class I shares. 2 Not annualized. GROWTH OF $10,000 This chart shows what happened to a hypothetical $10,000 investment in Class A shares for the period indicated. For comparison, we've shown the same investment in the Lehman Brothers Credit Bond Index. Line chart with the heading "GROWTH OF $10,000." Within the chart are three lines. The first line represents the Index and is equal to $21,094 as of November 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Bond Fund, before sales charge, and is equal to $20,736 as of November 30, 2001. The third bar represents the same hypothetical $10,000 investment made in the John Hancock Bond Fund, after sales charge, and is equal to $19,802 as of November 30, 2001. Class B 1 Class C 1 Class I 2 Inception date 11-23-93 10-1-98 9-4-01 Without sales charge $15,964 $11,460 $9,936 With maximum sales charge -- $11,345 -- Index $17,223 $12,161 $10,162 Assuming all distributions were reinvested for the period indicated, the chart above shows the value of a $10,000 investment in the Fund's Class B, Class C and Class I shares, respectively, as of November 30, 2001. Performance of the classes will vary based on the difference in sales charges paid by shareholders investing in the different classes and the fee structure of those classes. 1 No contingent deferred sales charge applicable. 2 For certain types of investors as described in the Fund's prospectus for Class I shares. FUND'S INVESTMENTS Securities owned by the Fund on November 30, 2001 (unaudited). This schedule is divided into three main categories: bonds, preferred stocks and warrants, and short-term investments. The bonds are further broken down by industry group. Short-term investments, which represent the Fund's cash position, are listed last.
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING** (000s OMITTED) VALUE BONDS 95.37% $1,385,000,816 (Cost $1,356,629,033) Aerospace 1.19% $17,357,955 Jet Equipment Trust, Equipment Trust Cert Ser 95B2 08-15-14 (R) 10.910% BB- $5,800 5,220,000 Lockheed Martin Corp., Bond 12-01-29 8.500 BBB- 5,595 6,726,029 Systems 2001 Asset Trust LLC, Pass Thru Cert 12-15-11 (R) 7.156 A 5,224 5,411,926 Agricultural Operations 0.55% 7,983,235 Cargill, Inc., Note 05-01-06 (R) 6.250 A+ 3,050 3,137,596 Potash Corp., Note (Canada) 05-31-11 (Y) 7.750 BBB+ 4,485 4,845,639 Automobiles/Trucks 1.33% 19,368,025 DaimlerChrysler Auto Trust, Pass Thru Ctf Ser 2000-E Class A-4 01-08-06 6.160 AAA 6,955 7,330,570 Delphi Automotive Systems Corp., Note 06-15-06 6.550 BBB 2,450 2,440,666 ERAC USA Finance Co., Note 02-15-05 (R) 6.625 BBB+ 1,440 1,450,310 Note 06-15-08 (R) 7.350 BBB+ 2,600 2,635,750 Note 12-15-09 (R) 7.950 BBB+ 2,675 2,778,870 Ford Motor Co., Note 07-16-31 7.450 BBB+ 2,890 2,731,859 Banks -- Foreign 3.58% 51,942,484 Abbey National First Capital, B.V., Sub Note (United Kingdom) 10-15-04 (Y) 8.200 AA- 10,000 10,952,000 African Development Bank, Sub Note (Supra National) 12-15-03 (Y) 9.750 AA- 8,000 8,914,480 Barclays Bank Plc, Perpetual Bond (7.375% to 12-15-11 then variable) (United Kingdom) 06-29-49 (R) (Y) 7.375 A+ 3,455 3,638,599 International Bank for Reconstruction & Development, Deb (Supra National) 09-01-16 (Y) 8.250 AAA 5,000 6,204,250 Royal Bank of Scotland Group Plc, Bond (United Kingdom) 03-31-49 (Y) 8.817 A- 3,130 3,429,197 Perpetual Bond (7.648% to 09-30-31 then variable) (United Kingdom) 08-31-49 (R) (Y) 7.648 A- 3,505 3,565,882 Scotland International Finance No. 2, B.V., Gtd Sub Note (Netherlands) 11-01-06 (R) (Y) 8.850 AA- 10,335 11,998,522 Skandinaviska Enskilda, Perpetual Bond (6.50% to 6-04-03 then variable) (Sweden) 12-29-49 (R) (Y) 6.500 BBB 3,150 3,239,554 Banks -- United States 2.57% 37,342,249 Bank of New York, Cap Security 12-01-26 (R) 7.780 A- 5,750 5,985,060 BNP Paribas Capital Trust, Perpetual Bond (9.003% to 10-27-10 then variable) 12-27-49 (R) 9.003 A 2,705 3,107,315 Colonial Bank, Sub Note 06-01-11 9.375 BBB- 2,595 2,775,067 RBSG Capital Corp., Gtd Cap Note 03-01-04 10.125 A 10,605 11,958,304 UBS Preferred Funding Trust I, Perpetual Bond (8.622% to 10-01-10 then variable) 10-01-49 8.622 AA- 2,870 2,911,328 Wells Fargo Bank N.A., Sub Note 02-01-11 6.450 A+ 3,855 3,987,535 Zions Bancorp, Note 10-15-11 (R) 6.500 BBB- 2,825 2,802,400 Zions Financial Corp., Gtd Note 05-15-11 6.950 BBB- 3,770 3,815,240 Beverages 0.29% 4,160,700 Canandaigua Brands, Inc., Sr Sub Note Ser C 12-15-03 8.750 B+ 4,140 4,160,700 Broker Services 0.45% 6,589,010 Goldman Sachs Group, Inc., Bond 01-15-11 6.875 A+ 3,880 4,004,160 Salomon Smith Barney Holdings, Inc., Note 03-15-06 5.875 AA- 2,500 2,584,850 Building 0.14% 1,992,000 Vulcan Materials Co., Note 02-01-06 6.400 A+ 1,920 1,992,000 Business Services -- Misc. 0.37% 5,313,600 Cendant Corp., Note 08-15-06 (R) 6.875 BBB 5,535 5,313,600 Chemicals 0.57% 8,258,061 Akzo Nobel, Inc., Bond 11-15-03 (R) 6.000 A- 2,860 2,972,941 Equistar Chemicals, L.P./Equistar Funding Corp., Sr Note 02-15-04 8.500 BBB- 2,785 2,685,770 Nova Chemicals Corp., Sr Note (Canada) 05-15-06 (Y) 7.000 BBB 2,795 2,599,350 Computers 0.09% 1,264,900 Sabre Holdings Corp., Note 08-01-11 7.350 BBB+ 1,390 1,264,900 Cosmetics & Personal Care 0.19% 2,723,814 International Flavors & Fragrance, Inc., Note 05-15-06 6.450 BBB+ 2,700 2,723,814 Electronics 0.29% 4,199,084 HQI Transelect Chile SA, Sr Note (Chile) 04-15-11 (Y) 7.875 A- 4,075 4,199,084 Energy 0.57% 8,303,031 MidAmerican Energy Holdings, Sr Bond 09-15-28 8.480 BBB- 4,275 4,781,331 P&L Coal Holdings Corp., Gtd Sr Sub Note Ser B 05-15-08 9.625 B+ 3,276 3,521,700 Finance 6.75% 98,065,543 American Express Credit Account Master Trust, Pass Thru Ctf Ser 2000-1 Class A 09-15-07 7.200 AAA 6,940 7,575,426 Bombardier Capital, Inc., Note 01-15-02 (R) 6.000 A- 4,675 4,683,882 Citigroup, Inc., Note 01-18-11 6.500 AA- 2,665 2,775,171 Ford Motor Credit Co., Note 02-01-06 6.875 BBB+ 3,650 3,757,164 Note 10-25-11 7.250 BBB+ 5,805 5,904,254 General Motors Acceptance Corp., Note 07-15-05 7.500 BBB+ 4,025 4,229,752 Note 03-02-11 7.250 BBB+ 4,145 4,223,838 Household Finance Corp., Note 07-15-10 8.000 A 2,680 3,013,338 Sr Note 05-09-05 8.000 A 5,165 5,636,771 HSBC Capital Funding, L.P., Perpetual Note (9.547% to 06-30-10 then variable) (Channel Islands) 12-31-49 (R) (Y) 9.547 A- 3,430 4,033,680 Humpuss Funding Corp., Gtd Note 12-15-09 (R) 7.720 B3 1,794 1,291,798 ING Capital Funding Trust III, Perpetual Bond (8.439% to 12-31-10 then variable) 12-31-49 8.439 A 2,850 3,149,250 MBNA Master Credit Card Trust II, Pass Thru Ctf Ser 2000-A Class A 07-16-07 7.350 AAA 7,040 7,662,547 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 BB+ 8,050 8,935,500 Deb Ser B 07-23-06 13.250 BB+ 1,900 2,223,000 Pemex Project Funding Master Trust, Gtd Note 10-13-10 9.125 BB+ 5,580 5,886,900 Standard Credit Master Trust, Ser 1995-1 Class A 01-07-07 8.250 AAA 9,970 11,113,360 Tiers-MIR-2001-14, Coll Trust 06-15-04 (R) 7.200 BBB- 5,200 5,123,248 U.S. Bank N.A., Note 08-01-11 6.375 A 3,740 3,823,103 Yanacocha Receivables Master Trust, Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 2,994 3,023,561 Food 0.79% 11,499,879 ConAgra Foods, Inc., Note 09-15-11 6.750 BBB+ 3,875 4,038,564 Sub Note 09-15-04 7.400 BBB 2,845 3,067,081 Earthgrains Co., (The), Sr Note 08-01-03 8.375 A+ 4,085 4,394,234 Government -- Foreign 1.83% 26,565,198 Chile, Republic of, Note (Chile) 01-11-12 (Y) 7.125 A- 2,805 2,879,445 Colombia, Republic of, Gtd Note (Colombia) 04-09-11 (Y) 9.750 BBB 3,669 3,861,634 Nova Scotia, Province of, Deb (Canada) 04-01-22 (Y) 8.750 A- 7,500 9,396,000 Quebec, Province of, Deb (Canada) 09-15-29 (Y) 7.500 A+ 3,215 3,653,269 Saskatchewan, Province of, Deb (Canada) 12-15-20 (Y) 9.375 A+ 5,000 6,774,850 Government -- United States 17.49% 253,985,760 United States Treasury, Bond 08-15-17 8.875 AAA 25,342 34,477,031 Bond 05-15-18 9.125 AAA 17,990 25,112,961 Bond 08-15-25 6.875 AAA 21,040 24,652,989 Bond 05-15-30 6.250 AAA 2,815 3,146,635 Bond 02-15-31 5.375 AAA 24,190 24,575,589 Inflation Indexed Note 01-15-07 3.375 AAA 21,188 21,472,467 Note 02-15-05 7.500 AAA 34,689 38,824,623 Note 07-15-06 7.000 AAA 43,655 48,975,235 Note 05-15-08 5.625 AAA 6,905 7,353,825 Note 08-15-10 5.750 AAA 23,695 25,394,405 Government -- U.S. Agencies 14.28% 207,349,169 Federal Home Loan Mortgage Corp., 30 Yr Pass Thru Ctf 01-01-16 11.250 AAA 328 369,100 Federal National Mortgage Assn., 15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 8,937 8,943,882 15 Yr Pass Thru Ctf 06-01-16 6.000 AAA 5,332 5,404,260 15 Yr Pass Thru Ctf 12-01-12 6.500 AAA 5,972 6,161,341 15 Yr Pass Thru Ctf 09-01-10 to 11-01-14 7.000 AAA 7,460 7,772,218 15 Yr Pass Thru Ctf 02-01-08 7.500 AAA 691 730,655 30 Yr Pass Thru Ctf 04-01-31 6.000 AAA 2,796 2,769,441 30 Yr Pass Thru Ctf 11-01-28 6.500 AAA 2,792 2,832,428 30 Yr Pass Thru Ctf 10-01-23 to 12-01-31*** 7.000 AAA 7,219 7,447,750 30 Yr Pass Thru Ctf 06-01-30 to 02-01-31 7.500 AAA 11,022 11,464,471 Note 01-15-30 7.125 AAA 20,130 22,853,790 Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 6.940 AAA 2,849 3,091,580 Financing Corp., Bond 02-08-18 9.400 AAA 7,000 9,469,670 Government National Mortgage Assn., 30 Yr Pass Thru Ctf 06-01-26 to 09-15-31*** 6.500 AAA 54,119 55,016,382 30 Yr Pass Thru Ctf 08-15-28 to 08-15-31 7.000 AAA 45,143 46,606,034 30 Yr Pass Thru Ctf 05-15-30 7.500 AAA 7,481 7,802,332 30 Yr Pass Thru Ctf 11-15-22 8.000 AAA 1,739 1,857,930 30 Yr Pass Thru Ctf 07-15-16 to 01-15-25 9.000 AAA 4,359 4,752,821 30 Yr Pass Thru Ctf 11-15-19 to 05-15-21 9.500 AAA 1,256 1,373,268 30 Yr Pass Thru Ctf 06-15-20 to 03-15-25 10.000 AAA 429 482,490 30 Yr Pass Thru Ctf 01-15-16 10.500 AAA 53 60,597 30 Yr Pass Thru Ctf 01-15-16 11.000 AAA 76 86,729 Insurance 2.10% 30,502,786 AXA, Sub Note (France) 12-15-30 (Y) 8.600 A- 4,080 4,606,038 Equitable Life Assurance Society of the United States, Surplus Note 12-01-05 (R) 6.950 A+ 3,700 3,934,728 Massachusetts Mutual Life Insurance Co., Surplus Note 11-15-23 (R) 7.625 AA 3,970 4,170,485 MONY Group, Inc. (The), Sr Note 12-15-05 7.450 A- 3,940 4,139,916 Nationwide Mutual Insurance, Notes 12-01-31 (R) 8.250 A- 2,650 2,676,500 Sun Canada Financial Co., Gtd Sub Note 12-15-07 (R) 6.625 AA- 7,250 7,540,000 URC Holdings Corp., Sr Note 06-30-06 (R) 7.875 AA+ 3,110 3,435,119 Leisure 0.73% 10,676,199 Harrah's Operating Co., Inc., Gtd Note 06-01-07 7.125 BBB- 3,900 3,976,830 Gtd Sr Sub Note 12-15-05 7.875 BB+ 2,055 2,160,319 HMH Properties, Inc., Gtd Sr Sec Note Ser A 08-01-05 7.875 BB 2,790 2,664,450 Waterford Gaming LLC/Waterford Gaming Finance Corp., Sr Note 03-15-10 (R) 9.500 B+ 1,820 1,874,600 Media 5.44% 78,954,319 Adelphia Communications Corp., Sr Note Ser B 10-01-02 9.250 B+ 4,750 4,797,500 Sr Note Ser B 07-15-03 8.125 B+ 2,250 2,227,500 AOL Time Warner, Inc., Bond 04-15-31 7.625 BBB+ 4,155 4,430,227 British Sky Broadcasting Group Plc, Gtd Sr Note (United Kingdom) 07-15-09 (Y) 8.200 BB+ 5,690 5,950,033 Century Communications Corp., Sr Note 03-01-05 9.500 B+ 1,720 1,685,600 Charter Communications Holdings LLC/Charter Communications Capital Corp., Sr Note 01-15-11 11.125 B+ 1,055 1,134,125 Sr Note 05-15-11 10.000 B+ 1,875 1,959,375 Clear Channel Communications, Inc., Sr Note 06-15-05 7.875 BBB- 5,170 5,405,287 Comcast Cable Communications, Inc., Sr Note 01-30-11 6.750 BBB 2,760 2,779,127 Continental Cablevision, Inc., Sr Note 05-15-06 8.300 A- 5,120 5,606,195 CSC Holdings, Inc., Sr Sub Deb 05-15-16 10.500 BB- 1,880 2,096,200 EchoStar DBS Corp., Sr Note 02-01-09 9.375 B+ 1,310 1,382,050 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 B+ 2,485 2,410,450 Grupo Televisa S.A., Note (Mexico) 09-13-11 (R) (Y) 8.000 BB+ 1,715 1,706,425 Lenfest Communications, Inc., Sr Note 11-01-05 8.375 BBB 2,685 2,947,647 Mediacom LLC/Mediacom Capital Corp., Sr Note 01-15-13 9.500 B+ 810 862,650 Sr Note Ser B 04-15-08 8.500 B+ 1,435 1,470,875 News America Holdings, Inc., Gtd Sr Deb 08-10-18 8.250 BBB- 1,805 1,893,391 News America, Inc., Gtd Sr Note 04-30-28 7.300 BBB- 2,575 2,425,804 Rogers Cablesystems, Ltd., Sr Note Ser B (Canada) 03-15-05 (Y) 10.000 BBB- 4,880 5,294,800 TCI Communications, Inc., Sr Deb 02-15-26 7.875 A- 2,830 2,940,398 Time Warner, Inc., Deb 01-15-13 9.125 BBB+ 3,420 4,123,391 Univision Communications, Inc., Sr Note 07-15-11 (R) 7.850 BB+ 4,145 4,310,800 Viacom, Inc., Gtd Sr Deb 07-30-30 7.875 A- 4,195 4,722,437 Gtd Sr Note 01-30-06 6.400 A- 4,185 4,392,032 Medical 1.44% 20,862,234 Dynacare, Inc., Sr Note (Canada) 01-15-06 (Y) 10.750 B+ 3,465 3,672,900 Fresenius Medical Care Capital Trust II, Gtd Trust Preferred Security 02-01-08 7.875 B+ 3,480 3,514,800 HCA -- The Healthcare Co., Note 09-01-10 8.750 BB+ 1,845 2,029,500 Sr Note 06-01-06 7.125 BB+ 3,930 4,051,830 HealthSouth Corp., Sr Note 02-01-08 8.500 BBB- 2,085 2,210,100 Quest Diagnostics, Inc., Gtd Sr Note 07-12-06 6.750 BBB- 2,820 2,894,284 Tenet Healthcare Corp., Sr Note 01-15-05 8.000 BBB 890 991,095 Triad Hospitals, Inc., Gtd Sr Note Ser B 05-01-09 8.750 B- 1,390 1,497,725 Metal 0.19% 2,714,608 Newmont Mining Corp., Note 05-15-11 8.625 BBB 2,600 2,714,608 Mortgage Banking 6.23% 90,533,366 Asset Securitization Corp., Pass Thru Ctf Ser 1997-D4 Class A-1B 04-14-29 7.400 AAA 7,085 7,588,035 Commercial Mortgage Acceptance Corp., Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-08 6.790 Aaa 5,109 5,358,121 ContiMortgage Home Equity Loan Trust, Pass Thru Ctf Ser 1995-2 Class A-5 08-15-25 8.100 AAA 2,950 2,950,189 Credit Suisse First Boston Mortgage Securities Corp., Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class A-1A 12-17-07 6.260 AAA 8,441 8,775,470 Deutsche Mortgage & Asset Receiving Corp., Commercial Mtg Pass-Through Ctf Ser 1998-C1 Class C 03-15-08 6.861 A2 3,585 3,684,148 FirstPlus Home Loan Trust, Pass Thru Ctf Ser 1998-4 Class A-5 01-10-18 6.380 AAA 3,344 3,360,230 GMAC Commercial Mortgage Securities, Inc., Pass Thru Ctf Ser 1998-C1 Class A-1 05-15-30 6.411 Aaa 11,359 11,758,499 LB Commercial Conduit Mortgage Trust, Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-07 6.410 Aaa 5,394 5,628,026 Morgan (J.P.) Commercial Mortgage Finance Corp., Mtg Pass Thru Ctf Ser 1997-C5 Class A-2 09-15-29 7.069 AAA 5,564 5,920,016 Morgan Stanley Capital I, Inc., Pass Thru Ctf Ser 1999-CAM1 Class A-3 11-15-08 6.920 AAA 12,480 13,273,379 Morgan Stanley Dean Witter Capital I Trust, Pass Thru Ctf Ser 2001-IQA Class A-1 12-18-32 4.570 Aaa 12,886 12,820,383 Salomon Brothers Mortgage Securities VII, Inc., Mtg Pass Thru Ctf Ser 1997-HUD2 Class A-2 07-25-24 6.750 Aaa 1,778 1,782,254 UCFC Home Equity Loan Trust, Pass Thru Ctf Ser 1996-D1 Class A-6 02-15-25 7.180 AAA 7,260 7,634,616 Oil & Gas 3.25% 47,250,057 Alberta Energy Co., Ltd., Note (Canada) 09-15-30 (Y) 8.125 BBB+ 2,850 3,093,846 Note (Canada) 11-01-31 (Y) 7.375 BBB+ 2,890 2,835,639 Amerada Hess Corp., Note 08-15-11 6.650 BBB 4,605 4,654,826 Anadarko Petroleum Corp., Deb 05-15-28 7.150 BBB+ 4,330 4,309,649 Apache Finance Canada Corp., Gtd Sr Note (Canada) 12-15-29 (Y) 7.750 A- 2,890 3,165,533 Forest Oil Corp., Sr Note 06-15-08 8.000 BB 1,695 1,716,188 Louis Dreyfus Natural Gas Corp., Note 12-01-07 6.875 BBB+ 2,685 2,802,254 Occidental Petroleum Corp., Note 01-15-07+ 5.875 BBB 2,815 2,828,596 Note 01-15-12+ 6.750 BBB 2,890 2,908,929 Sr Deb 09-15-09 10.125 BBB 1,080 1,306,595 Ocean Energy, Inc., Gtd Sr Sub Note Ser B 07-15-07 8.875 BB+ 2,220 2,339,813 Petroleum Geo-Services ASA, Sr Note (Norway) 03-30-28 (Y) 7.125 BBB- 1,425 1,065,059 Santa Fe Snyder Corp., Sr Sub Note 06-15-07 8.750 BBB 2,575 2,695,458 Tosco Corp., Note 02-15-30 8.125 BBB+ 5,550 6,391,991 Valero Energy Corp., Note 06-15-05 8.375 BBB- 1,690 1,835,847 Note 03-15-06 7.375 BBB- 3,110 3,299,834 Paper & Paper Products 1.26% 18,282,366 Georgia-Pacific Corp., Sr Note 05-15-06 7.500 BBB- 2,600 2,662,088 International Paper Co., Sr Note 07-08-05 8.125 BBB 4,165 4,473,210 Stone Container Corp., Sr Note 02-01-11 9.750 B 2,265 2,423,550 Stora Enso Oyj, Sr Note (Finland) 05-15-11 (Y) 7.375 BBB+ 4,255 4,527,320 Weyerhaeuser Co., Note 08-01-06 6.000 A- 4,135 4,196,198 Real Estate Investment Trusts 1.41% 20,477,906 American Health Properties, Inc., Note 01-15-07 7.500 BBB+ 2,350 2,411,688 Cabot Industrial Properties, L.P., Note 05-01-04 7.125 BBB 3,455 3,584,148 Camden Property Trust, Sr Note 04-15-04 7.000 BBB 3,800 3,988,898 Healthcare Realty Trust, Inc., Sr Note 05-01-11 8.125 BBB- 2,600 2,719,080 iStar Financial, Inc., Sr Note 08-15-08 8.750 BB+ 1,085 1,093,137 Liberty Property, L.P., Med Term Note 06-05-02 6.600 BBB 3,030 2,991,683 ProLogis Trust, Sr Note 04-15-04 6.700 BBB+ 3,555 3,689,272 Real Estate Operations 0.11% 1,650,831 EOP Operating, L.P., Sr Note 02-15-05 6.625 BBB+ 1,580 1,650,831 Retail 0.80% 11,577,077 Delhaize America, Inc., Note 04-15-11 (R) 8.125 BBB- 3,835 4,266,016 Kroger Co., Gtd Sr Note 04-01-11 6.800 BBB- 4,540 4,801,141 Toys "R" Us, Inc., Note 08-01-11 (R) 7.625 BBB+ 2,520 2,509,920 Telecommunications 5.59% 81,212,489 AT&T Canada Corp., Sr Disc Note, Step Coupon (10.750%, 11-01-02) (Canada) 11-01-07 (A) (Y) Zero BBB 2,850 1,710,000 Sr Note (Canada) 08-15-07 (Y) 12.000 BBB 2,430 1,919,700 AT&T Corp., Sr Note 11-15-31 (R) 8.000 BBB+ 3,405 3,378,135 AT&T Wireless Services, Inc., Sr Note 03-01-31 8.750 BBB 5,465 6,199,715 Citizens Communications Co., Note 05-15-06 8.500 BBB 5,370 5,734,086 Deutsche Telekom International Finance B.V., Gtd Bond (Netherlands) 06-15-05 (Y) 7.750 A- 2,325 2,505,118 Gtd Bond (Netherlands) 06-15-30 (Y) 8.250 A- 4,260 4,676,202 Dominion Resources, Inc., Sr Note Ser A 06-15-10 8.125 BBB+ 4,255 4,718,412 LCI International, Inc., Sr Note 06-15-07 7.250 BBB+ 3,860 3,973,793 Qwest Capital Funding, Inc., Gtd Note 02-15-11 7.250 BBB+ 2,840 2,842,641 Singapore Telecommunications Ltd., Bond (Singapore) 12-01-31 (R) (Y) 7.375 AA- 3,150 3,205,125 Sprint Capital Corp., Gtd Note 01-30-06 7.125 BBB+ 5,470 5,710,571 Gtd Note 11-15-28 6.875 BBB+ 5,525 4,985,208 Telefonos de Mexico S.A. de C.V., Sr Note (Mexico) 01-26-06 (Y) 8.250 BB+ 5,590 5,848,538 Telus Corp., Note (Canada) 06-01-11 (Y) 8.000 BBB+ 4,185 4,472,761 Verizon Global Funding Corp., Note 12-01-30 7.750 A+ 5,615 6,357,022 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 A- 2,640 3,009,600 WorldCom, Inc., Bond 05-15-31 8.250 BBB+ 4,230 4,427,118 Note 05-15-06 8.000 BBB+ 5,160 5,538,744 Transportation 2.77% 40,256,148 America West Airlines, Inc., Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 B+ 3,260 2,444,915 Burlington Northern Santa Fe Corp., Deb 08-15-30 7.950 BBB+ 5,545 6,176,520 Continental Airlines, Inc., Pass Thru Ctf Ser 1996-C 10-15-13 9.500 BBB- 4,071 3,175,487 Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA 5,303 4,725,039 Delta Air Lines, Inc., Note 12-15-05 7.700 BB 235 213,850 Northwest Airlines, Inc., Pass Thru Ctf Ser 1996-1C 01-02-05 10.150 BB 1,580 1,453,763 Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BB+ 3,359 2,821,927 NWA Trust, Sr Note Ser A 12-21-12 9.250 AA 4,771 4,905,138 Railcar Trust No. 1992-1, Pass Thru Ser 1992-1 Class A 06-01-04 7.750 AAA 7,550 7,926,083 United Airlines, Inc., Pass Thru Ctf Ser 2000-2 Class A-1 04-01-12 7.032 AA 3,582 3,477,522 U.S. Airways, Inc., Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 B 4,318 2,935,904 Utilities 10.73% 155,786,733 AES Corp., Sr Note 06-01-09 9.500 BB 2,620 2,567,600 Sr Note 09-15-10 9.375 BB 1,110 1,110,000 Sr Sub Note 07-15-06 10.250 B+ 3,570 3,462,900 AES Eastern Energy, Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 3,700 3,953,228 Beaver Valley Funding Corp., Sec Lease Oblig Bond 06-01-17 9.000 BBB- 3,960 4,349,070 BVPS II Funding Corp., Collateralized Lease Bond 06-01-17 8.890 BBB- 6,600 7,311,546 Calpine Canada Energy Finance ULC, Gtd Sr Note (Canada) 05-01-08 (Y) 8.500 BB+ 5,765 5,712,366 Calpine Corp., Sr Note 08-15-05 8.250 BB+ 1,685 1,709,549 Sr Note 05-15-06 10.500 BB+ 4,650 4,870,875 Cleveland Electric Illuminating Co., 1st Mtg Ser B 05-15-05 9.500 BBB 10,220 10,488,275 CMS Energy Corp., Sr Note 10-15-07 9.875 BB 1,160 1,270,200 Sr Note Ser B 01-15-04 6.750 BB 3,595 3,602,046 EIP Funding-PNM, Sec Fac Bond 10-01-12 10.250 BBB- 8,319 8,901,330 El Paso Corporation, Sr Note 08-01-31 7.800 BBB 4,170 4,070,629 Exelon Generation Co LLC, Sr Note 06-15-11 (R) 6.950 A- 4,165 4,260,254 GG1B Funding Corp., Deb 01-15-11 7.430 BBB- 3,288 3,411,792 Hydro-Quebec, Gtd Deb Ser FU (Canada) 02-01-12 (Y) 11.750 A+ 5,000 7,225,000 Gtd Deb Ser IF (Canada) 02-01-03 (Y) 7.375 A+ 7,185 7,580,606 Iberdrola International B.V., Note 10-01-02 7.500 A+ 8,000 8,296,400 Sr Note (Netherlands) 06-01-03 (R) (Y) 7.125 A+ 8,629 9,042,329 KeySpan Corp., Note 11-15-10 7.625 A 4,145 4,596,390 Long Island Lighting Co., Deb 03-15-23 8.200 A- 5,615 5,839,600 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 BB+ 1,191 1,238,704 Niagara Mohawk Power Corp., Sec Fac Deb Bond 01-01-18 8.770 Baa2 6,740 7,065,272 Northeast Utilities, Note Ser A 12-01-06 8.580 BBB 911 974,699 Pinnacle Partners, Sr Note 08-15-04 (R) 8.830 BBB- 3,830 3,890,066 Pinnacle West Capital Corp., Sr Note 04-01-06 6.400 BBB 3,810 3,904,374 PNPP II Funding Corp., Deb 05-30-16 9.120 BBB- 4,120 4,648,431 PSEG Energy Holdings, Inc., Sr Note 02-15-08 8.625 BBB- 2,685 2,747,346 Republic Services, Inc., Sr Note 08-15-11 6.750 BBB 4,150 4,203,576 Sierra Pacific Resources, Note 05-15-05 8.750 BBB- 1,835 1,934,971 Waterford 3 Funding Corp., Sec Lease Oblig Bond 01-02-17 8.090 BBB- 7,133 7,395,616 Xcel Energy, Inc., Sr Note 12-01-10 7.000 BBB+ 3,985 4,151,693 NUMBER OF ISSUER, DESCRIPTION, SHARES OR MATURITY DATE WARRANTS VALUE PREFERRED STOCKS AND WARRANTS 1.42% $20,657,818 (Cost $19,960,279) California Federal Preferred Capital Corp., 9.125%, Ser A, Preferred Stock 327,190 8,372,792 CSC Holdings, Inc., 11.125% Ser M, Preferred Stock 77,653 8,250,631 CSC Holdings, Inc., 11.750%, Ser H, Preferred Stock 33,520 3,595,020 MetroNet Communications Corp., Warrant (Canada) (R) (Y) * 4,625 439,375 INTEREST PAR VALUE RATE (000S OMITTED) VALUE SHORT-TERM INVESTMENTS 2.09% $30,312,000 (Cost $30,312,000) Joint Repurchase Agreement 2.09% Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 11-30-01, due 12-03-01 (Secured by U.S. Treasury Bonds, 5.250% thru 8.125%, due 02-15-29 thru 08-15-19) 2.100% $30,312 30,312,000 TOTAL INVESTMENTS 98.88% $1,435,970,634 OTHER ASSETS AND LIABILITIES, NET 1.12% $16,207,712 TOTAL NET ASSETS 100.00% $1,452,178,346 (A) Cash interest will paid on this obligation at the stated rate beginning on the stated date. (R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $143,293,075 or 9.87% of net assets as of November 30, 2001. (Y) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer; however, the security is U.S. dollar-denominated. * Non-income producing security. ** Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investor Services or John Hancock Advisers, Inc. where Standard & Poor's ratings are not available. *** A portion of these securities having an aggregate value of $10,733,825, or 0.74% of the Fund's net assets, has been purchased as forward commitments -- that is, the Fund has agreed on trade date to take delivery of and to make payment for these securities on a delayed basis subsequent to the date of this schedule. The purchase price and interest rate of these securities are fixed at trade date, although the Fund does not earn any interest on these securities until settlement date. The Fund has instructed its Custodian Bank to segregate assets with a current value at least equal to the amount of the forward commitments. Accordingly, the market value of $11,073,979 of United States Treasury Note, 7.000%, 07-15-06, has been segregated to cover the forward commitments. + A portion of these securities having an aggregate value of $5,737,526, or 0.40% of the Fund's net assets, has been purchased on a when-issued basis. The purchase price and the interest rate of these securities is fixed at trade date, although the Fund does not earn any interest on these securities until settlement date. The Fund has instructed its Custodian Bank to segregate assets with a current value at least equal to the amount of its when- issued commitments. Accordingly, the market value of $5,912,255 of United States Treasury Note, 7.000%, 07-15-06, has been segregated to cover the when-issued commitments. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
ASSETS AND LIABILITIES November 30, 2001 (unaudited) This Statement of Assets and Liabilities is the Fund's balance sheet. It shows the value of what the Fund owns, is due and owes. You'll also find the net asset value and the maximum offering price per share. ASSETS Investments at value (cost $1,406,901,312) $1,435,970,634 Cash 386 Receivable for investments sold 60,226,595 Receivable for shares sold 1,189,097 Dividends and interest receivable 23,806,944 Other assets 140,777 Total assets 1,521,334,433 LIABILITIES Payable for investments purchased 67,162,320 Payable for shares repurchased 523,150 Dividends payable 213,148 Payable to affiliates 1,021,121 Other payables and accrued expenses 236,348 Total liabilities 69,156,087 NET ASSETS Capital paid-in 1,487,078,961 Accumulated net realized loss on investments (53,337,000) Net unrealized appreciation of investments 29,069,322 Distributions in excess of net investment loss (10,632,937) Net assets $1,452,178,346 NET ASSET VALUE PER SHARE Based on net asset values and shares outstanding Class A ($1,166,642,136 [DIV] 78,013,537 shares) $14.95 Class B ($247,395,300 [DIV] 16,543,361 shares) $14.95 Class C ($38,130,914 [DIV] 2,549,820 shares) $14.95 Class I ($9,996 [DIV] 668 shares) $14.95 MAXIMUM OFFERING PRICE PER SHARE Class A 1 ($14.95 [DIV] 95.5%) $15.65 Class C ($14.95 [DIV] 99%) $15.10 1 On single retail sales of less than $100,000. On sales of $100,000 or more and on group sales the offering price is reduced. See notes to financial statements. OPERATIONS For the period ended November 30, 2001 (unaudited) 1 This Statement of Operations summarizes the Fund's investment income earned and expenses incurred in oper- ating the Fund. It also shows net gains (losses) for the period stated. INVESTMENT INCOME Interest (including income on securities loaned of $136,769) $47,154,285 Dividends 624,653 Total investment income 47,778,938 EXPENSES Investment management fee 3,562,421 Class A distribution and service fee 1,739,756 Class B distribution and service fee 1,164,026 Class C distribution and service fee 161,606 Class A, B and C transfer agent fee 1,753,214 Accounting and legal services fee 149,000 Custodian fee 143,899 Registration and filing fee 54,534 Trustees' fee 41,309 Printing 34,313 Miscellaneous 24,164 Auditing fee 23,025 Legal fee 7,841 Total expenses 8,859,108 Net investment income 38,919,830 REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain on investments 8,059,037 Change in unrealized appreciation (depreciation) on investments 18,481,352 Net realized and unrealized gain 26,540,389 Increase in net assets from operations $65,460,219 1 Semiannual period from 6-1-01 through 11-30-01. See notes to financial statements. CHANGES IN NET ASSETS This Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous period. The dif- ference reflects earnings less expenses, any investment gains and losses, distri- butions paid to shareholders, if any, and any increase or decrease in money share- holders invested in the Fund. YEAR PERIOD ENDED ENDED 5-31-01 11-30-01 1 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income $84,683,998 $38,919,830 Net realized gain 5,032,003 8,059,037 Change in net unrealized appreciation (depreciation) 65,332,336 18,481,352 Increase in net assets resulting from operations 155,048,337 65,460,219 Distributions to shareholders From net investment income Class A (71,799,469) (34,090,386) Class B (11,680,442) (6,022,394) Class C (1,204,086) (830,338) Class I 2 -- (158) (84,683,997) (40,943,276) From fund share transactions (5,151,356) 43,367,483 NET ASSETS Beginning of period 1,319,080,936 1,384,293,920 End of period 3 $1,384,293,920 $1,452,178,346 1 Semiannual period from 6-1-01 through 11-30-01. Unaudited. 2 Class I began operations on 9-4-01. 3 Includes distributions in excess of net investment income of $79,159 and $10,632,937, respectively. See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS A SHARES The Financial Highlights show how the Fund's net asset value for a share has changed since the end of the previous period. PERIOD ENDED 12-31-96 5-31-97 1 5-31-98 5-31-99 5-31-00 5-31-01 11-30-01 2 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $15.40 $14.90 $14.78 $15.25 $14.76 $13.93 $14.69 Net investment income 1.09 0.44 1.05 3 0.97 3 0.96 3 0.92 3 0.42 3 Net realized and unrealized gain (loss) on investments (0.50) (0.12) 0.47 (0.49) (0.83) 0.76 0.28 Total from investment operations 0.59 0.32 1.52 0.48 0.13 1.68 0.70 Less distributions From net investment income (1.09) (0.44) (1.05) (0.97) (0.96) (0.92) (0.44) Net asset value, end of period $14.90 $14.78 $15.25 $14.76 $13.93 $14.69 $14.95 Total return 4 (%) 4.11 2.22 5 10.54 3.11 0.97 12.38 4.80 5 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $1,416 $1,362 $1,328 $1,279 $1,098 $1,140 $1,167 Ratio of expenses to average net assets (%) 1.14 1.11 6 1.08 1.07 1.11 1.12 1.11 6 Ratio of net investment income to average net assets (%) 7.32 7.38 6 6.90 6.35 6.69 6.38 5.60 6,7 Portfolio turnover (%) 123 58 198 228 162 235 89
See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS B SHARES PERIOD ENDED 12-31-96 5-31-97 1 5-31-98 5-31-99 5-31-00 5-31-01 11-30-01 2 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $15.40 $14.90 $14.78 $15.25 $14.76 $13.93 $14.69 Net investment income 0.98 0.40 0.95 3 0.86 3 0.86 3 0.83 3 0.37 3 Net realized and unrealized gain (loss) on investments (0.50) (0.12) 0.47 (0.49) (0.83) 0.76 0.28 Total from investment operations 0.48 0.28 1.42 0.37 0.03 1.59 0.65 Less distributions Dividends from net investment income (0.98) (0.40) (0.95) (0.86) (0.86) (0.83) (0.39) Net asset value, end of period $14.90 $14.78 $15.25 $14.76 $13.93 $14.69 $14.95 Total return 4 (%) 3.38 1.93 5 9.78 2.39 0.27 11.64 4.44 5 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $134 $133 $166 $239 $197 $218 $247 Ratio of expenses to average net assets (%) 1.84 1.81 6 1.78 1.77 1.81 1.78 1.81 6 Ratio of net investment income to average net assets (%) 6.62 6.68 6 6.18 5.65 6.00 5.71 4.89 6,7 Portfolio turnover (%) 123 58 198 228 162 235 89
See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS C SHARES PERIOD ENDED 5-31-99 8 5-31-00 5-31-01 11-30-01 2,8 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $15.61 $14.76 $13.93 $14.69 Net investment income 3 0.55 0.85 0.82 0.37 Net realized and unrealized gain (loss) on investments (0.85) (0.83) 0.76 0.28 Total from investment operations (0.30) 0.02 1.58 0.65 Less distributions Dividends from net investment income (0.55) (0.85) (0.82) (0.39) Net asset value, end of period $14.76 $13.93 $14.69 $14.95 Total return 4 (%) 1.95 5 0.28 11.60 4.43 5 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $21 $24 $26 $38 Ratio of expenses to average net assets (%) 1.77 6 1.80 1.82 1.81 6 Ratio of net investment income to average net assets (%) 5.65 6 6.01 5.66 4.86 6,7 Portfolio turnover (%) 228 162 235 89
See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS I SHARES PERIOD ENDED 11-30-01 2,8 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $14.96 Net investment income 3 0.21 Net realized and unrealized gain on investments 0.01 Total from investment operations 0.22 Less distributions Dividends from net investment income (0.23) Net asset value, end of period $14.95 Total return 4 (%) 1.51 5 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) -- 9 Ratio of expenses to average net assets (%) 0.61 6 Ratio of net investment income to average net assets (%) 7.43 6,7 Portfolio turnover (%) 89
1 Effective 5-3-97, the fiscal year end changed from December 31 to May 31. 2 Semiannual period from 6-1-01 through 11-30-01. Unaudited. 3 Based on the average of the shares outstanding at the end of each month. 4 Assumes dividend reinvestment and does not reflect the effect of sales charges. 5 Not annualized. 6 Annualized. 7 Had the Fund not amortized premiums on debt securities, the annualized ratio of investment income to average net assets would have been 5.88%, 5.17%, 5.14% and 7.71% for Class A, Class B, Class C and Class I shares, respectively. 8 Class C shares began operations on 10-1-98. Class I shares began operations on 9-4-01. 9 Less than $500,000. See notes to financial statements. NOTES TO STATEMENTS Unaudited NOTE A Accounting policies John Hancock Bond Fund (the "Fund") is a diversified series of John Hancock Sovereign Bond Fund, an open-end investment management company registered under the Investment Company Act of 1940. The investment objective of the Fund is to generate a high level of current income, consistent with prudent investment risk, through investment in a diversified portfolio of bonds and other debt securities. The Trustees have authorized the issuance of multiple classes of shares of the Fund, designated as Class A, Class B, Class C and Class I shares. The shares of each class represent an interest in the same portfolio of investments of the Fund and have equal rights to voting, redemptions, dividends and liquidation, except that certain expenses, subject to the approval of the Trustees, may be applied differently to each class of shares in accordance with current regulations of the Securities and Exchange Commission and the Internal Revenue Service. Shareholders of a class that bears distribution and service expenses under terms of a distribution plan have exclusive voting rights to that distribution plan. Significant accounting policies of the Fund are as follows: Valuation of investments Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. Joint repurchase agreement Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, Inc., may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for the joint account on the Fund's behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. Investment transactions Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Some securities may be purchased on a "when-issued" or "forward delivery" basis, which means that the securities will be delivered to the Fund at a future date, usually beyond customary settlement date. Discount and premium on securities The Fund accretes discount and amortizes premium from par value on securities from either the date of issue or the date of purchase over the life of the security. Class allocations Income, common expenses and realized and unrealized gains (losses) are determined at the fund level and allocated daily to each class of shares based on the appropriate net assets of the respective classes. Distribution and service fees, if any, and transfer agent fees for Class I shares, are calculated daily at the class level based on the appropriate net assets of each class and the specific expense rate(s) applicable to each class. Expenses The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. Bank borrowings The Fund is permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating funds. The Fund had no borrowing activity under the line of credit during the period ended November 30, 2001. Securities lending The Fund may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. These fees are included in interest income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At November 30, 2001, the Fund loaned securities having a market value of $301,230,052, collateralized by securities in the amount of $303,174,920. Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the Fund has $55,393,254 of capital loss carryforwards available, to the extent provided by regulations, to offset future net realized capital gains. To the extent such carryforwards are used by the Fund, no capital gain distributions will be made. The Fund's carryforwards expire as follows: May 31, 2002 -- $9,347,493, May 31, 2004 -- $8,402,805, May 31, 2005 -- $1,183,431, May 31, 2007 -- $619,870, May 31, 2008 -- $15,467,220 and May 31, 2009 -- $20,372,435. Availability of a certain amount of loss carryforwards, which were acquired on September 15, 1995 in a merger, may be limited in a given year. Dividends, interest and distributions Dividend income on investment securities is recorded on the ex-dividend date. Interest income on investment securities is recorded on the accrual basis. The Fund records distributions to shareholders from net investment income and realized gains on the ex- dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Distributions paid by the Fund with respect to each class of shares will be calculated in the same manner, at the same time and will be in the same amount, except for the effect of expenses that may be applied differently to each class. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. NOTE B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser equivalent, on an annual basis, to the sum of: (a) 0.50% of the first $1,500,000,000 of the Fund's average daily net asset value, (b) 0.45% of the next $500,000,000, (c) 0.40% of the next $500,000,000 and (d) 0.35% of the Fund's average daily net asset value in excess of $2,500,000,000. The Fund has Distribution Plans with John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the Adviser. The Fund has adopted Distribution Plans with respect to Class A, Class B and Class C pursuant to Rule 12b-1 under the Investment Company Act of 1940 to reimburse JH Funds for the services it provides as distributor of shares of the Fund. Accordingly, the Fund makes payments to JH Funds at an annual rate not to exceed 0.30% of Class A average daily net assets and 1.00% of Class B and Class C average daily net assets. A maximum of 0.25% of such payments may be service fees as defined by the Conduct Rules of the National Association of Securities Dealers. Under the Conduct Rules, curtailment of a portion of the Fund's 12b-1 payments could occur under certain circumstances. Class A and Class C shares are assessed up-front sales charges. During the period ended November 30, 2001, JH Funds received net up-front sales charges of $640,544 with regard to sales of Class A shares. Of this amount, $41,230 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $334,188 was paid as sales commissions to unrelated broker-dealers and $265,126 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. The Adviser's indirect parent, John Hancock Life Insurance Company ("JHLICo"), is the indirect sole shareholder of Signator Investors. During the period ended November 30, 2001, JH Funds received net up-front sales charges of $140,257 with regard to sales of Class C shares. Of this amount, $133,129 was paid as sales commissions to unrelated broker-dealers and $7,128 was paid as sales commissions to sales personnel of Signator Investors. Class B shares which are redeemed within six years of purchase are subject to a contingent deferred sales charge ("CDSC") at declining rates, beginning at 5.00% of the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Class C shares which are redeemed within one year of purchase are subject to a CDSC at a rate of 1.00% of the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Proceeds from the CDSCs are paid to JH Funds and are used in whole or in part to defray its expenses for providing distribution-related services to the Fund in connection with the sale of Class B and Class C shares. For the period ended November 30, 2001, CDSCs received by JH Funds amounted to $253,332 for Class B shares and $9,776 for Class C shares. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc., an indirect subsidiary of JHLICo. For Class A, B and C shares, the Fund pays a monthly transfer agent fee based on the number of shareholder accounts, plus certain out-of-pocket expenses, aggregated and allocated to each class on the basis of their relative net asset values. For Class I shares, the Fund pays a monthly transfer agent fee at an annual rate of 0.05% of the average daily net assets attributable to Class I shares, plus certain out-of-pocket expenses. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the period was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Fund's deferred compensation liability are recorded on the Fund's books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investments as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund. NOTE C Fund share transactions This listing illustrates the number of Fund shares sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value. The Fund has an unlimited number of shares authorized with no par value.
YEAR ENDED 5-31-00 PERIOD ENDED 11-30-01 1 SHARES AMOUNT SHARES AMOUNT CLASS A SHARES Sold 20,329,913 $292,695,235 4,952,808 $73,961,348 Distributions reinvested 3,885,469 56,285,950 1,796,592 26,862,085 Repurchased (25,386,067) (365,444,508) (6,361,049) (94,798,441) Net increase (decrease) (1,170,685) ($16,463,323) 388,351 $6,024,992 CLASS B SHARES Sold 4,030,445 $58,808,128 3,300,471 $49,313,244 Distributions reinvested 438,799 6,362,603 210,982 3,157,557 Repurchased (3,783,675) (54,786,515) (1,804,620) (26,910,767) Net increase 685,569 $10,384,216 1,706,833 $25,560,034 CLASS C SHARES Sold 1,373,262 $19,986,436 1,005,944 $15,014,863 Distributions reinvested 53,807 633,249 22,870 343,072 Repurchased (1,370,639) (19,691,934) (240,544) (3,585,541) Net increase 56,430 $927,751 788,270 $11,772,394 CLASS I SHARES2 Sold -- -- 668 $10,063 Net increase -- -- 668 $10,063 NET INCREASE (DECREASE) (428,686) ($5,151,356) 2,884,122 $43,367,483
1 Semiannual period from 6-1-01 through 11-30-01. Unaudited. 2 Class I shares began operations on 9-4-01. NOTE D Investment transactions Purchases and proceeds from sales of securities, other than short-term securities and obligations of the U.S. government, during the period ended November 30, 2001, aggregated $1,296,176,503 and $1,197,385,861, respectively. The cost of investments owned at November 30, 2001, including short-term investments, for federal income tax purposes was $1,417,148,596. Gross unrealized appreciation and depreciation of investments aggregated $41,421,583 and $22,599,545, respectively, resulting in net unrealized appreciation of $18,822,038. NOTE E Change in accounting principle Effective June 30, 2001 the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, and began amortizing premiums on debt securities. Prior to this date, the Fund did not amortize premiums on debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Fund, but resulted in a $8,530,333 reduction in the cost of securities and a corresponding increase in net unrealized appreciation, based on securities held as of May 31, 2001. The effect of this change for the period ended November 30, 2001 was to decrease net investment income by $2,023,445, increase unrealized appreciation on investments by $1,033,183 and increase net realized gain on investments by $990,262. The effect of this change on the per share operating performance and the annualized ratio of net investment income to average net assets for the period ended November 30, 2001 was as follows: decrease in net investment income by $0.02 per share, increase in net realized and unrealized gains by $0.02 per share and decrease in the ratio of net investment income to average net assets by 0.28%. The statement of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change in presentation. FOR YOUR INFORMATION TRUSTEES Dennis S. Aronowitz* Richard P. Chapman, Jr. William J. Cosgrove* John M. DeCiccio Richard A. Farrell* Maureen R. Ford Gail D. Fosler William F. Glavin Dr. John A. Moore Patti McGill Peterson John W. Pratt* *Members of the Audit Committee OFFICERS Maureen R. Ford Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer INVESTMENT ADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 PRINCIPAL DISTRIBUTOR John Hancock Funds, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 CUSTODIAN The Bank of New York One Wall Street New York, New York 10286 TRANSFER AGENT John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, Massachusetts 02217-1000 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 HOW TO CONTACT US On the Internet www.jhfunds.com By regular mail John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 By express mail John Hancock Signature Services, Inc. Attn: Mutual Fund Image Operations 529 Main Street Charlestown, MA 02129 Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 TDD line 1-800-544-6713 [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner. A tag line below reads "JOHN HANCOCK FUNDS."] 1-800-225-5291 1-800-544-6713 (TDD) 1-800-338-8080 EASI-Line www.jhfunds.com Now available: electronic delivery www.jhancock.com/funds/edelivery This report is for the information of the shareholders of the John Hancock Bond Fund. 210SA 11/01 1/02 VOTE THIS PROXY CARD TODAY! YOUR PROMPT RESPONSE WILL SAVE YOUR FUND THE EXPENSE OF ADDITIONAL MAILINGS JOHN HANCOCK ACTIVE BOND FUND SPECIAL MEETING OF SHAREHOLDERS - MAY 29, 2002 PROXY SOLICITATION BY THE BOARD OF TRUSTEES The undersigned, revoking previous proxies, hereby appoint(s) Maureen R. Ford, Susan S. Newton and William H. King, with full power of substitution in each, to vote all the shares of beneficial interest of John Hancock Active Bond Fund ("Active Bond Fund") which the undersigned is (are) entitled to vote at the Special Meeting of Shareholders (the "Meeting") of Active Bond Fund to be held at 101 Huntington Avenue, Boston, Massachusetts, on May 29, 2002 at 9:00 a.m., Boston time, and at any adjournment(s) of the Meeting. All powers may be exercised by a majority of all proxy holders or substitutes voting or acting, or, if only one votes and acts, then by that one. Receipt of the Proxy Statement dated April 15, 2002 is hereby acknowledged. If not revoked, this proxy shall be voted for the proposal. Date , 2002 PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE ---------------------------------------------- ---------------------------------------------- Signature(s) NOTE: Signature(s) should agree with the name(s) printed herein. When signing as attorney, executor, administrator, trustee or guardian, please give your full name as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person. VOTE THIS PROXY CARD TODAY! YOUR PROMPT RESPONSE WILL SAVE YOUR FUND THE EXPENSE OF ADDITIONAL MAILINGS THIS PROXY WILL BE VOTED IN FAVOR OF (FOR) PROPOSAL 1 IF NO SPECIFICATION IS MADE BELOW. AS TO ANY OTHER MATTER, THE PROXY OR PROXIES WILL VOTE IN ACCORDANCE WITH THEIR BEST JUDGEMENT. PLEASE VOTE BY FILLING IN THE APPROPRIATE BOX BELOW (1) To approve an Agreement and Plan of Reorganization between John Hancock Active Bond Fund ("Active Bond Fund") and John Hancock Bond Fund ("Bond Fund"). Under this Agreement, Active Bond Fund would transfer all of its assets to Bond Fund in exchange for Class I shares of Bond Fund. These shares will be distributed proportionately to you and the other shareholders of Active Bond Fund. Bond Fund will also assume Active Bond Fund's liabilities. FOR |_| AGAINST |_| ABSTAIN |_| PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD. --------------- Shareholder Login PROXY DIRECT TM - -------------------------------------------------------------------------------- Back to Home Contact Us Security ? - -------------------------------------------------------------------------------- You can now submit your voting instructions online. To do so, please enter your Proxy Control Number in the area below. Your Internet Voting Control Number is located on your voting instruction card and is identified as Control Number or Internet Control Number. If you have received multiple voting instruction cards, each card has its own control number; you will need to login and provide your voting instructions separately for each such distinct Control Number. - -------------------------------------------------------------------------------- Enter Control Number here: [ ] [ ] [ ] [ ] Continue - -------------------------------------------------------------------------------- Your browser must support JavaScript 1.1 or higher and be able to accept cookies in order to continue. Click on HELP button at the top for more information and navigation tips. If you are unable to vote yor proxy using this service because of technical difficulties, you should refer to your Proxy Package for other voting options. VeriSign Secure Site Click to verify C 2001 PROXY DIRECT TM - Service of ALAMO Direct Mail Svcs, Inc. All rights reserved. John Hancock Institutional Series Trust Proxy PROXY DIRECT TM - -------------------------------------------------------------------------------- Back to Home Contact Us Security ? - -------------------------------------------------------------------------------- John Hancock ------------------ JOHN HANCOCK FUNDS i Below is the list of your holdings. Text next to each holding's name indicates whether you wish to vote as the Board recommends or to submit your individual instructions. To change between board recommended and individual instructions, click on the name of the holding; then follow the additional instructions. Unless you click on the name of the holding and the vote of your choice, your vote will automatically be recorded on the proposal as recommended by the Board. YOU MUST CLICK VOTE NOW! BUTTON TO COMPLETE YOUR SESSION - -------------------------------------------------------------------------------- List of Your Holdings Voting instructions - -------------------------------------------------------------------------------- John Hancock Active Bond Fund as recommended by the Board - -------------------------------------------------------------------------------- John Hancock Core Growth Fund as recommended by the Board - -------------------------------------------------------------------------------- John Hancock Core Value Fund as recommended by the Board - -------------------------------------------------------------------------------- John Hancock Dividend Performers Fund as recommended by the Board - -------------------------------------------------------------------------------- John Hancock Independence Balanced Fund as recommended by the Board - -------------------------------------------------------------------------------- John Hancock International Equity Fund as recommended by the Board - -------------------------------------------------------------------------------- John Hancock Medium Capitalization Growth Fund as recommended by the Board - -------------------------------------------------------------------------------- John Hancock Small Cap Equity Fund Y as recommended by the Board - -------------------------------------------------------------------------------- Click on arrow to modify voting instructions - -------------------------------------------- Help me... Cancel Vote Now! - ---------- ------ --------- If you need help navigating You can quit Internet Once you have the site or experience problems voting at any time. However, completed during your online session, your voting instructions set selection of your this page may provide you with up during this session will voting answers be disregarded instructions and are ready to submit them for processing, click the Vote Now! button - -------------------------------------------------------------------------------- Back to Home Contact Us Security C 2000 PROXY DIRECT TM - -------------------------------------------------------------------------------- John Hancock Institutional Series Trust Proxy PROXY DIRECT TM - -------------------------------------------------------------------------------- Back to Home Contact Us Security ? - -------------------------------------------------------------------------------- Shareholder: John P. Sample ALAMO Direct Mail Services, Inc. 23-10 Square Circle Lane Someoldtown, TS 12345- 6789 Acount: ALAMO-TST01 / 271-XXXX- John Hancock XXXX-123 ------------------ JOHN HANCOCK FUNDS Previous vote: None-Testing APPS/TR Setup John Hancock Active Bond Fund - -------------------------------------------------------------------------------- Applicable Campaign Proposals Mark All For Against Board - -------------------------------------------------------------------------------- 1 A proposal to approve an agreement and ( ) For ( ) Against ( ) Board Plan of Reorganization between John Hancock Active Bond Fund ("Active Bond Fund") and John Hancock Bond Fund ("Bond Fund"). Under this Agreement, your fund would transfer all of its assets to Bond Fund in exchange for Class I shares of Bond Fund. These shares would be distributed proportionately to you and the other shareholders of Active Bond Fund. Bond Fund would also assume Active Bond Fund's liabilities. - -------------------------------------------------------------------------------- Any other business that may properly come before the meeting. - -------------------------------------------------------------------------------- Voting Instructions ------------------- i Answers have been marked according to the Board's recommendations. Please change responses as appropriate before submission. [ ] Cancel [ ] Continue - -------------------------------------------------------------------------------- Back to Home Contact Us Security C 2000 PROXY DIRECT TM - -------------------------------------------------------------------------------- John Hancock Institutional Series Trust Proxy PROXY DIRECT TM - -------------------------------------------------------------------------------- Back to Home Contact Us Security ? - -------------------------------------------------------------------------------- John Hancock ------------------ JOHN HANCOCK FUNDS Thank you. Your voting instructions have been submitted for processing. If necessary, you can revisit Internet Voting site any time before the Meeting Date on Wednesday, May 29, 2002 at 9:00 AM [ET] to submit new voting instructions. This is the summary of your voting instructions delivered to John Hancock Funds. It is not a receipt or vote confirmation. You may print this page for your records. Instructions submitted on _________, 2002 Transaction Code: __________________ John Hancock Active Bond Fund - -------------------------------------------------------------------------------- 1 Approve an Agreement and Plan of Reorganization Voted For If you wish to vote another card, please click here. - -------------------------------------------------------------------------------- Back to Home Contact Us Security C 2000 PROXY DIRECT TM - -------------------------------------------------------------------------------- Part B Statement of Additional Information JOHN HANCOCK BOND FUND (the "Acquiring Fund", and a series of John Hancock Sovereign Bond Fund) JOHN HANCOCK ACTIVE BOND FUND (the "Acquired Fund", and a series of John Hancock Institutional Series) 101 Huntington Avenue Boston, MA 02199 1-800-225-5291 April 15, 2002 This Statement of Additional Information provides additional information and is not a prospectus. It should be read in conjunction with the related proxy statement and prospectus that is also dated April 15, 2002. This Statement of Additional Information provides additional information about John Hancock Bond Fund and the Fund that it is acquiring, John Hancock Active Bond Fund. Please retain this Statement of Additional Information for future reference. A copy of the proxy statement and prospectus can be obtained free of charge by calling John Hancock Signature Services, Inc., at 1-800-225-5291. Table Of Contents Page Introduction 3 Note Regarding Pro Forma Financial Information 3 Additional Information about the Acquiring Fund 3 General Information and History 3 Investment Objective and Policies 3 Management of the Acquiring Fund 3 Control Persons and Principal Holders of Shares 3 Investment Advisory and Other Services 3 Brokerage Allocation 3 Capital Stock and Other Securities 3 Purchase, Redemption and Pricing of Acquiring Fund Shares 3 Tax Status 4 Underwriters 4 Calculation of Performance Data 4 Financial Statements 4 Additional Information about the Acquired Fund 4 General Information and History 4 Investment Objective and Policies 4 Management of the Acquired Fund 4 Investment Advisory and Other Services 4 Brokerage Allocation 4 Capital Stock and Other Securities 4 Purchase, Redemption and Pricing of Acquired Fund Shares 5 Tax Status 5 Underwriters 5 Calculation of Performance Data 5 Financial Statements 5 Exhibits A - Statement of Additional Information, dated January 1, 2002, of the Acquiring Fund including audited financial statements as of May 31, 2001 and unaudited financial statements as of November 30, 2001. B - Statement of Additional Information, dated July 1, 2001, of the Acquired Fund including audited financial statements as of February 28, 2001 and unaudited financial statements as of August 30, 2001. 2 INTRODUCTION This Statement of Additional Information ("SAI") is intended to supplement the information provided in a proxy statement and prospectus dated April 15, 2002. The proxy statement and prospectus has been sent to the shareholders of the Acquired Fund in connection with the solicitation by the Trustees of the Acquired Fund of proxies to be voted at the Special Meeting of Shareholders of the Acquired Fund to be held on May 29, 2002. This Statement of Additional Information incorporates by reference the Statement of Additional Information of the Acquiring Fund, dated January 1, 2002, and the Statement of Additional Information of the Acquired Fund, dated July 1, 2001. The SAI for the Acquiring Fund and the SAI for the Acquired Fund are included with this Statement of Additional Information. NOTE REGARDING PRO FORMA FINANCIAL INFORMATION In accordance with Item 14(a)(2) of Form N-14, pro forma financial statements were not prepared for the proposed reorganizaiton of the Acquired Fund into the Acquiring Fund, since the net asset value of the Acquired Fund did not exceed ten percent of the net asset value of the Acquiring Fund on February 12, 2002. Additional Information About the Acquiring Fund General Information and History For additional information about the Acquiring Fund generally and its history, see "Organization of the Fund" in the Acquiring Fund SAI attached hereto as Exhibit A. Investment Objective and Policies For additional information about the Acquiring Fund's investment objective, policies and restrictions, see "Investment Objective and Policies" and "Investment Restrictions" in the Acquiring Fund SAI attached hereto as Exhibit A. Management of the Acquiring Fund For additional information about the Acquiring Fund's Board of Trustees, officers and management personnel, see "Those Responsible for Management" in the Acquiring Fund SAI attached hereto as Exhibit A. Control Persons and Principal Holders of Shares For additional information about control persons of the Acquiring Fund and principal holders of shares of the Acquiring Fund, see "Those Responsible for Management" in the Acquiring Fund SAI attached hereto as Exhibit A. Investment Advisory and Other Services For additional information about the Acquiring Fund's investment adviser, custodian, transfer agent and independent accounts, see "Investment Advisory and Other Services", "Distribution Contracts", "Transfer Agent Services", "Custody of Portfolio", and "Independent Auditors" in the Acquiring Fund SAI attached hereto as Exhibit A. Brokerage Allocation and Other Practices For additional information about the Acquiring Fund's brokerage allocation practices, see "Brokerage Allocation" in the Acquiring Fund SAI attached hereto as Exhibit A. Capital Stock and Other Securities For additional information about the voting rights and other characteristics of the Acquiring Funds' shares of beneficial interest, see "Description of the Fund's Shares" in the Acquiring Fund SAI attached hereto as Exhibit A. 3 Purchase, Redemption and Pricing of Acquiring Fund Shares For additional information about the purchase, redemption and pricing of the Acquiring Fund's shares, see "Net Asset Value", "Sales Compensation", "Special Redemptions", "Additional Services and Programs", and "Purchase and Redemptions through Third Parties" in the Acquiring Fund SAI attached hereto as Exhibit A. Tax Status For additional information about the tax status of the Acquiring Fund, see "Tax Status" in the Acquiring Fund SAI, attached hereto as Exhibit A. Underwriters For additional information about the Acquiring Fund's principal underwriter and the distribution contract between the principal underwriter and the Acquiring Fund, see "Distribution Contracts" in the Acquiring Fund SAI attached hereto as Exhibit A. Calculation of Performance Data For additional information about the investment performance of the Acquiring Fund, see "Calculation of Performance" in the Acquiring Fund SAI attached hereto as Exhibit A. Financial Statements Audited annual financial statements of the Acquiring Fund at May 31, 2001 and unaudited semiannual financial statements as of November 30, 2001 are attached to the Acquiring Fund SAI, which is attached hereto as Exhibit A. Additional Information About the Acquired Fund General Information and History For additional information about the Acquired Fund generally and its history, see "Organization of the Fund" in the Acquired Fund SAI attached hereto as Exhibit B. Investment Objective and Policies For additional information about the Acquired Fund's investment objectives, policies and restrictions, see "Investment Objective and Policies" and "Investment Restrictions" in the Acquired Fund SAI attached hereto as Exhibit B. Management of Acquired Fund For additional information about the Acquired Fund's Board of Trustees, officers and management personnel, see "Those Responsible for Management" in the Acquired Fund SAI attached hereto as Exhibit B. Investment Advisory and Other Services For additional information about the Acquired Fund's investment adviser, custodian, transfer agent and independent accountants, see "Investment Advisory and Other Services", "Distribution Contracts", "Transfer Agent Services", "Custody of Portfolio" and "Independent Auditors" in the Acquired Fund SAI attached hereto as Exhibit B. Brokerage Allocation and Other Practices For additional information about the Acquired Fund's brokerage allocation practices, see "Brokerage Allocation" in the Acquired Fund SAI attached hereto as Exhibit B. Capital Stock and Other Securities For additional information about the voting rights and other characteristics of the Acquired Fund's shares of beneficial interest, see "Description of the Fund's Shares" in the Acquired Fund SAI attached hereto as Exhibit B. 4 Purchase, Redemption and Pricing of Acquired Fund Shares For additional information about the purchase, redemption and pricing of the Acquired Fund's shares, see "Net Asset Value", "Sales Compensation", "Additional Services and Programs", "Special Redemptions" and "Purchases and Redemptions Through Third Parties" in the Acquired Fund SAI attached hereto as Exhibit B. Tax Status For additional information about the tax status of the Acquired Fund, see "Tax Status" in the Acquired Fund SAI attached hereto as Exhibit B. Underwriters For additional information about the Acquired Fund's principal underwriter and the distribution contract between the principal underwriter and the Acquired Fund, see "Distribution Contracts" in the Acquired Fund SAI attached hereto as Exhibit B. Calculation of Performance Data For additional information about the investment performance of the Acquired Fund, see "Calculation of Performance" in the Acquired Fund SAI attached hereto as Exhibit B. Financial Statements Audited annual financial statements of the Acquired Fund at February 28, 2001 and unaudited semi-annual financial statements as of August 31, 2001 are attached to the Acquired Fund SAI, which is attached hereto as Exhibit B. 5
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Supplement to Statement of Additional Information THE "DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES" section is supplemented under the heading "Waiver of Contingent Deferred Sales Charge" as follows: Redemptions of Class B and Class C shares made under a periodic withdrawal plan, or redemptions for fees charged by planners or advisors for advisory services, as long as your annual redemptions do not exceed 12% of your account value, including reinvested dividends, at the time you established your periodic withdrawal plan and 12% of the value of subsequent investments (less redemptions) in that account at the time you notify Signature Services. (Please note, this waiver does not apply to periodic withdrawal plan redemptions of Class A shares that are subject to a CDSC.) JOHN HANCOCK BOND FUND Class A, Class B, Class C and Class I Shares Statement of Additional Information January 1, 2002 This Statement of Additional Information provides information about John Hancock Bond Fund (the "Fund"), a diversified open-end investment company, in addition to the information that is contained in the combined Income Funds' current Prospectus (the "Prospectus") and in the Fund's current Prospectus for Class I shares (the "Prospectuses") . This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, Massachusetts 02217-1000 1-800-225-5291 TABLE OF CONTENTS Page Organization of the Fund.............................................. 2 Investment Objective and Policies..................................... 2 Investment Restrictions............................................... 14 Those Responsible for Management...................................... 16 Investment Advisory and Other Services................................ 21 Distribution Contracts................................................ 23 Sales Compensation.................................................... 25 Net Asset Value....................................................... 27 Initial Sales Charge on Class A and Class C Shares.................... 27 Deferred Sales Charge on Class B and Class C Shares................... 30 Special Redemptions................................................... 34 Additional Services and Programs...................................... 34 Purchases and Redemptions through Third Parties ...................... 36 Description of the Fund's Shares...................................... 36 Tax Status............................................................ 37 Calculation of Performance............................................ 41 Brokerage Allocation.................................................. 43 Transfer Agent Services............................................... 45 Custody of Portfolio.................................................. 45 Independent Auditors.................................................. 45 Appendix A- Description of Investment Risk............................ A-1 Appendix B-Description of Bond Ratings................................ B-1 Financial Statements.................................................. F-1 1 ORGANIZATION OF THE FUND The Fund is a diversified open-end investment management company organized as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts. The Fund was organized in 1984. Prior to October 1, 1998, the Fund was called John Hancock Sovereign Bond Fund. John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment adviser. The Adviser is an indirect wholly-owned subsidiary of John Hancock Life Insurance Company (formerly John Hancock Mutual Life Insurance Company) (the "Life Company"), a Massachusetts life insurance company chartered in 1862, with national headquarters at John Hancock Place, Boston, Massachusetts. The Life Company is a wholly owned by John Hancock Financial Services, Inc., a Delaware Corporation, organized in February, 2000. INVESTMENT OBJECTIVE AND POLICIES The following information supplements the discussion of the Fund's investment objective and policies discussed in the Prospectus. Appendix A contains further information describing investment risks. There is no assurance that the Fund will achieve its investment objective. The investment objective is fundamental and may only be changed with shareholder approval. The Fund's investment objective is to generate a high level of current income, consistent with prudent investment risk, through investment in a diversified portfolio of freely marketable debt securities. The Adviser seeks high current income consistent with the moderate level of risk associated with a portfolio consisting primarily of investment grade debt securities. To pursue this goal, the Fund normally invests at least 80% of the value of the Fund's Assets in a diversified portfolio of bonds and other debt securities. With respect to the Fund's investment policy of investing at least 80% of its Assets in bonds and other debt securities, "Assets" is defined as net assets plus the amount of any borrowings for investment purposes. Also, with respect to this 80% investment policy, the Fund will notify shareholders at least 60 days prior to any change in this policy. In addition, the Fund contemplates at least 75% of the value of its total assets will be in (1) debt securities that have, at the time of purchase, a rating within the four highest grades as determined by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or Standard & Poor's ("S&P") (AAA, AA, A, or BBB); (2) debt securities of banks, the U.S. Government and its agencies or instrumentalities and other issuers which, although not rated as a matter of policy by either Moody's or S&P, are considered by the Fund to have investment quality comparable to securities receiving ratings within the four highest grades; and (3) cash and cash equivalents. Under normal conditions, the Fund may not invest more than 10% of total assets in cash and/or cash equivalents (except cash segregated in relation to futures, forward and options contracts). Debt securities rated Baa or BBB are considered medium-grade obligations with speculative characteristics and adverse economic conditions or changing circumstances may weaken the issuers' capacity to pay interest and repay principal. The Fund will, when feasible, purchase debt securities which are non-callable. It is anticipated that under normal conditions, the Fund will not invest more than 25% of its total assets in U.S. dollar-denominated foreign securities (excluding U.S. dollar-denominated Canadian securities). The Fund will diversify its investments among a number of industry groups without concentration in any particular industry. The Fund's investments, and consequently its net asset value, will be subject to the market fluctuations and risks inherent in all securities. 2 The Fund may purchase corporate debt securities bearing fixed or fixed and contingent interest as well as those which carry certain equity features, such as conversion or exchange rights or warrants for the acquisition of stock of the same or a different issuer, or participations based on revenues, sales or profits. The Fund may purchase preferred stock. The Fund will not exercise any such conversion, exchange or purchase rights if, at the time, the value of all equity interests so owned would exceed 10% of the Fund's total assets taken at market value. For liquidity and flexibility, the Fund may place up to 20% of its Assets in investment-grade short-term securities. In abnormal circumstances, such as situations where the Fund experiences large cash inflows or anticipates unusually large redemptions, and in an abnormal market, economic, political or other conditions, the Fund may temporarily invest more than 20% of its Assets in investment-grade short-term securities, cash, and cash equivalents. The market value of debt securities which carry no equity participation usually reflects yields generally available on securities of similar quality and type. When such yields decline, the market value of a portfolio already invested at higher yields can be expected to rise if such securities are protected against early call. Similarly, when such yields increase, the market value of a portfolio already invested can be expected to decline. The Fund's portfolio may include debt securities which sell at substantial discounts from par. These securities are low coupon bonds which, during periods of high interest rates, because of their lower acquisition cost tend to sell on a yield basis approximating current interest rates. Ratings as Investment Criteria. In general, the ratings of Moody's and S&P represent the opinions of these agencies as to the quality of the securities which they rate. It should be emphasized, however, that such ratings are relative and subjective and are not absolute standards of quality. These ratings will be used by the Fund as initial criteria for the selection of portfolio securities. Among the factors which will be considered are the long-term ability of the issuer to pay principal and interest and general economic trends. Appendix B contains further information concerning the ratings of Moody's and S&P and their significance. Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither of these events will require the sale of the securities by the Fund Participation Interests. Participation interests, which may take the form of interests in, or assignments of certain loans, are acquired from banks who have made these loans or are members of a lending syndicate. The Fund's investments in participation interests may be subject to its 15% limitation on investments in illiquid securities. Structured Securities. The Fund may invest in structured securities including notes, bonds or debentures, the value of the principal of and/or interest on which is to be determined by reference to changes in the value of specific currencies, interest rates, commodities, indices or other financial indicators (the "Reference") or the relative change in two or more References. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable Reference. The terms of the structured securities may provide that in certain circumstances no principal is due at maturity and, therefore, may result in the loss of the Fund's investment. Structured securities may be positively or negatively indexed, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, the change in interest rate or the value of the security at maturity may be a multiple of the change in the value of the Reference. Consequently, structured securities entail a greater degree of market risk than other types of debt obligations. Structured securities may also be more volatile, less liquid and more difficult to accurately price than less complex fixed income investments. 3 Lower Rated High Yield Debt Obligations. The Fund may invest up to 25% of the value of its total assets in fixed income securities rated below Baa by Moody's, or below BBB by S&P, or in securities which are unrated. The Fund may invest in securities rated as low as Ca by Moody's or CC by S&P, which may indicate that the obligations are highly speculative and in default. Lower rated securities are generally referred to as junk bonds. See the Appendix attached to this Statement of Additional Information, for the distribution of securities in the various ratings categories and a description of the characteristics of the categories. The Fund is not obligated to dispose of securities whose issuers subsequently are in default or which are downgraded below the above-stated ratings. The Fund may invest in unrated securities which, in the opinion of the Adviser, offer comparable yields and risks to those securities which are rated. Debt obligations rated in the lower ratings categories, or which are unrated, involve greater volatility of price and risk of loss of principal and income. In addition, lower ratings reflect a greater possibility of an adverse change in financial condition affecting the ability of the issuer to make payments of interest and principal. The market price and liquidity of lower rated fixed income securities generally respond to short-term economic, corporate and market developments to a greater extent than do higher rated securities. In the case of lower-rated securities, these developments are perceived to have a more direct relationship to the ability of an issuer of lower rated securities to meet its ongoing debt obligations. Reduced volume and liquidity in the high yield bond market, or the reduced availability of market quotations, will make it more difficult to dispose of the bonds and value accurately the Fund's assets. The reduced availability of reliable, objective data may increase the Fund's reliance on management's judgment in valuing the high yield bonds. To the extent that the Fund invests in these securities, the achievement of the Fund's objective will depend more on the Adviser's judgment and analysis than would otherwise be the case. In addition, the Fund's investments in high yield securities may be susceptible to adverse publicity and investor perceptions, whether or not the perceptions are justified by fundamental factors. In the past, economic downturns and increases in interest rates have caused a higher incidence of default by the issuers of lower-rated securities and may do so in the future, particularly with respect to highly leveraged issuers. The market prices of zero coupon and payment-in-kind bonds are affected to a greater extent by interest rate changes, and thereby tend to be more volatile than securities that pay interest periodically and in cash. Increasing rate note securities are typically refinanced by the issuers within a short period of time. The Fund accrues income on these securities for tax and accounting purposes, which is required to be distributed to shareholders. Because no cash is received while income accrues on these securities, the Fund may be forced to liquidate other investments to make the distributions. The Fund may acquire individual securities of any maturity and is not subject to any limits as to the average maturity of its overall portfolio. The longer the Fund's average portfolio maturity, the more the value of the portfolio and the net asset value of the Fund's shares will fluctuate in response to changes in interest rates. An increase in interest rates will generally reduce the value of the Fund's portfolio securities and the Fund's shares, while a decline in interest rates will generally increase their value. Securities of Domestic and Foreign Issuers. The Fund may invest in U.S. dollar-denominated securities of foreign and United States issuers that are issued in or outside of the United States. Foreign companies may not be subject to accounting standards and government supervision comparable to U.S. companies, and there is often less publicly available information about their operations. Foreign markets generally provide less liquidity than U.S. markets (and thus potentially greater price volatility) and typically provide fewer regulatory protections for investors. Foreign securities can also be affected by political or financial instability abroad. It is anticipated that under normal conditions, the Fund will not invest more than 25% of its total assets in U.S. dollar-denominated foreign securities (excluding U.S. dollar-denominated Canadian securities). 4 Mortgage-backed and Derivative Securities. Mortgage-backed securities represent participation interests in pools of adjustable and fixed rate mortgage loans which are guaranteed by agencies or instrumentalities of the U.S. government. Unlike conventional debt obligations, mortgage-backed securities provide monthly payments derived from the monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans. The mortgage loans underlying mortgage-backed securities are generally subject to a greater rate of principal prepayments in a declining interest rate environment and to a lesser rate of principal prepayments in an increasing interest rate environment. Under certain interest and prepayment scenarios, the Fund may fail to recover the full amount of its investment in mortgage-backed securities notwithstanding any direct or indirect governmental or agency guarantee. Since faster than expected prepayments must usually be invested in lower yielding securities, mortgage-backed securities are less effective than conventional bonds in "locking in" a specified interest rate. In a rising interest rate environment, a declining prepayment rate may extend the average life of many mortgage-backed securities. Extending the average life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates. The Fund's investments in mortgage-backed securities may include conventional mortgage passthrough securities and certain classes of multiple class collateralized mortgage obligations ("CMOs"). In order to reduce the risk of prepayment for investors, CMOs are issued in multiple classes, each having different maturities, interest rates, payment schedules and allocations of principal and interest on the underlying mortgages. Senior CMO classes will typically have priority over residual CMO classes as to the receipt of principal and/or interest payments on the underlying mortgages. The CMO classes in which the Fund may invest include but are not limited to sequential and parallel pay CMOs, including planned amortization class ("PAC") and target amortization class ("TAC") securities. Different types of mortgage-backed securities are subject to different combinations of prepayment, extension, interest rate and/or other market risks. Conventional mortgage passthrough securities and sequential pay CMOs are subject to all of these risks, but are typically not leveraged. PACs, TACs and other senior classes of sequential and parallel pay CMOs involve less exposure to prepayment, extension and interest rate risk than other mortgage-backed securities, provided that prepayment rates remain within expected prepayment ranges or "collars." Repurchase Agreements. In a repurchase agreement the Fund would buys a security for a relatively short period (usually not more than 7 days) subject to the obligation to sell it back to the issuer at a fixed time and price plus accrued interest. The Fund will enter into repurchase agreements only with member banks of the Federal Reserve System and with "primary dealers" in U.S. Government securities. The Adviser will continuously monitor the creditworthiness of the parties with whom the Fund enters into repurchase agreements. The Fund has established a procedure providing that the securities serving as collateral for each repurchase agreement must be delivered to the Fund's custodian either physically or in book-entry form and that the collateral must be marked to market daily to ensure that each repurchase agreement is fully collateralized at all times. In the event of bankruptcy or other default by a seller of a repurchase agreement, the Fund could experience delays in liquidating the underlying securities during the period in which the Fund seeks to enforce its rights thereto, possible subnormal levels of income decline in value of the underlying securities or lack of access to income during this period as well as the expense of enforcing its rights. 5 Reverse Repurchase Agreements. The Fund may also enter into reverse purchase agreements which involve the sale of U.S. Government securities held in its portfolio to a bank with an agreement that the Fund will buy back the securities at a fixed future date at a fixed price plus an agreed amount of "interest" which may be reflected in the repurchase price. Reverse repurchase agreements are considered to be borrowings by the Fund. Reverse repurchase agreements involve the risk that the market value of securities purchased by the Fund with proceeds of the transaction may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase. The Fund will also continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will reacquire those securities upon effecting their repurchase. To minimize various risks associated with reverse repurchase agreements, the Fund will establish and maintain a separate account consisting of liquid securities, of any type or maturity, in an amount at least equal to the repurchase prices of the securities (plus any accrued interest thereon) under such agreements. In addition, the Fund will not enter into reverse repurchase agreements or borrow money, except from banks as a temporary measure for extraordinary emergency purposes in amounts not to exceed 33 1/3% of the Fund's total assets (including the amount borrowed) taken at market value. The Fund will not use leverage to attempt to increase income. The Fund will not purchase securities while outstanding borrowings exceed 5% of the Fund's total assets. The Fund will enter into reverse repurchase agreements only with federally insured banks which are approved in advance as being creditworthy by the Trustees. Under the procedures established by the of Trustees, the Adviser will monitor the creditworthiness of the banks involved. Restricted Securities. The Fund may purchase securities that are not registered ("restricted securities") under the Securities Act of the 1933 Act ("1933 Act"), including commercial paper issued in reliance on Section 4(2) of the 1933 Act. The Fund will not invest more than 15% limit on illiquid investments. If the Trustees determine, based upon a continuing review of the trading markets for specific Section 4(2) paper or Rule 144A securities, that they are liquid, they will not be subject to the 15% limit in illiquid investments. The Trustees may adopt guidelines and delegate to the Adviser the daily function of determining the monitoring and liquidity of restricted investments. The Trustees, however, will retain sufficient oversight and be ultimately responsible for the determinations. The Trustees will carefully monitor the Fund's liquidity and availability of information. This investment practice could have the effect of increasing the level of liquidity in the Fund if qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Options on Securities and Securities Indices. The Fund may purchase and write (sell) call and put options on any securities in which it may invest or on any securities index based on securities in which it may invest. These options may be listed on national domestic securities exchanges or traded in the over-the-counter market. The Fund may write covered put and call options and purchase put and call options to enhance total return, as a substitute for the purchase or sale of securities, or to protect against declines in the value of portfolio securities and against increases in the cost of securities to be acquired. Writing Covered Options. A call option on securities written by the Fund obligates the Fund to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. A put option on securities written by a Fund obligates the Fund to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities 6 index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security. Writing covered call options may deprive the Fund of the opportunity to profit from an increase in the market price of the securities in its portfolio. Writing covered put options may deprive the Fund of the opportunity to profit from a decrease in the market price of the securities to be acquired for its portfolio. All call and put options written by the Funds are covered. A written call option or put option may be covered by (i) maintaining cash or liquid securities in a segregated account with a value at least equal to the Fund's obligation under the option, (ii) entering into an offsetting forward commitment and/or (iii) purchasing an offsetting option or any other option which, by virtue of its exercise price or otherwise, reduces the Fund's net exposure on its written option position. A written call option on securities is typically covered by maintaining the securities that are subject to the option in a segregated account. The Fund may cover call options on a securities index by owning securities whose price changes are expected to be similar to those of the underlying index. The Fund may terminate its obligations under an exchange traded call or put option by purchasing an option identical to the one it has written. Obligations under over-the-counter options may be terminated only by entering into an offsetting transaction with the counterparty to such option. Such purchases are referred to as "closing purchase transactions." Purchasing Options. The Fund would normally purchase call options in anticipation of an increase, or put options in anticipation of a decrease ("protective puts") in the market value of securities of the type in which it may invest. The Fund may also sell call and put options to close out its purchased options. The purchase of a call option would entitle the Fund, in return for the premium paid, to purchase specified securities at a specified price during the option period. The Fund would ordinarily realize a gain on the purchase of a call option if, during the option period, the value of such securities exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the call option. The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell specified securities at a specified price during the option period. The purchase of protective puts is designed to offset or hedge against a decline in the market value of the Fund's portfolio securities. Put options may also be purchased by the Fund for the purpose of affirmatively benefiting from a decline in the price of securities which it does not own. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of put options may be offset by countervailing changes in the value of the Fund's portfolio securities. The Fund's options transactions will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on which such options are traded. These limitations govern the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert, regardless of whether the options are written or purchased on the same or different exchanges, boards of trade or other trading facilities or are held or written in one or more accounts or through one or more brokers. Thus, the number of options which the Fund may write or purchase may be affected by options written or purchased by other investment advisory clients of the Adviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions. Risks Associated with Options Transactions. There is no assurance that a liquid secondary market on a domestic or foreign options exchange will exist for any particular exchange-traded option or at any particular time. If the Fund is unable to effect a closing purchase transaction with respect to covered options it has written, the Fund will not be able to sell the underlying securities or 7 dispose of assets held in a segregated account until the options expire or are exercised. Similarly, if the Fund is unable to effect a closing sale transaction with respect to options it has purchased, it would have to exercise the options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options). If trading were discontinued, the secondary market on that exchange (or in that class or series of options) would cease to exist. However, outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. The Fund's ability to terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. The Adviser will determine the liquidity of each over-the-counter option in accordance with guidelines adopted by the Trustees. The writing and purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The successful use of options depends in part on the Adviser's ability to predict future price fluctuations and, for hedging transactions, the degree of correlation between the options and securities markets. Futures Contracts and Options on Futures Contracts. To seek to increase total return or hedge against changes in interest rates or securities prices, the Fund may purchase and sell futures contracts, and purchase and write call and put options on these futures contracts. The Fund may also enter into closing purchase and sale transactions with respect to any of these contracts and options. The futures contracts may be based on various securities (such as U.S. Government securities), securities indices and any other financial instruments and indices. All futures contracts entered into by the Fund are traded on U.S. exchanges or boards of trade that are licensed, regulated or approved by the Commodity Futures Trading Commission ("CFTC"). Futures Contracts. A futures contract may generally be described as an agreement between two parties to buy and sell particular financial instruments for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contract). Positions taken in the futures markets are not normally held to maturity but are instead liquidated through offsetting transactions which may result in a profit or a loss. While futures contracts on securities will usually be liquidated in this manner, the Fund may instead make, or take, delivery of the underlying securities whenever it appears economically advantageous to do so. A clearing corporation associated with the exchange on which futures contracts are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date. 8 Hedging and Other Strategies. Hedging is an attempt to establish with more certainty than would otherwise be possible the effective price or rate of return on portfolio securities or securities that the Fund proposes to acquire. When securities prices are falling, the Fund can seek to offset a decline in the value of its current portfolio securities through the sale of futures contracts. When securities prices are rising, the Fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later be available in the market when it effects anticipated purchases. The Fund may, for example, take a "short" position in the futures market by selling futures contracts in an attempt to hedge against an anticipated decline in market prices that would adversely affect the value of the Fund's portfolio securities. Such futures contracts may include contracts for the future delivery of securities held by the Fund or securities with characteristics similar to those of the Fund's portfolio securities. If, in the opinion of the Adviser, there is a sufficient degree of correlation between price trends for the Fund's portfolio securities and futures contracts based on other financial instruments, securities indices or other indices, the Fund may also enter into such futures contracts as part of its hedging strategy. Although under some circumstances prices of securities in the Fund's portfolio may be more or less volatile than prices of such futures contracts, the Adviser will attempt to estimate the extent of this volatility difference based on historical patterns and compensate for any differential by having the Fund enter into a greater or lesser number of futures contracts or by attempting to achieve only a partial hedge against price changes affecting the Fund's portfolio securities. When a short hedging position is successful, any depreciation in the value of portfolio securities will be substantially offset by appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of the Fund's portfolio securities would be substantially offset by a decline in the value of the futures position. On other occasions, the Fund may take a "long" position by purchasing futures contracts. This would be done, for example, when the Fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices then available in the applicable market to be less favorable than prices that are currently available. The Fund may also purchase futures contracts as a substitute for transactions in securities, to alter the investment characteristics of portfolio securities or to gain or increase its exposure to a particular securities market. Options on Futures Contracts. The Fund may purchase and write options on futures for the same purposes as its transactions in futures contracts. The purchase of put and call options on futures contracts will give the Fund the right (but not the obligation) for a specified price to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, the Fund obtains the benefit of the futures position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs. The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of the Fund's assets. By writing a call option, the Fund becomes obligated, in exchange for the premium (upon exercise of the option) to sell a futures contract if the option is exercised, which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates a premium which may partially offset an increase in the price of securities that the Fund intends to purchase. However, the Fund becomes obligated (upon exercise of the option) to purchase a futures contract if the option is exercised, which may have a value lower than the exercise price. The loss incurred by the Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. 9 The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option of the same series. There is no guarantee that such closing transactions can be effected. The Fund's ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market. Other Considerations. The Fund will engage in futures and related options transactions either for bona fide hedging purposes or to seek to increase total return as permitted by the CFTC. To the extent that the Fund is using futures and related options for hedging purposes, futures contracts will be sold to protect against a decline in the price of securities that the Fund owns or futures contracts will be purchased to protect the Fund against an increase in the price of securities it intends to purchase. The Fund will determine that the price fluctuations in the futures contracts and options on futures used for hedging purposes are substantially related to price fluctuations in securities held by the Fund or securities or instruments which it expects to purchase. As evidence of its hedging intent, the Fund expects that on 75% or more of the occasions on which it takes a long futures or option position (involving the purchase of futures contracts), the Fund will have purchased, or will be in the process of purchasing, equivalent amounts of related securities in the cash market at the time when the futures or option position is closed out. However, in particular cases, when it is economically advantageous for the Fund to do so, a long futures position may be terminated or an option may expire without the corresponding purchase of securities or other assets. To the extent that the Fund engages in nonhedging transactions in futures contracts and options on futures, the aggregate initial margin and premiums required to establish these nonhedging positions will not exceed 5% of the net asset value of the Fund's portfolio, after taking into account unrealized profits and losses on any such positions and excluding the amount by which such options were in-the-money at the time of purchase. Transactions in futures contracts and options on futures involve brokerage costs, require margin deposits and, in the case of contracts and options obligating the Fund to purchase securities, require the Fund to establish a segregated account consisting of cash or liquid securities in an amount equal to the underlying value of such contracts and options. While transactions in futures contracts and options on futures may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates or securities prices may result in a poorer overall performance for the Fund than if it had not entered into any futures contracts or options transactions. Perfect correlation between the Fund's futures positions and portfolio positions will be impossible to achieve. In the event of an imperfect correlation between a futures position and a portfolio position which is intended to be protected, the desired protection may not be obtained and the Fund may be exposed to risk of loss. Some futures contracts or options on futures may become illiquid under adverse market conditions. In addition, during periods of market volatility, a commodity exchange may suspend or limit trading in a futures contract or related option, which may make the instrument temporarily illiquid and difficult to price. Commodity exchanges may also establish daily limits on the amount that the price of a futures contract or related option can vary from the previous day's settlement price. Once the daily limit is reached, no trades may be made that day at a price beyond the limit. This may prevent the Fund from closing out positions and limiting its losses. Forward Commitment and When-Issued Securities. The Fund may purchase securities on a when-issued or forward commitment basis. "When-issued" refers to securities whose terms are available and for which a market exists, but which have not been issued. The Fund will engage in when-issued transactions with respect to securities purchased for its portfolio in order to obtain what is considered to 10 be an advantageous price and yield at the time of the transaction. For when-issued transactions, no payment is made until delivery is due, often a month or more after the purchase. In a forward commitment transaction, the Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. When the Fund engages in forward commitment and when-issued transactions, it relies on the seller to consummate the transaction. The failure of the issuer or seller to consummate the transaction may result in the Fund's losing the opportunity to obtain a price and yield considered to be advantageous. The purchase of securities on a when- issued or forward commitment basis also involves a risk of loss if the value of the security to be purchased declines prior to the settlement date. On the date the Fund enters into an agreement to purchase securities on a when-issued or forward commitment basis, the Fund will segregate in a separate account cash or liquid securities, of any type or maturity, equal in value to the Fund's commitment. These assets will be valued daily at market, and additional cash or securities will be segregated in a separate account to the extent that the total value of the assets in the account declines below the amount of the when-issued commitments. Alternatively, the Fund may enter into offsetting contracts for the forward sale of other securities that it owns. Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollar roll" transactions with selected banks and broker-dealers pursuant to which the Fund sells mortgage-backed securities and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. The Fund will only enter into covered rolls. A "covered roll" is a specific type of dollar roll for which there is an offsetting cash position or a cash equivalent security position which matures on or before the forward settlement date of the dollar roll transaction. Covered rolls are not treated as a borrowing or other senior security and will be excluded from the calculation of the Fund's borrowings and other senior securities. For financial reporting and tax purposes, the Fund treats mortgage dollar rolls as two separate transactions; one involving the purchase of a security and a separate transaction involving a sale. Asset-Backed Securities. The Fund may invest a portion of its assets in asset-backed securities. Asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. During periods of declining interest rates, prepayment of loans underlying asset-backed securities can be expected to accelerate. Accordingly, the Fund's ability to maintain positions in these securities will be affected by reductions in the principal amount of such securities resulting from prepayments, and its ability to reinvest the returns of principal at comparable yields is subject to generally prevailing interest rates at that time. Credit card receivables are generally unsecured and the debtors on such receivables are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set-off certain amounts owed on the credit cards, thereby reducing the balance due. Automobile receivables generally are secured, but by automobiles rather than residential real property. Most issuers of automobile receivables permit the loan servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the asset- backed securities. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in the underlying automobiles. Therefore, there is the possibility that, in some cases, recoveries on repossessed collateral may not be available to support payments on these securities. 11 Swaps, Caps, Floors and Collars. As one way of managing its exposure to different types of investments, the Fund may enter into interest rate swaps, currency swaps, and other types of swap agreements such as caps, collars and floors. In a typical interest rate swap, one party agrees to make regular payments equal to a floating interest rate times a "notional principal amount," in return for payments equal to a fixed rate times the same amount, for a specified period of time. If a swap agreement provides for payment in different currencies, the parties might agree to exchange the notional principal amount as well. Swaps may also depend on other prices or rates, such as the value of an index or mortgage prepayment rates. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level, while the seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor. Swap agreements will tend to shift the Fund's investment exposure from one type of investment to another. For example, if the Fund agreed to exchange payments in dollars for payments in a foreign currency, the swap agreement would tend to decrease the Fund's exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates. Caps and floors have an effect similar to buying or writing options. Depending on how they are used, swap agreements may increase or decrease the overall volatility of a Fund's investments and its share price and yield. Swap agreements are sophisticated hedging instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. As a result, swaps can be highly volatile and may have a considerable impact on the Fund's performance. Swap agreements are subject to risks related to the counterparty's ability to perform, and may decline in value if the counterparty's creditworthiness deteriorates. The Fund may also suffer losses if it is unable to terminate outstanding swap agreements or reduce its exposure through offsetting transactions. The Fund will maintain in a segregated account with its custodian, cash or liquid, high grade debt securities equal to the net amount, if any, of the excess of the Fund's obligations over its entitlements with respect to swap, cap, collar or floor transactions. Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in- kind, delayed and zero coupon bonds. These are securities issued at a discount from their face value because interest payments are typically postponed until maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. These securities also may take the form of debt securities that have been stripped of their interest payments. A portion of the discount with respect to stripped tax-exempt securities or their coupons may be taxable. The market prices in pay-in-kind, delayed and zero coupon bonds generally are more volatile than the market prices of interest-bearing securities and are likely to respond to a greater degree to changes in interest rates than interest-bearing securities having similar maturities and credit quality. The Fund's investments in pay-in-kind, delayed and zero coupon bonds may require the Fund to sell certain of its portfolio securities to generate sufficient cash to satisfy certain income distribution requirements. See "TAX STATUS." Brady Bonds. The Fund may invest in Brady Bonds and other sovereign debt securities of countries that have restructured or are in the process of restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt securities described as part of a restructuring plan created by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external indebtedness (generally, commercial bank debt). In restructuring its external debt under the Brady Plan framework, a debtor nation negotiates with its existing bank lenders as well as multilateral institutions such as the World Bank and the International Monetary Fund (the "IMF"). The Brady Plan facilitates the exchange of commercial bank debt for newly issued bonds (known as Brady Bonds). The World Bank and the IMF provide 12 funds pursuant to loan agreements or other arrangements which enable the debtor nation to collateralize the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under these arrangements the IMF debtor nations are required to implement domestic monetary and fiscal reforms. These reforms have included the liberalization of trade and foreign investment, the privatization of state-owned enterprises and the setting of targets for public spending and borrowing. These policies and programs seek to promote the debtor country's ability to service its external obligations and promote its economic growth and development. The Brady Plan only sets forth general guiding principles for economic reform and debt reduction, emphasizing that solutions must be negotiated on a case-by-case basis between debtor nations and their creditors. The Adviser believes that economic reforms undertaken by countries in connection with the issuance of Brady Bonds make the debt of countries which have issued or have announced plans to issue Brady Bonds an attractive opportunity for investment. Brady Bonds may involve a high degree of risk, may be in default or present the risk of default. Agreements implemented under the Brady Plan to date are designed to achieve debt and debt-service reduction through specific options negotiated by a debtor nation with its creditors. As a result, the financial packages offered by each country differ. The types of options have included the exchange of outstanding commercial bank debt for bonds issued at 100% of face value of such debt, bonds issued at a discount of face value of such debt, bonds bearing an interest rate which increases over time and bonds issued in exchange for the advancement of new money by existing lenders. Certain Brady Bonds have been collateralized as to principal due at maturity by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity of such Brady Bonds, although the collateral is not available to investors until the final maturity of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and the debtor nations' reserves. In addition, the first two or three interest payments on certain types of Brady Bonds may be collateralized by cash or securities agreed upon by creditors. Although Brady Bonds may be collateralized by U.S. Government securities, repayment of principal and interest is not guaranteed by the U.S. Government. Lending of Securities. The Fund may lend portfolio securities to brokers, dealers, and financial institutions if the loan is collateralized by cash or U.S. Government securities according to applicable regulatory requirements. The Fund may reinvest any cash collateral in short-term securities and money market funds. When the Fund lends portfolio securities, there is a risk that the borrower may fail to return the securities involved in the transaction. As a result, the Fund may incur a loss or, in the event of the borrower's bankruptcy, the Fund may be delayed in or prevented from liquidating the collateral. It is a fundamental policy of the Fund not to lend portfolio securities having a total value exceeding 33 1/3% of its total assets. Rights and Warrants. The Fund may purchase warrants and rights which are securities permitting, but not obligating, their holder to purchase the underlying securities at a predetermined price, subject to the Fund's Investment Restrictions. Generally, warrants and stock purchase rights do not carry with them the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. As a result, an investment in warrants and rights may be considered to entail greater investment risk than certain other types of investments. In addition, the value of warrants and rights does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or prior to their expiration date. Investment in warrants and rights increases the potential profit or loss to be realized from the investment of a given amount of the Fund's assets as compared with investing the same amount in the underlying stock. 13 Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase and subsequent sale of a security after it has been held for a relatively brief period of time. The Fund may engage in short-term trading in response to stock market conditions, changes in interest rates or other economic trends and developments, or to take advantage of yield disparities between various fixed income securities in order to realize capital gains or improve income. Short term trading may have the effect of increasing portfolio turnover rate. A high rate of portfolio turnover (100% or greater) involves correspondingly greater brokerage expenses. The Fund's portfolio turnover rate is set forth in the table under the caption "Financial Highlights" in the Prospectus. The Fund intends to use short-term trading of securities as a means of managing its portfolio to achieve its investment objective. The Fund, in reaching a decision to sell one security and purchase another security at approximately the same time, will take into account a number of factors, including the quality ratings, interest rates, yields, maturity dates, call prices, and refunding and sinking fund provisions of the securities under consideration, as well as historical yield spreads and current economic information. The success of short-term trading will depend upon the ability of the Fund to evaluate particular securities, to anticipate relevant market factors, including trends of interest rates and earnings and variations from such trends, to obtain relevant information, to evaluate it promptly, and to take advantage of its evaluations by completing transactions on a favorable basis. It is expected that the expenses involved in short-term trading, which would not be incurred by an investment company which does not use this portfolio technique, will be significantly less than the profits and other benefits which will accrue to shareholders. The portfolio turnover rate will depend on a number of factors, including the fact that the Fund intends to continue to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Fund intends to limit its short-term trading so that less than 30% of the Fund's gross annual income (including all dividend and interest income and gross realized capital gains, both short and long-term, without being offset for realized capital losses) will be derived from gross realized gains on the sale or other disposition of securities held for less than three months. This limitation, which must be met by all mutual funds in order to obtain such Federal tax treatment, at certain times may prevent the Fund from realizing capital gains on some securities held for less than three months. INVESTMENT RESTRICTIONS Fundamental Investment Restrictions. The following investment restrictions will not be changed without approval of a majority of the Fund's outstanding voting securities which, as used in the Prospectus and this Statement of Additional Information, means approval by the lesser of (1) the holders of 67% or more of the Fund's shares represented at a meeting if more than 50% of the Fund's outstanding shares are present in person or by proxy at that meeting or (2) more than 50% of the Fund's outstanding shares. The Fund may not: (1) Issue senior securities, except as permitted by paragraphs (2), (6) and (7) below. For purposes of this restriction, the issuance of shares of beneficial interest in multiple classes or series, the purchase or sale of options, futures contracts and options on futures contracts, forward commitments, forward foreign exchange contracts and repurchase agreements entered into in accordance with the Fund's investment policy, and the pledge, mortgage or hypothecation of the Fund's assets within the meaning of paragraph (3) below are not deemed to be senior securities. 14 (2) Borrow money, except from banks as a temporary measure for extraordinary emergency purposes in amounts not to exceed 33 1/3% of the Fund's total assets (including the amount borrowed) taken at market value. The Fund will not use leverage to attempt to increase income. The Fund will not purchase securities while outstanding borrowings exceed 5% of the Fund's total assets. (3) Pledge, mortgage, or hypothecate its assets, except to secure indebtedness permitted by paragraph (2) above and then only if such pledging, mortgaging or hypothecating does not exceed 33 1/3% of the Fund's total assets taken at market value. (4) Act as an underwriter, except to the extent that, in connection with the disposition of portfolio securities, the Fund may be deemed to be an underwriter for purposes of the 1933 Act. (5) Purchase or sell real estate or any interest therein, except that the Fund may invest in securities of corporate or governmental entities secured by real estate or marketable interests therein or issued by companies that invest in real estate or interests therein. (6) Make loans, except that the Fund (1) may lend portfolio securities in accordance with the Fund's investment policies up to 33 1/3% of the Fund's total assets taken at market value, (2) enter into repurchase agreements, and (3) purchase all or a portion of an issue of publicly distributed debt securities, bank loan participation interests, bank certificates of deposit, bankers' acceptances, debentures or other securities, whether or not the purchase is made upon the original issuance of the securities. (7) Invest in commodities or commodity contracts or in puts, calls, or combinations of both, except interest rate futures contracts, options on securities, securities indices, currency and other financial instruments and options on such futures contracts, forward foreign currency exchange contracts, forward commitments, securities index put or call warrants and repurchase agreements entered into in accordance with the Fund's investment policies. (8) Purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after such purchase, the value of its investments in such industry would exceed 25% of its total assets taken at market value at the time of each investment. This limitation does not apply to investments in obligations of the U.S. Government or any of its agencies or instrumentalities. (9) Purchase securities of an issuer, (other than the U.S. Government, its agencies or instrumentalities) if (a) Such purchase would cause more than 5% of the Fund's total assets taken at market value to be invested in the securities of such issuer, or (b) Such purchase would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund. In connection with the lending of portfolio securities under item (6) above, such loans must at all times be fully collateralized by cash or securities of the U.S. Government or its agencies or instrumentalities and the Fund's custodian must take possession of the collateral either physically or in book entry form. Any cash collateral will consist of short-term high quality debt instruments. Securities used as collateral must be marked to market daily. 15 Non-fundamental Investment Restrictions. The following investment restrictions are designated as non-fundamental and may be changed by the Trustees without shareholder approval: The Fund may not: (a) Participate on a joint or joint-and-several basis in any securities trading account. The "bunching" of orders for the sale or purchase of marketable portfolio securities with other accounts under the management of the Adviser to save commissions or to average prices among them is not deemed to result in a securities trading account. (b) Purchase securities on margin or make short sales, except margin deposits in connection with transactions in options, futures contracts, options on futures contracts and other arbitrage transactions or unless by virtue of its ownership of other securities, the Fund has the right to obtain securities equivalent in kind and amount to the securities sold and, if the right is conditional, the sale is made upon the same conditions, except that the Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of securities and in connection with transactions involving forward foreign currency exchange transactions. (c) Invest for the purpose of exercising control over or management of any company. (d) Invest more than 15% of its net assets in illiquid securities. (e) Purchase a security if, as a result, (i) more than 10% of the Fund's total assets would be invested in the securities of other investment companies, (ii) the Fund would hold more than 3% of the total outstanding voting securities of any one investment company, or (iii) more than 5% of the Fund's total assets would be invested in the securities of any one investment company. These limitations do not apply to (a) the investment of cash collateral, received by the Fund in connection with lending the Fund's portfolio securities, in the securities of open-end investment companies or (b) the purchase of shares of any investment company in connection with a merger, consolidation, reorganization or purchase of substantially all of the assets of another investment company. Subject to the above percentage limitations, the Fund may, in connection with the John Hancock Group of Funds Deferred Compensation Plan for Independent Trustees/Directors, purchase securities of other investment companies within the John Hancock Group of Funds. If a percentage restriction on investment or utilization of assets as set forth above is adhered to at the time an investment is made, a later change in percentage resulting from changes in the value of the Fund's assets will not be considered a violation of the restriction. The Funds will invest only in countries on the Adviser's Approved Country Listing. The Approved Country Listing is a list maintained by the Adviser's investment department that outlines all countries, including the United States, that have been approved for investment by Funds managed by the Adviser. In addition, no Fund may invest either directly or indirectly in any Russian equity. Only certain funds can invest in certain types of Russian debt. These funds are: Active Bond, Income, Investors, High Income, Bond, High Yield Bond, Strategic Income and VA Strategic Income. Each of these funds may invest only up to 5% of total assets in: (1) Sovereign Russian Debt and Municipal Fixed Income Securities; (2) that are NOT ruble- denominated; (3) that are held physically outside of Russia; and (4) have Euroclear settlement. 16 THOSE RESPONSIBLE FOR MANAGEMENT The business of the Fund is managed by its Trustees of the Trust, who elect officers who are responsible for the day-to-day operations of the Fund and who execute policies formulated by the Trustees. Several of the officers and Trustees of the Fund are also Officers and Directors of the Adviser or Officers and Directors of the Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- Maureen R. Ford * Trustee, Chairman, Executive Vice President John 101 Huntington Avenue President and Chief Hancock Financial Services, Inc., Boston, MA 02199 Executive Officer John Hancock Life Insurance March 1950 (1,2) Company; Chairman, Director, President and Chief Executive Officer, John Hancock Advisers, Inc. (the "Adviser") and The Berkeley Financial Group, Inc. ("The Berkeley Group"); Chairman, Director and Chief Executive Officer, John Hancock Funds, Inc. ("John Hancock Funds"); Chairman, Director and President, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc."); Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation (SAMCorp.); Director, Independence Investment LLC and Independence Fixed Income LLC; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). John M. DeCiccio* Trustee Executive Vice President and Chief John Hancock Place Investment Officer John Hancock P.O. Box 111 Financial Services, Inc.; Director, Boston, MA 02117 Executive Vice President and Chief July 1948 Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, Inc., Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, The Berkeley Group, the Adviser, John Hancock Funds, Massachusetts Business Development Corporation; Director, Insurance Agency Inc. (until 1999) and John Hancock Signature Services, Inc. (until 1997). Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston 101 Huntington Avenue University School of Law (as of Boston, MA 02199 1996); Director, Brookline Bancorp. June 1931 Richard P. Chapman, Jr. Trustee (1) Chairman, President, and Chief 101 Huntington Avenue Executive Officer, Brookline Boston, MA 02199 Bancorp. (lending); Trustee, February 1935 Northeastern University (education); Director, Depositors Insurance Fund, Inc. (insurance). - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser. 17 Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- William J. Cosgrove Trustee Vice President, Senior Banker and 101 Huntington Avenue Senior Credit Officer, Citibank, Boston, MA 02199 N.A. (retired September 1991); January 1933 Executive Vice President, Citadel Group Representatives, Inc.; Trustee, the Hudson City Savings Bank (since 1995). Richard A. Farrell Trustee President of Farrell, Healer & Co., 101 Huntington Avenue (venture capital management firm) Boston, MA 02199 (since 1980); Prior to 1980, headed November 1932 the venture capital group at Bank of Boston Corporation. Gail D. Fosler Trustee Senior Vice President and Chief 101 Huntington Avenue Economist, The Conference Board Boston, MA 02199 (non-profit economic and business December 1947 research); Director, Unisys Corp.; Director H.B. Fuller Company; and DBS Holdings (Singapore) (Banking and Financial Services); Director, National Bureau of Economic Research (academic). William F. Glavin Trustee President Emeritus, Babson College 101 Huntington Avenue (as of 1997); Vice Chairman, Xerox Boston, MA 02199 Corporation (until June 1989); March 1932 Director, Reebok, Inc. (since 1994) and Inco Ltd. Dr. John A. Moore Trustee President and Chief Executive 101 Huntington Avenue Officer, Institute for Evaluating Boston, MA 02199 Health Risks, (nonprofit February 1939 institution) (since September 1989). Patti McGill Peterson Trustee Executive Director, Council for 101 Huntington Avenue International Exchange of Scholars Boston, MA 02199 (since January 1998), Vice May 1943 President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until December 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John W. Pratt Trustee Professor of Business 101 Huntington Avenue Administration Emeritus, Harvard Boston, MA 02199 University Graduate School of September 1931 Business Administration (as of June 1998). - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser. 18 Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- William L. Braman Executive Vice Executive Vice President and Chief 101 Huntington Avenue President and Chief Investment Officer, the Adviser and Boston, MA 02199 Investment Officer (2) each of the John Hancock Funds; December 1953 Executive Vice President and Chief Investment Officer, Barring Asset Management, London UK (until May 2000). Richard A. Brown Senior Vice President Senior Vice President and Chief 101 Huntington Avenue and Chief Financial Financial Officer of the Adviser, Boston, MA 02199 Officer (2) John Hancock Funds, and The April 1949 Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until January 2001). Susan S. Newton Senior Vice Senior Vice President and Chief 101 Huntington Avenue President, Secretary Legal Officer the Adviser; John Boston, MA 02199 and Chief Legal Hancock Funds; Vice President March 1950 Officer Signature Services (until May 2000), The Berkeley Group, NM Capital and SAMCorp. William H. King Vice President and Vice President and Assistant 101 Huntington Avenue Treasurer Treasurer, the Adviser; Vice Boston, MA 02199 President and Treasurer, John July 1952 Hancock Funds; Assistant Treasurer, John Hancock Funds (until June 2001). Thomas H. Connors Vice President and Vice President and Compliance 101 Huntington Avenue Compliance Officer Officer, the Adviser; Vice Boston, MA 02199 President, John Hancock Funds. September 1959 - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser.
19 The following table provides information regarding the compensation paid by the Fund and the other investment companies in the John Hancock Fund Complex to the Independent Trustees for their services. Ms. Ford and Mr. DeCiccio, each a non-Independent Trustee, and each of the officers of the Fund are interested persons of the Adviser, are compensated by the Adviser and/or its affiliates and receive no compensation from the Fund for their services. Aggregate Total Compensation From the Compensation Fund and John Hancock Fund Independent Trustees From the Fund(1) Complex to Trustees(2) - -------------------- ---------------- --------------------------- Dennis S. Aronowitz $ 8,551 $ 75,000 Richard P. Chapman, Jr.* 8,973 78,000 William J. Cosgrove* 8,141 72,000 Leland O. Erdahl+ 3,216 72,100 Richard A. Farrell 8,385 75,000 Gail D. Fosler 8,307 68,000 William F. Glavin* 7,689 64,000 Dr. John A. Moore* 8,319 72,100 Patti McGill Peterson 7,849 70,350 John W. Pratt 8,141 72,000 ----------- ---------- Total $77,571 $718,550 (1) Compensation is for the fiscal year ended May 31, 2001. (2) Total compensation paid by the John Hancock Funds Complex to the Independent Trustees is as of December 31, 2000. As of this date, there were sixty-nine funds in the John Hancock Fund Complex, with each of these Independent Trustees serving on thirty-one funds. +As of February 28, 2001, Mr. Erdahl resigned as Trustee of the Complex. * As of December 31, 2000, the value of the aggregate accrued deferred compensation amount from all funds in the John Hancock Funds Complex for Mr. Chapman was $85,948, Mr. Cosgrove was $218,258, Mr. Glavin was $317,363 and for Dr. Moore was $263,160 under the John Hancock Group of Funds Deferred Compensation Plan for Independent Trustees. All of the officers listed are officers or employees of the Adviser or affiliated companies. Some of the Trustees and officers may also be officers and/or directors and/or Trustees of one or more of the other funds for which the Adviser serves as investment adviser. As of September 25, 2001, the officers and Trustees of the Fund as a group beneficially owned less than 1% of the outstanding shares of the Fund. As of that date, the following shareholders beneficially owned 5% of or more of the outstanding shares of the Funds listed below: 20 Percentage of Total Outstanding Shares of Name and Address of Shareholders Class of Shares the Class of the Fund - -------------------------------- ----------------- --------------------- MLPF&S For The Sole B 23.25% Benefit of Its Customers Attn Fund Administration 97C84 4800 Deer Lake Drive East Jacksonville FL 32246-6484 MLPF&S For The Sole C 42.47% Benefit of Its Customers Attn Fund Administration 4800 Deer Lake Drive East Jacksonville FL 32246-6484 INVESTMENT ADVISORY AND OTHER SERVICES The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603, was organized in 1968 and has approximately $30 billion in assets under management in its capacity as investment adviser to the Fund and the other funds in the John Hancock group of funds as well as retail and institutional privately managed accounts. The Adviser is an affiliate of the Life Company, one of the most recognized and respected financial institutions in the nation. With total assets under management of more than $100 billion, the Life Company is one of the ten largest life insurance companies in the United States, and carries a high rating from Standard & Poor's and A. M. Best. Founded in 1862, the Life Company has been serving clients for over 130 years. The Fund has entered into an investment management contract (the "Advisory Agreement") with the Adviser which was approved by the Fund's shareholders. Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously an investment program for the Fund and determine, subject to the overall supervision and review of the Trustees, which investments should be purchased, held, sold or exchanged and (b) provide supervision over all aspects of the Fund's operations except those which are delegated to a custodian, transfer agent or other agent. The Fund bears all costs of its organization and operation, including but not limited to expenses of preparing, printing and mailing all shareholders' reports, notices, prospectuses, proxy statements and reports to regulatory agencies; expenses relating to the issuance, registration and qualification of shares; government fees; interest charges; expenses of furnishing to shareholders their account statements; taxes; expenses of redeeming shares; brokerage and other expenses connected with the execution of portfolio securities transactions; expenses pursuant to the Fund's plan of distribution; fees and expenses of custodians including those for keeping books and accounts, maintaining a committed line of credit and calculating the net asset value of shares; fees and expenses of transfer agents and dividend disbursing agents; legal, accounting, financial, management, tax and auditing fees and expenses of the Fund (including an allocable portion of the cost of the Adviser's employees rendering such services to the Fund); the compensation and expenses of Trustees who are not otherwise affiliated with the Trust, the Adviser or any of their affiliates; expenses of Trustees' and shareholders' meetings; trade association memberships; insurance premiums; and any extraordinary expenses. 21 As compensation for its services under the Advisory Agreement, the Fund pays the Adviser monthly a fee based on a stated percentage of the average of the daily net assets of the Fund as follows: Average Daily Net Assets Annual Rate ------------------------ ----------- First $1,500,000,000 0.50% Next $500,000,000 0.45% Next $500,000,000 0.40% Amount Over $2,500,000,0000 0.35% From time to time, the Adviser may reduce its fee or make other arrangements to limit the Fund's expenses to a specified percentage of average daily net assets. The Adviser retains the right to re-impose a fee and recover any other payments to the extent that, at the end of any fiscal year, the Fund's annual expenses fall below this limit. For the fiscal years ended May 31, 1999, 2000 and 2001, the Adviser received fees of $7,686,223, $7,206,180 and $6,760,696, respectively. Securities held by the Fund may also be held by other funds or investment advisory clients for which the Adviser or its affiliates provides investment advice. Because of different investment objectives or other factors, a particular security may be bought for one or more funds or clients when one or more are selling the same security. If opportunities for the purchase or sale of securities by the Adviser for the Fund for other funds or clients, for which the Adviser renders investment advice, arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds or clients in a manner deemed equitable to all of them. To the extent that transactions on behalf of more than one client of the Adviser or its affiliates may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Pursuant to the Advisory Agreement, the Adviser is not liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which its Advisory Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser in the performance of its duties or from reckless disregard of the obligations and duties under the Advisory Agreement. Under the Advisory Agreement, the Fund may use the name "John Hancock" or any name derived from or similar to it only for so long as the Advisory Agreement or any extension, renewal or amendment thereof remains in effect. If the Advisory Agreement is no longer in effect, the Fund (to the extent that it lawfully can) will cease to use such a name or any other name indicating that it is advised by or otherwise connected with the Adviser. In addition, the Adviser or the Life Company may grant the nonexclusive right to use the name "John Hancock" or any similar name to any other corporation or entity, including but not limited to any investment company of which the Life Company or any subsidiary or affiliate thereof or any successor to the business of any subsidiary or affiliate thereof shall be the investment adviser. The continuation of the Advisory Agreement and Distribution Agreement was approved by all of the Trustees. The Advisory Agreement, and the Distribution Agreement discussed below, will continue in effect from year to year, provided that its continuance is approved annually both (i) by the holders of a majority of the outstanding voting securities of the Trust or by the Trustees, and (ii) by a majority of the Trustees who are not parties to the Agreement or "interested persons" of any such parties. Both agreements may be terminated on 60 days written notice by any party or by a vote of a majority of the outstanding voting securities of the Fund and will terminate automatically if assigned. 22 Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a party to an Accounting and Legal Services Agreement with the Adviser. Pursuant to this agreement, the Adviser provides the Fund with certain tax, accounting and legal services. For the fiscal years ended May 31, 1999, 2000 and 2001, the Fund paid the Adviser $226,136, $276,177 and $262,846, respectively, for services under this Agreement. Personnel of the Adviser and its affiliates may trade securities for their personal accounts. The Fund also may hold, or may be buying or selling, the same securities. To prevent the Fund from being disadvantaged, the adviser(s), principal underwriter and the Fund have adopted a code of ethics which restricts the trading activity of those personnel. DISTRIBUTION CONTRACTS The Fund has a Distribution Agreement with John Hancock Funds. Under the agreement, John Hancock Funds is obligated to use its best efforts to sell shares of each class of the Fund. Shares of the Fund are also sold by selected broker-dealers (the "Selling Brokers") which have entered into selling agency agreements with John Hancock Funds. These Selling Brokers are authorized to designate other intermediaries to receive purchase and redemption orders on behalf of the Fund. John Hancock Funds accepts orders for the purchase of the shares of the Fund which are continually offered at net asset value next determined, plus any applicable sales charge, if any. In connection with the sale of Fund shares, John Hancock Funds and Selling Brokers receive compensation from a sales charge imposed, in the case of Class A and Class C shares, at the time of sale. In the case of Class B or Class C shares, the broker receives compensation immediately but John Hancock Funds is compensated on a deferred basis. Total underwriting commissions for sales of the Fund's Class A shares for the fiscal years ended May 31, 1999, 2000 and 2001 was $1,782,697, $825,833 and $1,043,537, respectively. Of such amounts $137,960, $72,056 and $105,641, were retained by John Hancock Funds for 1999, 2000 and 2001. Total underwriting commissions for sales of the Fund's Class C shares for the period from May 1, 2000 to May 31, 2000 and for the fiscal year May 31, 2001 was $9,774 and $167,416, respectively. Of such amounts no commissions were retained by John Hancock Funds. The remainder of the underwriting commissions were reallowed to Selling Broker . The Fund's Trustees adopted Distribution Plans with respect to each class of shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Investment Company Act"). Under the Plans, the Fund will pay distribution and service fees at an aggregate annual rate of up to 0.30% for Class A shares and 1.00% for Class B and Class C shares of the Fund's average daily net assets attributable to shares of that class. However, the service fee will not exceed 0.25% of the Fund's average daily net assets attributable to each class of shares. The distribution fees will be used to reimburse the John Hancock Funds for its distribution expenses, including but not limited to: (i) initial and ongoing sales compensation to Selling Brokers and others (including affiliates of the John Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional and overhead expenses incurred in connection with the distribution of Fund shares; and (iii) with respect to Class B and Class C shares only, interest expenses on unreimbursed distribution expenses. The service fees will be used to compensate Selling Brokers and others for providing personal and account maintenance services to shareholders. In the event that John Hancock Funds is not fully reimbursed for payments or expenses they incur 23 under the Class A Plan, these expenses will not be carried beyond twelve months from the date they were incurred. Unreimbursed expenses under the Class B and Class C Plans will be carried forward together with interest on the balance of these unreimbursed expenses. The Fund does not treat the unreimbursed expenses under the Class B and Class C Plans as a liability of the Fund because the Trustees may terminate the Class B and/or Class C Plan at any time with no additional liability for these expenses to the shareholders and the Fund. For the fiscal year ended May 31, 2001, an aggregate of $6,911,125 of distribution expenses or 3.38% of the average net assets of the Class B shares of the Fund, was not reimbursed or recovered by John Hancock Funds through the receipt of deferred sales charges or Rule 12b-1 fees in prior periods. For the fiscal year ended May 31, 2001, an aggregate of $0 of distribution expenses or 0% of the average net assets of the Class C shares of the Fund, was not reimbursed or recovered by John Hancock Funds through the receipt of deferred sales charges or Rule 12b-1 fees. The Plans and all amendments were approved by the Trustees, including a majority of the Trustees who are not interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Plans (the "Independent Trustees"), by votes cast in person at meetings called for the purpose of voting on these Plans. Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund with a written report of the amounts expended under the Plans and the purpose for which these expenditures were made. The Trustees review these reports on a quarterly basis to determine their continued appropriateness. The Plans provide that they will continue in effect only so long as their continuance is approved at least annually by a majority of both the Trustees and the Independent Trustees. The Plans provide that they may be terminated without penalty (a) by vote of a majority of the Independent Trustees, (b) by a vote of a majority of the Fund's outstanding shares of the applicable class in each case upon 60 days' written notice to John Hancock Funds, and (c) automatically in the event of assignment. The Plans further provide that they may not be amended to increase the maximum amount of the fees for the services described therein without the approval of a majority of the outstanding shares of the class of the Fund which has voting rights with respect to the Plan. Each Plan provides that no material amendment to the Plans will be effective unless it is approved by a vote of a majority of the Trustees and the Independent Trustees of the Fund. The holders of Class A, Class B and Class C shares have exclusive voting rights with respect to the Plan applicable to their respective class of shares. In adopting the Plans the Trustees concluded that, in their judgment, there is a reasonable likelihood that the Plans will benefit the holders of the applicable class of shares of the Fund. Class I shares of the Fund are not subject to any distribution plan. Expenses associated with the obligation of John Hancock Funds to use its best efforts to sell Class I shares will be paid by the Adviser or by John Hancock Funds and will not be paid from the fees paid under Class A, Class B or Class C Plans. Amounts paid to John Hancock Funds by any class of shares of the Fund will not be used to pay the expenses incurred with respect to any other class of shares of the Fund; provided, however, that expenses attributable to the Fund as a whole will be allocated, to the extent permitted by law, according to a formula based upon gross sales dollars and/or average daily net assets of each such class, as may be approved from time to time by vote of a majority of the Trustees. From time to time, the Fund may participate in joint distribution activities with other Funds and the costs of those activities will be borne by each Fund in proportion to the relative net asset value of the participating Funds. During the fiscal year ended May 31, 2001, the Fund paid John Hancock Funds the following amounts of expenses in connection with their services for the Fund. 24
Expense Items ------------- Printing and Interest Mailing of Carrying or Prospectus to Compensation Expenses of John Other Finance Advertising New Shareholders to Selling Brokers Hancock Funds Charges ----------- ---------------- ------------------ ---------------- ------------- Class A $332,612 $13,960 $2,048,678 $983,451 $ 0 Class B $287,154 $10,313 $ 980,297 $675,194 $18,468 Class C $ 24,735 $ 1,176 $ 112,976 $ 73,873 $ 0
SALES COMPENSATION As part of their business strategies, the Fund, along with John Hancock Funds, pays compensation to financial services firms that sell the Fund's shares. These firms typically pass along a portion of this compensation to your broker or financial representative. The two primary sources of broker compensation payments for Class A, Class B and Class C are (1) the12b-1 fees that are paid out of the Fund's assets and (2) sales charges paid by investors. The sales charges and 12b-1 fees are detailed in the prospectus and under "Distribution Contracts" in this Statement of Additional Information. The portions of these expenses that are paid to financial services firms are shown on the next page. For Class I shares, John Hancock Funds may make a one-time payment at the time of initial purchase out of its own resources to a Selling Broker who sells shares of the Fund. This payment may not exceed 0.15% of the amount invested. Whenever you purchase Class A, Class B or Class C shares, the financial services firm receives a reallowance/payment, as described below. The firm also receives the first year's 12b-1 service fee at this time. Beginning with the second year after an investment is made, the financial services firm receives an annual 12b-1 service fee of 0.25% of its total eligible fund net assets. This fee is paid quarterly in arrears by the Fund. In addition, from time to time, John Hancock Funds, at its expense, may provide significant additional compensation to financial services firms in connection with the sale of shares of the Fund. Such compensation provided by John Hancock Funds may include, for example, financial assistance to financial services firms in connection with their marketing and sales development programs for their registered representatives and other employees, as well as payment for travel expenses, including lodging, incurred by registered representatives and other employees for such marketing and sales development programs, seminars for the public, advertising and sales campaigns regarding one or more Funds, and/or other financial services firms-sponsored events or activities. From time to time, John Hancock Funds may make expense reimbursements for special training of a financial services firm's registered representatives and other employees in group meetings. Other compensation, such as asset retention fees, finder's fees and reimbursement for wire transfer fees, may be offered to the extent not prohibited by law or any self-regulatory agency, such as the NASD. 25
Broker Receives Broker Receives Sales charge Maximum 12b-1Service Total Broker Paid by investors Reallowance fee(% of net Compensation (1) Class A investments (% of offering price) (% of offering price) investment) (3) (% of offering price) - ------------------- --------------------- --------------------- --------------- --------------------- Up to $99,999 4.50% 3.76% 0.25% 4.00% $100,000 - $249,999 3.75% 3.01% 0.25% 3.25% $250,000 - $499,999 2.75% 2.06% 0.25% 2.30% $500,000 - $999,999 2.00% 1.51% 0.25% 1.75% Investments of Class A shares of $1 million or more (4) - -------------------------------- First $1M - $4,999,999 -- 0.75% 0.25% 1.00% Next $1M - $5M above that -- 0.25% 0.25% 0.50% (2) Next $1 or more above that -- 0.00% 0.25% 0.25% (2) Broker Receives Broker Receives 12b-1 Service Maximum fee Total Broker Reallowance (% of net Compensation (1) Class B investments (% of offering price) investment) (3) (% of offering price) - ------------------- --------------------- --------------- -------------------- All investments 3.75% 0.25% 4.00% Broker Receives Broker Receives 12b-1 Maximum Service fee Total Broker Reallowance (% of net Compensation (1) Class C investments (% of offering price) investment) (3) (% of offering price) - ------------------- --------------------- --------------- --------------------- Over $1,000,000 or amounts -- 0.75% 0.25% 1.00% purchased at NAV All other amounts 1.00% 1.75% 0.25% 2.00% Broker Receives Broker Receives 12b-1 Maximum Service fee Total Broker Reallowance (% of net Compensation (1) Class I investments (% of offering price) investment) (3) (% of offering price) - ------------------- --------------------- --------------- --------------------- All other amounts -- 0.00% 0.00% 0.00% (5)
(1) Broker percentages and 12b-1 service fee percentages are calculated from different amounts, and therefore may not equal total broker compensation percentages if combined using simple addition. (2) For Group Investment Program sales, the maximum total broker compensation for investments of $1 million or more is 1.00% of the offering price (one year CDSC of 1.00% applies for each sale). (3) After first year broker receives 12b-1 service fees quarterly in arrears. (4) John Hancock Funds may reduce aggregate investments by the amount of recent redemptions. 26 (5) John Hancock Funds may make a one-time payment at the time of initial purchase out of its own resources to a Selling Broker who sells Class I shares of the Fund. This payment may be up to 0.15% of the amount invested. CDSC revenues collected by John Hancock Funds may be used to pay broker commissions when there is no initial sales charge. NET ASSET VALUE For purposes of calculating the net asset value ("NAV") of the Fund's shares, the following procedures are utilized wherever applicable. Debt investment securities are valued on the basis of valuations furnished by a principal market maker or a pricing service, both of which generally utilize electronic data processing techniques to determine valuations for normal institutional size trading units of debt securities without exclusive reliance upon quoted prices. Short-term debt investments which have a remaining maturity of 60 days or less are generally valued at amortized cost which approximates market value. If market quotations are not readily available or if in the opinion of the Adviser any quotation or price is not representative of true market value, the fair value of the security may be determined in good faith in accordance with procedures approved by the Trustees. Foreign securities are valued on the basis of quotations from the primary market in which they are traded. Any assets or liabilities expressed in terms of foreign currencies are translated into U.S. dollars by the custodian bank based on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on the date of any determination of a Fund's NAV. If quotations are not readily available, or the value has been materially affected by the events occurring after closing of a foreign market, assets are valued by a method that Trustees believe accurately reflects fair value. The NAV of each fund and class is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by dividing a class's net assets by the number of its shares outstanding. On any day an international market is closed and the New York Stock Exchange is open, any foreign securities will be valued at the prior day's close with the current day's exchange rate. Trading of foreign securities may take place on Saturdays and U.S. business holidays on which a Fund's NAV is not calculated. Consequently, a Fund's portfolio securities may trade and the NAV of the Fund's redeemable securities may be significantly affected on days when a shareholder has no access to the Fund. INITIAL SALES CHARGE ON CLASS A AND CLASS C SHARES Shares of the Fund are offered at a price equal to their net asset value plus a sales charge which, at the option of the purchaser, may be imposed either at the time of purchase (the "initial sales charge alternative") or on a contingent deferred basis (the "deferred sales charge alternative"). The fund no longer issues share certificates. Shares are electronically recorded. The Trustees reserve the right to change or waive the Fund's minimum investment requirements and to reject any order to purchase shares (including purchase by exchange) when in the judgment of the Adviser such rejection is in the Fund's best interest. The sales charges applicable to purchases of Class A and Class C shares of the Fund are described in the Prospectus. Methods of obtaining reduced sales charges referred to generally in the Prospectus are described in detail below. In calculating the sales charge applicable to current purchases of Class A shares of the Fund, the investor is entitled to accumulate current purchases with the 27 greater of the current value (at offering price) of the Class A shares of the Fund owned by the investor or, if John Hancock Signature Services, Inc. ("Signature Services") is notified by the investor's dealer or the investor at the time of the purchase, the cost of the Class A shares owned. Without Sales Charges. Class A shares may be offered without a front-end sales charge or contingent deferred sales charge ("CDSC") to various individuals and institutions as follows: o A Trustee or officer of the Trust; a Director or officer of the Adviser and its affiliates, sub-adviser or Selling Brokers; employees or sales representatives of any of the foregoing; retired officers, employees or Directors of any of the foregoing; a member of the immediate family (spouse, children, grandchildren, mother, father, sister, brother, mother-in-law, father-in-law, daughter-in-law, son-in-law, niece, nephew and same-sex domestic partner) of any of the foregoing; or any fund, pension, profit sharing or other benefit plan for the individuals described above. o A broker, dealer, financial planner, consultant or registered investment advisor that has entered into a signed agreement with John Hancock Funds providing specifically for the use of Fund shares in fee-based investment products or services made available to their clients. o A former participant in an employee benefit plan with John Hancock funds, when he or she withdraws from his or her plan and transfers any or all of his or her plan distributions directly to the Fund. o A member of a class action lawsuit against insurance companies who is investing settlement proceeds. o Retirement plans participating in Merrill Lynch servicing programs, if the Plan has more than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information. o Retirement plans investing through the PruArray Program sponsored by Prudential Securities. o Pension plans transferring assets from a John Hancock variable annuity contract to the Fund pursuant to an exemptive application approved by the Securities Exchange Commission. o Participant directed defined contribution plans with at least 100 eligible employees at the inception of the Fund account, may purchase Class A shares with no initial sales charge. However, if the shares are redeemed within 12 months after the end of the calendar year in which the purchase was made, a CDSC will be imposed at the following rate: Amount Invested CDSC Rate --------------- --------- $1 to $4,999,000 1.00% Next $5 million to $9,999,999 0.50% Amounts of $10 million and over 0.25% Class C shares may be offered without a front-end sales charge to: o Investments of redemption proceeds from a non-John Hancock mutual fund. 28 o Group Retirement plan products for which John Hancock Signature Services performs recordkeeping and administrative services. (These plans include 403(b), Simple IRA, SEP and SARSEP plans.) Also included are plans formerly record kept by John Hancock Signature Services (including 401(k)). o Group Retirement plan products sold through third party administrators under the John Hancock SELECT retirement plan program. (These plans include 401(k), Money Purchase and Profit Sharing plans.) o An investor who buys through a Merrill Lynch omnibus account. However, a CDSC may apply if the shares are sold within 12 months of purchase. Class A and Class C shares may also be purchased without an initial sales charge in connection with certain liquidation, merger or acquisition transactions involving other investment companies or personal holding companies. Combination Privilege. In calculating the sales charge applicable to purchases of Class A shares made at one time, the purchases will be combined to reduce sales charges if made by (a) an individual, his or her spouse and their children under the age of 21, purchasing securities for his or their own account, (b) a trustee or other fiduciary purchasing for a single trust, estate or fiduciary account, and (c) groups which qualify for the Group Investment Program (see below). A company's (not an individual's) qualified and non-qualified retirement plan investments can be combined to take advantage of this privilege. Further information about combined purchases, including certain restrictions on combined group purchases, is available from Signature Services or a Selling Broker's representative. Accumulation Privilege. Investors (including investors combining purchases) who are already Class A shareholders may also obtain the benefit of the reduced sales charge by taking into account not only the amount being invested but also the investor's purchase price or current account value of the Class A shares of all John Hancock funds which carry a sales charge already held by such person. Class A shares of John Hancock money market funds will only be eligible for the accumulation privilege if the investor has previously paid a sales charge on the amount of those shares. Retirement plan investors may include the value of Class B shares if Class B shares held are greater than $1 million. Retirement plans must notify Signature Services to utilize. A company's (not an individual's) qualified and non-qualified retirement plan investments can be combined to take advantage of this privilege. Group Investment Program. Under the Combination and Accumulation Privileges, all members of a group may combine their individual purchases of Class A shares to potentially qualify for breakpoints in the sales charge schedule. This feature is provided to any group which (1) has been in existence for more than six months, (2) has a legitimate purpose other than the purchase of mutual fund shares at a discount for its members, (3) utilizes salary deduction or similar group methods of payment, and (4) agrees to allow sales materials of the fund in its mailings to members at a reduced or no cost to John Hancock Funds. Letter of Intention. Reduced sales charges are also applicable to investments in Class A shares made pursuant to a Letter of Intention (the "LOI"), which should be read carefully prior to its execution by an investor. The Fund offers two options regarding the specified period for making investments under the LOI. All investors have the option of making their investments over a specified period of thirteen (13) months. Investors who are using the Fund as a funding medium for a qualified retirement plan, however, may opt to make the necessary investments called for by the LOI over a forty-eight (48) month period. These retirement plans include traditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs) SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and Section 457 plans. An individual's non-qualified and qualified 29 retirement plans investments cannot be combined to satisfy an LOI of 48 months. Such an investment (including accumulations and combinations but not including reinvested dividends) must aggregate $100,000 or more invested during the specified period from the date of the LOI or from a date within ninety (90) days prior thereto, upon written request to Signature Services. The sales charge applicable to all amounts invested under the LOI is computed as if the aggregate amount intended to be invested had been invested immediately. If such aggregate amount is not actually invested, the difference in the sales charge actually paid and the sales charge payable had the LOI not been in effect is due from the investor. However, for the purchases actually made within the specified period (either 13 or 48 months) the sales charge applicable will not be higher than that which would have applied (including accumulations and combinations) had the LOI been for the amount actually invested. The LOI authorizes Signature Services to hold in escrow sufficient Class A shares (approximately 5% of the aggregate) to make up any difference in sales charges on the amount intended to be invested and the amount actually invested, until such investment is completed within the specified period, at which time the escrow Class A shares will be released. If the total investment specified in the LOI is not completed, the Class A shares held in escrow may be redeemed and the proceeds used as required to pay such sales charge as may be due. By signing the LOI, the investor authorizes Signature Services to act as his or her attorney-in-fact to redeem any escrowed Class A shares and adjust the sales charge, if necessary. A LOI does not constitute a binding commitment by an investor to purchase, or by the Fund to sell, any additional Class A shares and may be terminated at any time. Because Class I shares are sold at net asset value without the imposition of any sales charge, none of the privileges described under these captions are available to Class I investors. DEFERRED SALES CHARGE ON CLASS B and CLASS C SHARES Investments in Class B shares are purchased at net asset value per share without the imposition of an initial sales charge so the Fund will receive the full amount of the purchase payment. Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed within six years or one year of purchase, respectively, will be subject to a CDSC at the rates set forth in the Prospectus as a percentage of the dollar amount subject to the CDSC. The charge will be assessed on an amount equal to the lesser of the current market value or the original purchase cost of the Class B or Class C shares being redeemed. No CDSC will be imposed on increases in account value above the initial purchase prices, including all shares derived from reinvestment of dividends or capital gains distributions. Class B shares are not available to retirement plans that had more than 100 eligible employees at the inception of the Fund account. The amount of the CDSC, if any, will vary depending on the number of years from the time of payment for the purchase of Class B shares until the time of redemption of such shares. Solely for purposes of determining the number of years from the time of any payment for the purchases of both Class B and Class C shares, all payments during a month will be aggregated and deemed to have been made on the first day of the month. In determining whether a CDSC applies to a redemption, the calculation will be determined in a manner that results in the lowest possible rate being charged. It will be assumed that your redemption comes first from shares you have held beyond the six-year CDSC redemption period for Class B or one year CDSC redemption period for Class C, or those you acquired through dividend and 30 capital gain reinvestment, and next from the shares you have held the longest during the six-year period for Class B shares. For this purpose, the amount of any increase in a share's value above its initial purchase price is not regarded as a share exempt from CDSC. Thus, when a share that has appreciated in value is redeemed during the CDSC period, a CDSC is assessed only on its initial purchase price. When requesting a redemption for a specific dollar amount please indicate if you require the proceeds to equal the dollar amount requested. If not indicated, only the specified dollar amount will be redeemed from your account and the proceeds will be less any applicable CDSC. Example: You have purchased 100 Class B shares at $10 per share. The second year after your purchase, your investment's net asset value per share has increased by $2 to $12, and you have gained 10 additional shares through dividend reinvestment. If you redeem 50 shares at this time your CDSC will be calculated as follows: oProceeds of 50 shares redeemed at $12 per share (50 x 12) $600.00 o*Minus Appreciation ($12 - $10) x 100 shares (200.00) o Minus proceeds of 10 shares not subject to CDSC (dividend reinvestment) (120.00) ------- oAmount subject to CDSC $280.00 *The appreciation is based on all 100 shares in the account not just the shares being redeemed. Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or in part by John Hancock Funds to defray its expenses related to providing distribution-related services to the Funds in connection with the sale of the Class B and Class C shares, such as the payment of compensation to select Selling Brokers for selling Class B and Class C shares. The combination of the CDSC and the distribution and service fees facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of the purchase. Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on redemptions of Class B and Class C shares and of Class A shares that are subject to CDSC, unless indicated otherwise, in the circumstances defined below: For all account types: * Redemptions made pursuant to the Funds' right to liquidate your account if you own shares worth less than $1,000. * Redemptions made under certain liquidation, merger or acquisition transactions involving other investment companies or personal holding companies. * Redemptions due to death or disability. (Does not apply to trust accounts unless trust is being dissolved.) * Redemptions made under the Reinstatement Privilege, as described in "Sales Charge Reductions and Waivers" of the Prospectus. * Redemptions of Class B (but not Class C) shares made under a periodic withdrawal plan or redemptions for fees charged by planners or advisors for advisory services, as long as your annual redemptions do not exceed 12% of your account value, including reinvested dividends, at the time you established your periodic withdrawal plan and 12% of the value of subsequent investments (less redemptions) in that account at the time you notify Signature Services. (Please note, this waiver does not apply to periodic withdrawal plan redemptions of Class A shares that are subject to a CDSC.) 31 * Redemptions by Retirement plans participating in Merrill Lynch servicing programs, if the Plan has less than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information. * Redemptions of Class A shares by retirement plans that invested through the PruArray Program sponsored by Prudential Securities. * Redemptions of Class A shares made after one year from the inception date of a retirement plan at John Hancock. For retirement Accounts (such as traditional, Roth and Education IRAs, SIMPLE IRAs, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other plans as described in the Internal Revenue Code) unless otherwise noted. * Redemptions made to effect mandatory or life expectancy distributions under the Internal Revenue Code. (Waiver based on required, minimum distribution calculations for John Hancock Mutual Fund IRA assets only.) * Returns of excess contributions made to these plans. * Redemptions made to effect distributions to participants or beneficiaries from employer sponsored retirement plans under section 401(a) (such as Money Purchase Pension Plans and Profit-Sharing/401(k) Plans), 457 and 408 (SEPs and SIMPLE IRAs of the Internal Revenue Code * Redemptions from certain IRA and retirement plans that purchased shares prior to October 1, 1992 and certain IRA plans that purchased shares prior to May 15, 1995. Please see matrix for some examples. 32
- ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement Distribution (401 (k), MPP, Rollover PSP) 457 & 408 (SEPs & Simple IRAs) - ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Death or Disability Waived Waived Waived Waived Waived - ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Over 70 1/2 Waived Waived Waived Waived for 12% of account required value annually minimum in periodic distributions*or payments 12% of account value annually in periodic payments - ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Between 59 1/2 and Waived Waived Waived Waived for Life 12% of account 70 1/2 Expectancy or value annually 12% of account in periodic value annually payments in periodic payments - ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Under 59 1/2 Waived for Waived for Waived for Waived for 12% of account (Class B only) annuity payments annuity annuity annuity value annually (72t) or 12% of payments (72t) payments (72t) payments (72t) in periodic account value or 12% of or 12% of or 12% of payments annually in account value account value account value periodic payments annually in annually in annually in periodic periodic periodic payments payments payments - ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Loans Waived Waived N/A N/A N/A - ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A - ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Hardships Waived Waived Waived N/A N/A - ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Qualified Domestic Waived Waived Waived N/A N/A Relations Orders - ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Termination of Waived Waived Waived N/A N/A Employment Before Normal Retirement Age - ----------------------- ------------------ ---------------- ---------------- ----------------- ---------------- Return of Excess Waived Waived Waived Waived N/A - ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
*Required minimum distributions based on John Hancock Mutual Fund IRA assets only. If you qualify for a CDSC waiver under one of these situations, you must notify Signature Services at the time you make your redemption. The waiver will be granted once Signature Services has confirmed that you are entitled to the waiver. 33 SPECIAL REDEMPTIONS Although it would not normally do so, the Fund has the right to pay the redemption price of shares of the Fund in whole or in part in portfolio securities as prescribed by the Trustees. When the shareholder sells portfolio securities received in this fashion, the shareholder will incur a brokerage charge. Any such securities would be valued for the purposes of making such payment at the same value as used in determining net asset value. The Fund has, however, elected to be governed by Rule 18f-1 under the Investment Company Act. Under that rule, the Fund must redeem its shares for cash except to the extent that the redemption payments to any shareholder during any 90-day period would exceed the lesser of $250,000 or 1% of the Fund's net asset value at the beginning of such period. ADDITIONAL SERVICES AND PROGRAMS Exchange Privilege. The Fund permits exchanges of shares of any class of a fund for shares of the same class in any other John Hancock fund offering that class. Exchanges between funds with shares that are not subject to a CDSC are based on their respective net asset values. No sales charge or transaction charge is imposed. Shares of the Fund which are subject to a CDSC may be exchanged into shares of any of the other John Hancock funds that are subject to a CDSC without incurring the CDSC; however, the shares acquired in an exchange will be subject to the CDSC schedule of the shares acquired if and when such shares are redeemed (except that shares exchanged into John Hancock 500 Index Fund will retain the exchanged fund's CDSC schedule). For purposes of computing the CDSC payable upon redemption of shares acquired in an exchange, the holding period of the original shares is added to the holding period of the shares acquired in an exchange. If a retirement plan exchanges the plan's Class A account in its entirety from the Fund to a non-John Hancock investment, the one-year CDSC applies. If a shareholder exchanges Class B shares purchased prior to January 1, 1994 for Class B shares of any other John Hancock fund, the acquired shares will continue to be subject to the CDSC schedule that was in effect when the exchanged shares were purchased. The Fund reserves the right to require that previously exchanged shares (and reinvested dividends) be in the Fund for 90 days before a shareholder is permitted a new exchange. The Fund may refuse any exchange order. The Fund may change or cancel its exchange policies at any time, upon 60 days' notice to its shareholders. An exchange of shares is treated as a redemption of shares of one fund and the purchase of shares of another for Federal Income Tax purposes. An exchange may result in a taxable gain or loss. See "TAX STATUS". Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic Withdrawal Plan. Payments under this plan represent proceeds arising from the redemption of Fund shares. Since the redemption price of the Fund shares may be more or less than the shareholder's cost, which may result in realization of gain or loss for purposes of Federal, state and local income taxes. The maintenance of a Systematic Withdrawal Plan concurrently with purchases of additional shares of the Fund could be disadvantageous to a shareholder because of the initial sales charge payable on such purchases of Class A shares and the 34 CDSC imposed on redemptions of Class B and Class C shares and because redemptions are taxable events. Therefore, a shareholder should not purchase shares at the same time a Systematic Withdrawal Plan is in effect. The Fund reserves the right to modify or discontinue the Systematic Withdrawal Plan of any shareholder on 30 days' prior written notice to such shareholder, or to discontinue the availability of such plan in the future. The shareholder may terminate the plan at any time by giving proper notice to Signature Services. Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the Prospectus. The program, as it relates to automatic investment checks, is subject to the following conditions: The investments will be drawn on or about the day of the month indicated. The privilege of making investments through the MAAP may be revoked by Signature Services without prior notice if any investment is not honored by the shareholder's bank. The bank shall be under no obligation to notify the shareholder as to the non-payment of any checks. The program may be discontinued by the shareholder either by calling Signature Services or upon written notice to Signature Services which is received at least five (5) business days prior to the order date of any investment. Reinstatement or Reinvestment Privilege. If Signature Services is notified prior to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days after the date of redemption, reinvest without payment of a sales charge any part of the redemption proceeds in shares of the same class of the Fund or another John Hancock fund, subject to the minimum investment limit of that fund. The proceeds from the redemption of Class A shares may be reinvested at net asset value without paying a sales charge in Class A shares of the Fund or in Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a shareholder may reinvest the proceeds from this redemption at net asset value in additional shares of the class from which the redemption was made. The shareholder's account will be credited with the amount of any CDSC charged upon the prior redemption and the new shares will continue to be subject to the CDSC. The holding period of the shares acquired through reinvestment will, for purposes of computing the CDSC payable upon a subsequent redemption, include the holding period of the redeemed shares. To protect the interests of other investors in the Fund, the Fund may cancel the reinvestment privilege of any parties that, in the opinion of the Fund, are using market timing strategies or making more than seven exchanges per owner or controlling party per calendar year. Also, the Fund may refuse any reinvestment request. The Fund may change or cancel its reinvestment policies at any time. A redemption or exchange of Fund shares is a taxable transaction for Federal income tax purposes even if the reinvestment privilege is exercised, and any gain or loss realized by a shareholder on the redemption or other disposition of Fund shares will be treated for tax purposes as described under the caption "TAX STATUS." Retirement plans participating in Merrill Lynch's servicing programs: - --------------------------------------------------------------------- Class A shares are available at net asset value for plans with $3 million in plan assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either of these limits, Class A shares are not available. 35 For participating retirement plans investing in Class B shares, shares will convert to Class A shares after eight years, or sooner if the plan attains assets of $5 million (by means of a CDSC-free redemption/purchase at net asset value). PURCHASES AND REDEMPTIONS THROUGH THIRD PARTIES Shares of the Fund may be purchased or redeemed through certain broker-dealers or Service Agents ("Brokers"). Brokers may charge for their services or place limitations on the extent to which you may use the services of the Fund. The Fund will be deemed to have received a purchase or redemption order when an authorized broker, or if applicable, a broker's authorized designee, receives the order. If a broker is an agent or designee of the Fund, orders are processed at the NAV next calculated after the broker receives the order. The broker must segregate any orders it receives after the close of regular trading on the New York Stock Exchange and transmit those orders to the Fund for execution at NAV next determined. Some brokers that maintain nominee accounts with the Fund for their clients charge an annual fee on the average net assets held in such accounts for accounting, servicing, and distribution services they provide with respect to the underlying Fund shares. The Adviser, the Fund, and/or John Hancock Funds, Inc. (the Fund's principal distributor), share in the expense of these fees. DESCRIPTION OF THE FUND'S SHARES The Trustees of the Trust are responsible for the management and supervision of the Fund. The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest of the Fund, without par value. Under the Declaration of Trust, the Trustees have the authority to create and classify shares of beneficial interest in separate series, without further action by shareholders. As of the date of this Statement of Additional Information, the Trustees have not authorized any additional series of the Fund, other than the Fund, although they may do so in the future. The Declaration of Trust also authorizes the Trustees to classify and reclassify the shares of the Fund, or any new series of the Trust, into one or more classes. The Trustees have authorized the issuance of four classes of shares of the Fund, designated as Class A, Class B, Class C and Class I. The shares of each class of the Fund represent an equal proportionate interest in the aggregate net assets attributable to that class of the Fund. Holders of each class of shares have certain exclusive voting rights on matters relating to their respective distribution plans. The different classes of the Fund may bear different expenses relating to the cost of holding shareholder meetings necessitated by the exclusive voting rights of any class of shares. Dividends paid by the Fund, if any, with respect to each class of shares will be calculated in the same manner, at the same time and on the same day and will be in the same amount, except for differences resulting from the facts that (i) the distribution and service fees relating to each class shares will be borne exclusively by that class, (ii) Class B and Class C shares will pay higher distribution and service fees than Class A shares and (iii) each of class of shares will bear any class expenses properly allocable to that class of shares, subject to the conditions the Internal Revenue Service imposes with respect to the multiple-class structures. Similarly, the net asset value per share may vary depending on which class of shares are purchased. No interest will be paid on uncashed dividend or redemption checks. In the event of liquidation, shareholders of each class are entitled to share pro rata in the net assets of the Fund available for distribution to these shareholders. Shares entitle their holders to one vote per share, are freely transferable and have no preemptive, subscription or conversion rights. When issued, shares are fully paid and non-assessable, except as set forth below. 36 Unless otherwise required by the Investment Company Act or the Declaration of Trust, the Fund has no intention of holding annual meetings of shareholders. Fund shareholders may remove a Trustee by the affirmative vote of at least two-thirds of the Trust's outstanding shares and the Trustees shall promptly call a meeting for such purpose when requested to do so in writing by the record holders of not less than 10% of the outstanding shares of the Trust. Shareholders may, under certain circumstances, communicate with other shareholders in connection with requesting a special meeting of shareholders. However, at any time that less than a majority of the Trustees holding office were elected by the shareholders, the Trustees will call a special meeting of shareholders for the purpose of electing Trustees. Under Massachusetts law, shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable for acts or obligations of the Trust. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts, obligations or affairs of the Fund. The Declaration of Trust also provides for indemnification out of the Fund's assets for all losses and expenses of any shareholder held personally liable by reason of being or having been a shareholder. The Declaration of Trust also provides that no series of the Trust shall be liable for the liabilities of any other series. Furthermore, no fund included in this Fund's prospectus shall be liable for the liabilities of any other John Hancock Fund. Liability is therefore limited to circumstances in which the Fund itself would be unable to meet its obligations, and the possibility of this occurrence is remote. The Fund reserves the right to reject any application which conflicts with the Fund's internal policies or the policies of any regulatory authority. John Hancock Funds does not accept starter, credit card or third party checks. All checks returned by the post office as undeliverable will be reinvested at net asset value in the fund or funds from which a redemption was made or dividend paid. Information provided on the account application may be used by the Fund to verify the accuracy of the information or for background or financial history purposes. A joint account will be administered as a joint tenancy with right of survivorship, unless the joint owners notify Signature Services of a different intent. A shareholder's account is governed by the laws of The Commonwealth of Massachusetts. For telephone transactions the transfer agent will take measures to verify the identity of the caller, such as asking for name, account number, Social Security or other taxpayer ID number and other relevant information. If appropriate measures are taken, the transfer agent is not responsible for any losses that may occur to any account due to an unauthorized telephone call. Also for your protection telephone transactions are not permitted on accounts whose names or addresses have changed within the past 30 days. Proceeds from telephone transactions can only be mailed to the address of record. Selling activities for the Fund may not take place outside the U.S. except with U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on Non-U.S. investors' accounts with foreign mailing addresses are required to certify that all sales activities have occurred, and in the future will occur, only in the U.S. A foreign corporation may purchase shares of the Fund only if it has a U.S. mailing address. TAX STATUS The Fund is treated as a separate entity for accounting and tax purposes, has qualified as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and intends to continue to qualify for each taxable year. As such and by complying with the applicable provisions of the Code regarding the sources of its income, the timing of its distributions, and the diversification of its assets, the Fund will not be subject to Federal income tax on its taxable income (including net realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. 37 The Fund will be subject to a 4% non-deductible Federal excise tax on certain amounts not distributed (and not treated as having been distributed) on a timely basis in accordance with annual minimum distribution requirements. The Fund intends under normal circumstances to seek to avoid or minimize liability for such tax by satisfying such distribution requirements. Distributions from the Fund's current or accumulated earnings and profits ("E&P") will be taxable under the Code for investors who are subject to tax. If these distributions are paid from the Fund's "investment company taxable income," they will be taxable as ordinary income; and if they are paid from the Fund's "net capital gain," they will be taxable as capital gain. (Net capital gain is the excess (if any) of net long-term capital gain over net short-term capital loss, and investment company taxable income is all taxable income and capital gains, other than net capital gain, after reduction by deductible expenses.) Some distributions may be paid in January but may be taxable to shareholders as if they had been received on December 31 of the previous year. The tax treatment described above will apply without regard to whether distributions are received in cash or reinvested in additional shares of the Fund. Distributions, if any, in excess of E&P will constitute a return of capital under the Code, which will first reduce an investor's federal tax basis in Fund shares and then, to the extent such basis is exceeded, will generally give rise to capital gains. Shareholders who have chosen automatic reinvestment of their distributions will have a federal tax basis in each share received pursuant to such a reinvestment equal to the amount of cash they would have received had they elected to receive the distribution in cash, divided by the number of shares received in the reinvestment. The amount of the Funds net realized capital gains, if any, in any given year will vary depending upon the Adviser's current investment strategy and whether the Adviser believes it to be in the best interest of the Fund to dispose of portfolio securities and/or engage in option, futures or forward transactions that will generate capital gains or to enter into options or futures transactions. At the time of an investor's purchase of Fund shares, a portion of the purchase price is often attributable to realized or unrealized appreciation in the Fund's portfolio. Consequently, subsequent distributions on these shares from such appreciation may be taxable to such investor even if the net asset value of the investor's shares is, as a result of the distributions, reduced below the investor's cost for such shares, and the distributions in reality represent a return of a portion of the purchase price. Upon a redemption or other disposition of shares of the Fund (including by exercise of the exchange privilege) in a transaction that is treated as a sale for tax purposes, a shareholder will ordinarily realize a taxable gain or loss depending upon the amount of the proceeds and the investor's basis in his shares. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholder's hands. A sales charge paid in purchasing shares of the Fund cannot be taken into account for purposes of determining gain or loss on the redemption or exchange of such shares within ninety (90) days after their purchase to the extent Class A shares of the Fund or another John Hancock fund are subsequently acquired without payment of a sales charge pursuant to the reinvestment or exchange privilege. This disregarded charge will result in an increase in the shareholder's tax basis in the shares subsequently acquired. Also, any loss realized on a redemption or exchange may be disallowed to the extent the shares disposed of are replaced with other shares of the Fund within a period of sixty- one (61) days beginning thirty (30) days before and ending thirty (30) days after the shares are disposed of, such as pursuant to automatic dividend reinvestments. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized upon the redemption of shares with a tax holding period of six months or less will be treated as a long-term capital loss to the extent of any amounts treated as distributions of long-term capital gain with respect to such shares. Shareholders should consult their own tax advisers regarding their particular circumstances to determine whether a disposition of Fund shares is properly treated as a sale for tax purposes, as is assumed in the foregoing discussion. 38 Although its present intention is to distribute, at least annually, all net capital gain, if any, the Fund reserves the right to retain and reinvest all or any portion of the excess, as computed for Federal income tax purposes, of net long-term capital gain over net short-term capital loss in any year. The Fund will not in any event distribute net capital gain realized in any year to the extent that a capital loss is carried forward from prior years against such gain. To the extent such excess was retained and not exhausted by the carryforward of prior years' capital losses, it would be subject to Federal income tax in the hands of the Fund. Upon proper designation of this amount by the Fund, each shareholder would be treated for Federal income tax purposes as if the Fund had distributed to him on the last day of its taxable year his pro rata share of such excess, and he had paid his pro rata share of the taxes paid by the Fund and reinvested the remainder in the Fund. Accordingly, each shareholder would (a) include his pro rata share of such excess as capital gain in his return for his taxable year in which the last day of the Fund's taxable year falls, (b) be entitled either to a tax credit on his return for, or to a refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his shares in the Fund by the difference between his pro rata share of this excess and his pro rata share of these taxes. For Federal income tax purposes, the Fund is permitted to carry forward a net capital loss in any year to offset net capital gains, if any, during the eight years following the year of the loss. To the extent subsequent net capital gains are offset by such losses, they would not result in Federal income tax liability to the Fund and, as noted above, would not be distributed to shareholders. The Fund has $55,393,254 of capital loss carryforwards available, to the extent provided by regulations, to offset future net realized capital gains. These carryforwards expire at various times and amounts from 2002 through 2009. Dividends and capital gain distributions from the Fund will not qualify for the dividends-received deduction for corporations. Different tax treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement distributions and certain prohibited transactions, is accorded to accounts maintained as qualified retirement plans. Shareholders should consult their tax advisers for more information. The Fund may be subject to withholding and other taxes imposed by foreign countries with respect to the Fund's investments in certain foreign securities, if any. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes in some cases. Because more than 50% of the Fund's assets at the close of any taxable year will generally not consist of stocks or securities of foreign corporations, the Fund will generally be unable to pass through such taxes to its shareholders, who will therefore generally not be entitled to any foreign tax credit or deduction with respect to their investment in the Fund. The Fund will deduct such taxes in determining the amount it has available for distribution to shareholders. The Fund is required to accrue income on any debt securities that have more than a de minimus amount of original issue discount (or debt securities acquired at a market discount, if the Fund elects to include market discount in income currently) prior to the receipt of the corresponding cash payments. The mark to market rules applicable to certain options and futures contracts may also require the Fund to recognize gain within a concurrent receipt of cash. However, the Fund must distribute to shareholders for each taxable year substantially all of its net income and net capital gains, including such income or gain, to qualify as a regulated investment company and avoid liability for any federal income or excise tax. Therefore, the Fund may have to dispose of its portfolio securities under disadvantageous circumstances to generate cash, or borrow cash, to satisfy these distribution requirements. 39 A state income (and possibly local income and/or intangible property) tax exemption is generally available to the extent the Fund's distributions are derived from interest on (or, in the case of intangibles property taxes, the value of its assets is attributable to) certain U.S. Government obligations, provided in some states that certain thresholds for holdings of such obligations and/or reporting requirements are satisfied. The Fund will not seek to satisfy any threshold or reporting requirements that may apply in particular taxing jurisdictions, although the Fund may in its sole discretion provide relevant information to shareholders. The Fund will be required to report to the Internal Revenue Service (the "IRS") all taxable distributions to shareholders, as well as gross proceeds from the redemption or exchange of Fund shares, except in the case of certain exempt recipients, i.e., corporations and certain other investors distributions to which are exempt from the information reporting provisions of the Code. Under the backup withholding provisions of Code Section 3406 and applicable Treasury regulations, all such reportable distributions and proceeds may be subject to backup withholding of federal income tax in the case of non-exempt shareholders who fail to furnish the Fund with their correct taxpayer identification number and certain certifications required by the IRS or if the IRS or a broker notifies the Fund that the number furnished by the shareholder is incorrect or that the shareholder is subject to backup withholding as a result of failure to report interest or dividend income. The Fund may refuse to accept an application that does not contain any required taxpayer identification number or certification that the number provided is correct. If the backup withholding provisions are applicable, any such distributions and proceeds, whether taken in cash or reinvested in shares, will be reduced by the amounts required to be withheld. Any amounts withheld may be credited against a shareholder's U.S. federal income tax liability. Investors should consult their tax advisers about the applicability of the backup withholding provisions. The Fund may be required to account for its transactions in forward rolls or swaps, caps, floors and collars in a manner that, under certain circumstances, may limit the extent of its participation in such transactions. Additionally, the Fund may be required to recognize gain, but not loss, if a swap or other transaction is treated as a constructive sale of an appreciated financial position in the Fund's portfolio. The Fund may have to sell portfolio securities under disadvantageous circumstances to generate cash, or borrow cash, to satisfy these distribution requirements. The Fund may invest in debt obligations that are in the lower rating categories or are unrated, including debt obligations of issuers not currently paying interest as well as issuers who are in default. Investments in debt obligations that are at risk of or in default present special tax issues for the Fund. Tax rules are not entirely clear about issues such as when the Fund may cease to accrue interest, original issue discount, or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income, and whether exchanges of debt obligations in a workout context are taxable. These and other issues will be addressed by the Fund, in the event it invests in such securities, in order to reduce the risk of distributing insufficient income to preserve its status as a regulated investment company and seek to avoid becoming subject to Federal income or excise tax. Certain options and futures transactions undertaken by the Fund may cause the Fund to recognize gains or losses from marking to market even though its positions have not been sold or terminated and affect the character as long-term or short-term and timing of some capital gains and losses realized by the Fund. Also, some of the Fund's losses on its transactions involving options and futures contracts and/or offsetting or successor portfolio positions may be deferred rather than being taken into account currently in calculating the Fund's taxable income or gain. Certain of such transactions may also cause the Fund to dispose of investments sooner than would otherwise have occurred. These 40 transactions may thereafter affect the amount, timing and character of the Fund's distributions to shareholders. Some of the applicable tax rules may be modified if the Fund is eligible and chooses to make one or more of certain tax elections that may be available. The Fund will take into account the special tax rules (including consideration of available elections) applicable to options and futures transactions in order to seek to minimize any potential adverse tax consequences. The foregoing discussion relates solely to U.S. Federal income tax law as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic corporations, partnerships, trusts or estates) subject to tax under such law. The discussion does not address special tax rules applicable to certain types of investors, such as tax-exempt entities, insurance companies and financial institutions. Dividends, capital gain distributions and ownership of or gains realized on the redemption (including an exchange) of shares of the Fund may also be subject to state and local taxes. Shareholders should consult their own tax advisers as to the Federal, state or local tax consequences of ownership of shares of, and receipt of distributions from, the Fund in their particular circumstances. Non-U.S. investors not engaged in a U.S. trade or business with which their Fund investment in the Fund is effectively connected will be subject to U.S. Federal income tax treatment that is different from that described above. These investors may be subject to nonresident alien withholding tax at the rate of 30% (or a lower rate under an applicable tax treaty), on amounts treated as ordinary dividends from the Fund and, unless an effective IRS Form W-8, W-8BEN or other authorized withholding certificate is on file and to backup withholding on certain other payments from the Fund. Non-U.S. investors should consult their tax advisors regarding such treatment and the application of foreign taxes to an investment in the Fund. The Fund is not subject to Massachusetts corporate excise or franchise taxes. The Fund anticipates that, provided that the Fund qualifies as a regulated investment company under the Code, it will also not be required to pay any Massachusetts income tax. CALCULATION OF PERFORMANCE For the 30-day period ending May 31, 2001, the yield on Class A, Class B and Class C shares of the Fund was 7.23%, 6.87% and 6.79%, respectively. The average annual total return of the Class A shares of the Fund for the 1 year, 5 year and 10 year periods ended May 31, 2001 was 7.30%, 6.13% and 7.32%, respectively. The average total return of Class B shares of the Fund for the 1 year and 5 years and since inception on November 23, 1993 was 6.64%, 6.07% and 5.81%, respectively. The average total return of Class C shares of the Fund for the 1 year period and since inception on October 1, 1998 was 9.50% and 3.15%, respectively The Fund may advertise yield, where appropriate. The Fund's yield is computed by dividing net investment income per share determined for a 30-day period by the maximum offering price per share (which includes the full sales charge, where applicable) on the last day of the period, according to the following standard formula: 6 Yield = 2 ( [ ( a - b ) + 1 ] - 1 ) ------- cd 41 Where: a = dividends and interest earned during the period. b = net expenses accrued during the period. c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends. d = the maximum offering price per share on the last day of the period (NAV where applicable). Total return is computed by finding the average annual compounded rate of return over the 1 year, 5 year and 10 year periods that would equate the initial amount invested to the ending redeemable value according to the following formula: n _____ T = \ /ERV/P - 1 Where: P = a hypothetical initial investment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value of hypothetical $1,000 investment made at the beginning of the 1 year, 5 year and 10 year periods. Because each class has its own sales charge and fee structure, the classes have different performance results. In the case of each class, this calculation assumes the maximum sales charge is included in the initial investment or the CDSC applied at the end of the period, respectively. This calculation assumes that all dividends and distributions are reinvested at net asset value on the reinvestment dates during the period. The "distribution rate" is determined by annualizing the result of dividing the declared dividends of the Fund during the period stated by the maximum offering price or net asset value at the end of the period. Excluding the Fund's sales charge from the distribution rate produces a higher rate. In addition to average annual total returns, the Fund may quote unaveraged or cumulative total returns reflecting the simple change in value of an investment over a stated period. Cumulative total returns may be quoted as a percentage or as a dollar amount, and may be calculated for a single investment, a series of investments, and/or a series of redemptions, over any time period. Total returns may be quoted with or without taking the Fund's sales charge on Class A shares or the CDSC on Class B or Class C shares into account. Excluding the Fund's sales charge on Class A shares and the CDSC on Class B or Class C shares from a total return calculation produces a higher total return figure. From time to time, in reports and promotional literature, the Fund's yield and total return will be compared to indices of mutual funds and bank deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed Income Fund Performance Analysis," a monthly publication which tracks net assets, total return, and yield on fixed income mutual funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used for comparison purposes, as well as the Russell and Wilshire Indices. Comparisons may also be made to bank certificates of deposit ("CD's") which differ from mutual funds, such as the Fund, in several ways. The interest rate established by the sponsoring bank is fixed for the term of a CD. There are penalties for early withdrawal from CDs, and the principal on a CD is insured. 42 Performance rankings and ratings reported periodically in and excerpts from, national financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. may also be utilized. The Fund's promotional and sales literature may make reference to the Fund's "beta." Beta reflects the market-related risk of the Fund by showing how responsive the Fund is to the market. The performance of the Fund is not fixed or guaranteed. Performance quotations should not be considered to be representations of performance of the Fund for any period in the future. The performance of the Fund is a function of many factors including its earnings, expenses and number of outstanding shares. Fluctuating market conditions; purchases, sales and maturities of portfolio securities; sales and redemptions of shares of beneficial interest; and changes in operating expenses are all examples of items that can increase or decrease the Fund's performance. BROKERAGE ALLOCATION Decisions concerning the purchase and sale of portfolio securities and the allocation of brokerage commissions are made by the Adviser pursuant to recommendations made by its investment committee of the Adviser, which consists of officers and directors of the Adviser and affiliates, and Trustees who are interested persons of the Fund. Orders for purchases and sales of securities are placed in a manner which, in the opinion of the Adviser, will offer the best price and market for the execution of each such transaction. Purchases from underwriters of portfolio securities may include a commission or commissions paid by the issuer and transactions with dealers serving as market makers reflect a "spread." Debt securities are generally traded on a net basis through dealers acting for their own account as principals and not as brokers; no brokerage commissions are payable on such transactions. In the U.S. Government securities market, securities are generally traded on a "net" basis with dealers acting as principal for their own account without a stated commission, although the price of the security usually includes a profit to the dealer. On occasion, certain money market instruments and agency securities may be purchased directly from the issuer, in which case no commissions or premiums are paid. In other countries, both debt and equity securities are traded on exchanges at fixed commission rates. Commissions on foreign transactions are generally higher than the negotiated commission rates available in the U.S. There is generally less government supervision and regulation of foreign stock exchanges and broker-dealers than in the U.S. The Fund's primary policy is to execute all purchases and sales of portfolio instruments at the most favorable prices consistent with best execution, considering all of the costs of the transaction including brokerage commissions. This policy governs the selection of brokers and dealers and the market in which a transaction is executed. Consistent with the foregoing primary policy, the Conduct Rules of the National Association of Securities Dealers, Inc. and other policies as the Trustees may determine, the Adviser may consider sales of shares of the Fund as a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. To the extent consistent with the foregoing, the Fund will be governed in the selection of brokers and dealers, and the negotiation of brokerage commission rates and dealer spreads, by the reliability and quality of the services, including primarily the availability and value of research information and to a lesser extent statistical assistance furnished to the Adviser of the Fund, and their value and expected contribution to the performance of the Fund. It is not possible to place a dollar value on information and services to be received from brokers and dealers, since it is only supplementary to the research efforts of the Adviser. The receipt of research information is not expected to reduce significantly the expenses of the Adviser. The research information and 43 statistical assistance furnished by brokers and dealers may benefit the Life Company or other advisory clients of the Adviser, and, conversely, brokerage commissions and spreads paid by other advisory clients of the Adviser may result in research information and statistical assistance beneficial to the Fund. The Fund will make no commitment to allocate portfolio transactions upon any prescribed basis. While the Adviser's officers will be primarily responsible for the allocation of the Fund's brokerage business, the policies in this regard must be consistent with the foregoing and will at all times be subject to review by the Trustees. For the fiscal years ended May 31, 1999, 2000 and 2001, negotiated brokerage commissions were $23,247, $24,185 and $1,232, respectively. As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund may pay to a broker which provides brokerage and research services to the Fund an amount of disclosed commission in excess of the commission which another broker would have charged for effecting that transaction. This practice is subject to a good faith determination by the Trustees that such price is reasonable in light of the services provided and to such policies as the Trustees may adopt from time to time. During the fiscal year end May 31, 2001 the Fund did not pay commissions to compensate any brokers for research services such as industry, economic and company reviews and evaluations of securities. The Adviser's indirect parent, the Life Company, is the indirect sole shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999, John Hancock Distributors, Inc.) "Signator" or "Affiliated Broker"). Pursuant to procedures determined by the Trustees and consistent with the above policy of obtaining best net results, the Fund may execute portfolio transactions with or through Affiliated Brokers. For the fiscal years ended May 31, 1999, 2000 and 2001, the Fund did not execute any portfolio transactions with Affiliated Brokers. Signator may act as broker for the Fund on exchange transactions, subject, however, to the general policy of the Fund set forth above and the procedures adopted by the Trustees pursuant to the Investment Company Act. Commissions paid to an Affiliated Broker must be at least as favorable as those which the Trustees believe to be contemporaneously charged by other brokers in connection with comparable transactions involving similar securities being purchased or sold. A transaction would not be placed with an Affiliated Broker if the Fund would have to pay a commission rate less favorable than the Affiliated Broker's contemporaneous charges for comparable transactions for its other most favored, but unaffiliated, customers except for accounts for which the Affiliated Broker acts as a clearing broker for another brokerage firm, and any customers of the Affiliated Broker not comparable to the Fund as determined by a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser, which is affiliated with the Affiliated Brokers, has, as an investment adviser to the Fund, the obligation to provide investment management services, which includes elements of research and related investment skills, such research and related skills will not be used by the Affiliated Brokers as a basis for negotiating commissions at a rate higher than that determined in accordance with the above criteria. Other investment advisory clients advised by the Adviser may also invest in the same securities as the Fund. When these clients buy or sell the same securities at substantially the same time, the Adviser may average the transactions as to price and allocate the amount of available investments in a manner which the Adviser believes to be equitable to each client, including the Fund. Because of this, client accounts in a particular style may sometimes not sell or acquire securities as quickly or at the same prices as they might if each were managed and traded individually. 44 For purchases of equity securities, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. For high demand issues (for example, initial public offerings), shares will be allocated pro rata by account size as well as on the basis of account objective, account size ( a small account's allocation may be increased to provide it with a meaningful position), and the account's other holdings. In addition, an account's allocation may be increased if that account's portfolio manager was responsible for generating the investment idea or the portfolio manager intends to buy more shares in the secondary market. For fixed income accounts, generally securities will be allocated when appropriate among accounts based on account size, except if the accounts have different objectives or if an account is too small to get a meaningful allocation. For new issues, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. However, if a partial allocation is too small to be meaningful, it may be reallocated based on such factors as account objectives, strategies, duration benchmarks and credit and sector exposure. For example, value funds will likely not participate in initial public offerings as frequently as growth funds. In some instances, this investment procedure may adversely affect the price paid or received by the Fund or the size of the position obtainable for it. On the other hand, to the extent permitted by law, the Adviser may aggregate securities to be sold or purchased for the Fund with those to be sold or purchased for other clients managed by it in order to obtain best execution. TRANSFER AGENT SERVICES John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston, Massachusetts 02217-1000, a wholly owned indirect subsidiary of the Life Company, is the transfer and dividend paying agent for the Fund. The Fund pays Signature Services an annual fee of $21.00 for each Class A shareholder account, $23.50 for each Class B shareholder account and $22.50 for each Class C shareholder account. For Class A, B and C, the Fund also pays certain out-of-pocket expenses. These expenses are charged to the Fund by account, aggregated and allocated to each class on the basis of their relative net asset values. The Fund pays Signature Services an annual fee of 0.05% of average daily net assets attributable to Class I shares plus certain out-of-pocket expenses. CUSTODY OF PORTFOLIO Portfolio securities of the Fund are held pursuant to a custodian agreement between the Fund and The Bank of New York, One Wall Street, New York, New York 10286. Under the custodian agreement, The Bank of New York is performing custody, Foreign Custody Manager and fund accounting services. INDEPENDENT AUDITORS Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has been selected as the independent auditors of the Fund. The financial statements of the Fund, incorporated by reference in the Prospectus and this Statement of Additional Information have been audited by Ernst & Young LLP for the periods indicated in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 45 APPENDIX A- Description of Investment Risk MORE ABOUT RISK A fund's risk profile is largely defined by the fund's principal securities and investment practices. You may find the most concise description of the fund's risk profile in the prospectus. A fund is permitted to utilize -- within limits established by the trustees -- certain other securities and investment practices that have higher risks and opportunities associated with them. To the extent that the fund utilizes these securities or practices, its overall performance may be affected, either positively or negatively. On the following pages are brief definitions of certain associated risks with them, with examples of related securities and investment practices included in brackets. See the "Investment Objectives and Policies" and "Investment Restrictions" sections of this Statement of Additional Information for a description of this Fund's investment policies. The fund follows certain policies that may reduce these risks. As with any mutual fund, there is no guarantee that the fund will earn income or show a positive total return over any period of time -- days, months or years. TYPES OF INVESTMENT RISK Correlation risk The risk that changes in the value of a hedging instrument will not match those of the asset being hedged (hedging is the use of one investment to offset the effects of another investment). Incomplete correlation can result in unanticipated risks. (e.g., currency contracts, futures and related options, options on securities and indices, swaps, caps, floors and collars). Credit risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation. (e.g., non- investment-grade debt securities, borrowing; reverse repurchase agreements, covered mortgage dollar roll transactions, repurchase agreements, securities lending, brady bonds, foreign debt securities, in-kind, delayed and zero coupon debt securities, asset-backed securities, mortgage-backed securities, participation interest, options on securities, structured securities and swaps, caps floors and collars). Currency risk The risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign currency-denominated investments, and may widen any losses.(e.g., foreign debt securities, currency contracts, swaps, caps, floors and collars). Extension risk The risk that an unexpected rise in interest rates will extend the life of a mortgage-backed security beyond the expected prepayment time, typically reducing the security's value.(e.g. mortgage-backed securities and structured securities). Interest rate risk The risk of market losses attributable to changes in interest rates. With fixed-rate securities, a rise in interest rates typically causes a fall in values, while a fall in rates typically causes a rise in values. (e.g., non-investment-grade debt securities, covered mortgage dollar roll transactions, brady bonds, foreign debt securities, in-kind, delayed and zero coupon debt securities, asset-backed securities, mortgage-backed securities, participation interest, swaps, caps, floors and collars). Leverage risk Associated with securities or practices (such as borrowing) that multiply small index or market movements into large changes in value. (e.g. borrowing; reverse repurchase agreements, covered mortgage dollar roll transactions, when-issued securities and forward commitments, currency contracts, financial futures and options; securities and index options, structured securities, swaps, caps, floors and collars). A-1 o Hedged When a derivative (a security whose value is based on another security or index) is used as a hedge against an opposite position that the fund also holds, any loss generated by the derivative should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. o Speculative To the extent that a derivative is not used as a hedge, the fund is directly exposed to the risks of that derivative. Gains or losses from speculative positions in a derivative may be substantially greater than the derivative's original cost. Liquidity risk The risk that certain securities may be difficult or impossible to sell at the time and the price that the seller would like. The seller may have to lower the price, sell other securities instead, or forego an investment opportunity, any of which could have a negative effect on fund management or performance. (e.g. non-investment-grade debt securities, restricted and illiquid securities, mortgage-backed securities, participation interest, currency contracts, futures and related options; securities and index options, structured securities, swaps, caps, floors and collars). Management risk The risk that a strategy used by a fund's management may fail to produce the intended result. Common to all mutual funds. Market risk The risk that the market value of a security may move up and down, sometimes rapidly and unpredictably. Market risk may affect a single issuer, an industry, a sector of the bond market or the market as a whole. Common to all stocks and bonds and the mutual funds that invest in them. (e.g. covered mortgage dollar roll transactions, short-term trading, when-issued securities and forward commitments, brady bonds, foreign debt securities, in-kind, delayed and zero coupon debt securities, restricted and illiquid securities, rights and warrants, financial futures and options; and securities and index options, structured securities). Natural event risk The risk of losses attributable to natural disasters, crop failures and similar events. Opportunity risk The risk of missing out on an investment opportunity because the assets necessary to take advantage of it are tied up in less advantageous investments.(e.g. covered mortgage dollar roll transactions, when-issued securities and forward commitments, currency contracts, financial futures and options; securities and securities and index options). Political risk The risk of losses attributable to government or political actions, from changes in tax or trade statutes to governmental collapse and war. (e.g., brady bonds and foreign debt securities). Prepayment risk The risk that unanticipated prepayments may occur during periods of falling interest rates, reducing the value of mortgage-backed securities. (e.g., mortgage backed securities). Valuation risk The risk that a fund has valued certain of its securities at a higher price than it can sell them for. (e.g., non-investment-grade debt securities, participation interest, structured securities, swaps, caps, floors and collars). A-2 APPENDIX B- Description of Bond Ratings Moody's describes its lower ratings for corporate bonds as follows: Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterized bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Bonds which are rated Ca represented obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's describes its three highest ratings for commercial paper as follows: Issuers rated P-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. P-1 repayment capacity will normally be evidenced by the following characteristics: (1) leading market positions in well- established industries; (2) high rates of return on funds employed; (3) conservative capitalization structures with moderate reliance on debt and ample asset protections; (4) broad margins in earnings coverage of fixed financial charges and high internal cash generation; and (5) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated P-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated P-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. B-1 Standard & Poor's describes its lower ratings for corporate bonds as follows: BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB, B, CCC, CC, C, D Debt rated 'BB', 'B', 'CCC', 'CC', 'C' and 'D' is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. 'BB' indicates the lowest degree of speculation and 'C' the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. BB Debt rated 'BB' has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The 'BB' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied 'BBB-' rating. B Debt rated 'B' has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The 'B' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-' rating. CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The 'CCC' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied 'B' or 'B-' rating. CC The rating 'CC' is typically applied to debt subordinated to senior debt that is assigned an actual or implied 'CCC' rating. C The rating 'C' is typically applied to debt subordinated to senior debt which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. D The rating 'D' is typically applied when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments n an obligation are jeopardized. Standard & Poor's describes its three highest ratings for commercial paper as follows: A-1. This designation indicated that the degree of safety regarding timely payment is very strong. B-2 A-2. Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming as for issues designated A-1. A-3. Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. Issuers rated P-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated P-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. B-3 FINANCIAL STATEMENTS F-1 Supplements to the John Hancock Institutional Funds Prospectus Dated July 2, 2001 John Hancock Small Cap Equity Fund - ---------------------------------- On November 20, 2001, the Trustees of the John Hancock Small Cap Equity Fund voted to change the Fund's name to the John Hancock Small Cap Equity Fund Y, effective March 1, 2002. John Hancock Active Bond Fund - ----------------------------- John Hancock Medium Capitalization Growth Fund - ---------------------------------------------- John Hancock Small Cap Equity Fund Y - ------------------------------------ John Hancock International Equity Fund - -------------------------------------- On February 26, 2002, the Trustees of the John Hancock Institutional Series Trust (the "Trust") voted to recommend that shareholders of the Series of the Trust listed below (the "Acquired Funds") approve the following tax-free reorganizations: - -------------------------------------------------------------------------------- Acquired Funds Acquiring Funds - -------------------------------------------------------------------------------- Active Bond Fund Bond Fund - -------------------------------------------------------------------------------- Medium Capitalization Growth Fund Mid Cap Growth Fund - -------------------------------------------------------------------------------- Small Cap Equity Fund Y Small Cap Equity Fund - -------------------------------------------------------------------------------- International Equity Fund International Fund - -------------------------------------------------------------------------------- Under the terms of each reorganization, subject to shareholder approval at a shareholder meeting scheduled for May 29, 2002, each Acquired Fund would transfer all of its assets and liabilities to the corresponding Acquiring Fund in a tax-free exchange for Class I shares of equal value of the Acquiring Fund. Further information regarding each proposed reorganization will be contained in a proxy statement and prospectus scheduled to be mailed to shareholders on or about April 15, 2002. Effective March 15, 2002, each Acquired Fund will be closed to all new accounts. February 27, 2002 John Hancock Medium Capitalization Growth Fund - ---------------------------------------------- On page 8, the "Portfolio Managers" section for the John Hancock Medium Capitalization Growth Fund has been changed as follows: PORTFOLIO MANAGERS Paul J. Berlinguet ------------------ Vice president of adviser Joined fund team in 2001 Joined adviser in 2001 U.S. equity investment manager at Baring America Asset Management (1989-2001) Began business career in 1986 Robert J. Uek, CFA ------------------ Vice president of adviser Joined fund team in 2001 Joined adviser in 1997 Corporate finance manager at Ernst & Young (1994-1997) Began business career in 1990 Timothy N. Manning ------------------ Joined fund team in 2000 Joined adviser in 2000 Analyst at State Street Research (1999-2000) Equity research associate at State Street Research (1996-1999) Began business career in 1993 January 7, 2002 John Hancock Small Cap Equity Fund - ---------------------------------- On page 10, the "Portfolio Managers" section for the John Hancock Small Cap Equity Fund has been changed as follows: PORTFOLIO MANAGERS James S. Yu, CFA ---------------- Vice president of adviser Joined fund team in 2000 Joined adviser in 2000 Analyst at Merrill Lynch Asset Management (1998-2000) Analyst at Gabelli & Company (1995-1998) Began business career in 1991 Roger C. Hamilton ----------------- Vice president of adviser Joined fund team in 1999 Joined adviser in 1994 Began business career in 1980 December 10, 2001 John Hancock Institutional Funds Supplement to the Prospectus and Statement of Additional Information Dated July 2, 2001 John Hancock Small Capitalization Value Fund - -------------------------------------------- On September 25, 2001, the Trustees of the John Hancock Small Capitalization Value Fund voted to change the Fund's name to the John Hancock Small Cap Equity Fund, effective September 30, 2001. September 25, 2001 John Hancock Institutional Funds Prospectus July 2, 2001 - -------------------------------------------------------------------------------- Active Bond Fund Dividend Performers Fund Medium Capitalization Growth Fund Small Capitalization Value Fund Focused Small Cap Growth Fund (formerly Small Capitalization Growth Fund) International Equity Fund As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved these funds or determined whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. [LOGO](R) -------------------- JOHN HANCOCK FUNDS Contents - -------------------------------------------------------------------------------- A fund-by-fund summary Active Bond Fund 4 of goals, strategies, risks, performance and expenses. Dividend Performers Fund 6 Medium Capitalization Growth Fund 8 Small Capitalization Value Fund 10 Focused Small Cap Growth Fund 12 International Equity Fund 14 Policies and instructions for Your account opening, maintaining and closing an account in any Who can buy shares 16 institutional fund. Opening an account 16 Buying shares 17 Selling shares 18 Transaction policies 20 Dividends and account policies 20 Business structure 21 Further information on the Financial highlights 22 institutional funds. For more information back cover Overview - -------------------------------------------------------------------------------- FUND INFORMATION KEY Concise fund-by-fund descriptions begin on the next page. Each description provides the following information: [Clip Art] Goal and strategy The fund's particular investment goals and the strategies it intends to use in pursuing those goals. [Clip Art] Main risks The major risk factors associated with the fund. [Clip Art] Past performance The fund's total return, measured year-by-year and over time. [Clip Art] Your expenses The overall costs borne by an investor in the fund, including annual expenses. JOHN HANCOCK INSTITUTIONAL FUNDS These funds offer clearly defined investment strategies, each focusing on a particular market segment and following a disciplined investment process. Blended together or selected individually, these funds are designed to meet the needs of investors seeking risk-managed investment strategies from seasoned professional portfolio managers. RISKS OF MUTUAL FUNDS Mutual funds are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Because you could lose money by investing in these funds, be sure to read all risk disclosure carefully before investing. THE MANAGEMENT FIRM All John Hancock institutional funds are managed by John Hancock Advisers, Inc. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial Services, Inc. and manages more than $30 billion in assets. 3 Active Bond Fund GOAL AND STRATEGY [Clip Art] The fund seeks a high rate of total return consistent with prudent investment risk. To pursue this goal, the fund normally invests 80% of assets in a diversified portfolio of investment-grade debt securities. These include corporate bonds and debentures as well as U.S. government and agency securities. Most of these securities are investment-grade, although the fund may invest up to 20% of assets in junk bonds rated as low as CC/Ca and their unrated equivalents. There is no limit on the fund's average maturity. In managing the fund's portfolio, the managers concentrate on sector allocation, industry allocation and securities selection: deciding which types of bonds and industries to emphasize at a given time, and then which individual bonds to buy. When making sector and industry allocations, the managers try to anticipate shifts in the business cycle, using top-down analysis to determine which sectors and industries may benefit over the next 12 months. In choosing individual securities, the managers use bottom-up research to find securities that appear comparatively undervalued. The managers look at bonds of all different quality levels and maturities from many different issuers. These may include bonds of foreign governments and companies which are usually U.S. dollar-denominated. The fund uses a disciplined, risk-controlled approach to fixed income management. The fund may invest in mortgage-related securities and certain other derivatives (investments whose value is based on indexes, securities or currencies). The fund intends to keep its exposure to interest rate movements generally in line with that of the markets in which it invests. Under normal conditions, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal conditions, the fund may temporarily invest in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS James K. Ho, CFA - --------------------------------------- Executive vice president of adviser Joined team in 1995 Joined adviser in 1985 Began business career in 1977 Benjamin A. Matthews - --------------------------------------- Vice president of adviser Joined team in 1995 Joined adviser in 1995 Began business career in 1970 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment. Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 4.82% 10.38% 8.97% -0.41% 11.51% 2001 total return as of March 31: 2.91% Best quarter: Q4 '00, 4.24% Worst quarter: Q1 '96, -0.93% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year 11.51% 11.85% 5 year 6.96% 6.24% Life of fund - began 3/30/95 7.59% 7.76% Index: Lehman Brothers Government/Credit Bond Index, an unmanaged index of U.S. government, U.S. corporate and Yankee bonds. 4 MAIN RISKS [Clip Art] The major factors that influence this fund's performance are interest rates and credit risk. When interest rates rise, bond prices generally fall. An increase in the fund's average maturity will normally increase its sensitivity to changes in interest rates. The fund could lose money if the credit ratings of any bonds it owns are downgraded or the issuers default. In general, lower-rated bonds have higher credit risks. If certain sectors or investments do not perform as the fund expects, it could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Junk bonds and foreign securities may make the fund more sensitive to market or economic shifts in the U.S. and abroad. o If interest rate movements cause the fund's mortgage-related and callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o In a rising interest rate environment, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses. Any U.S. government guarantees on individual securities in the portfolio do not apply to these securities' market value or current yield, or to fund shares. The fund may trade securities actively, which could increase its transaction costs (thus lowering performance) and increase your taxable distributions. ================================================================================ YOUR EXPENSES [Clip Art] Operating expenses are paid from the fund's assets, and therefore are paid by shareholders indirectly. - -------------------------------------------------------------------------------- Annual operating expenses - -------------------------------------------------------------------------------- Management fee 0.50% Other expenses 1.56% Total fund operating expenses 2.06% Expense reimbursement (at least until 6/30/02) 1.46% Net annual operating expenses 0.60% The hypothetical example below shows what your expenses would be after the expense reimbursement (first year only) if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions, that the average annual return was 5% and that your shares were redeemed at the end of the time frames. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future. - -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10 - -------------------------------------------------------------------------------- $61 $504 $973 $2,273 FUND CODES - --------------------------------------- Ticker JHABX CUSIP 410132203 Newspaper ActiveBd JH fund number 421 5 Dividend Performers Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term growth of capital with income as a secondary objective. To pursue this goal, the fund normally invests at least 80% of assets in a diversified portfolio of U.S. stocks with market capitalizations within the range of the Standard & Poor's 500 Stock Index. On May 31, 2001, that range was $730 million to $482 billion. The managers normally invest at least 80% of assets in "dividend performers." These are companies that have typically increased their dividend payments over time, or which the managers believe demonstrate the potential for above- average stability of growth of earnings and dividends. In managing the portfolio, the managers use fundamental financial analysis to identify individual companies with high-quality income statements, substantial cash reserves and identifiable catalysts for growth, which may be new products or benefits from industry-wide growth. The managers generally visit companies to evaluate the strength and consistency of their management strategy. Finally, the managers look for stocks that are reasonably priced relative to their earnings and industry. Historically, companies that meet these criteria have tended to have large market capitalizations. The fund may not invest more than 5% of assets, at time of purchase, in any one security. The fund typically invests in U.S. companies but may invest in American Depositary Receipts. It may also make limited use of certain derivatives (investments whose value is based on indexes). Under normal conditions, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal conditions, the fund may temporarily invest in U.S. government securities with maturities of up to three years and more than 10% of assets in cash or cash equivalents. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS John F. Snyder, III - --------------------------------------- Executive vice president of adviser Joined team in 1995 Joined adviser in 1991 Began business career in 1971 Peter M. Schofield, CFA - --------------------------------------- Vice president of adviser Joined fund team in 1996 Joined adviser in 1996 Portfolio manager at Geewax, Terker & Co. (1984-1996) Began business career in 1984 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment. Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 18.56% 34.33% 17.95% 13.38% -0.62% 2001 total return as of March 31: -12.01% Best quarter: Q4 '98, 20.75% Worst quarter: Q3 '98, -11.46% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -0.62% -9.10% 5 year 16.18% 18.33% Life of fund - began 3/30/95 17.29% 20.27% Index: Standard &Poor's 500 Index, an unmanaged index of 500 stocks. 6 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to movements in the stock market. The fund's investment strategy will influence performance significantly. Large-capitalization stocks could fall out of favor, causing the fund to underperform funds that focus on small- or medium-capitalization stocks. Similarly, if individual securities do not perform as the management team expects, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses. o Foreign investments carry additional risks, including inadequate or inaccurate financial information and social or political instability. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. ================================================================================ YOUR EXPENSES [Clip Art] Operating expenses are paid from the fund's assets, and therefore are paid by shareholders indirectly. - -------------------------------------------------------------------------------- Annual operating expenses - -------------------------------------------------------------------------------- Management fee 0.60% Other expenses 0.51% Total fund operating expenses 1.11% Expense reimbursement (at least until 6/30/02) 0.41% Net annual operating expenses 0.70% The hypothetical example below shows what your expenses would be after the expense reimbursement (first year only) if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions, that the average annual return was 5% and that your shares were redeemed at the end of the time frames. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future. - -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10 - -------------------------------------------------------------------------------- $72 $312 $572 $1,315 FUND CODES - --------------------------------------- Ticker JHDPX CUSIP 410132104 Newspaper DivPerf JH fund number 442 7 Medium Capitalization Growth Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund normally invests at least 80% of assets in stocks of medium-capitalization companies -- companies in the capitalization range of the Russell Midcap Growth Index. On May 31, 2001, that range was $50 million to $21 billion. In managing the portfolio, the managers seek to identify promising sectors for investment. The managers consider broad economic trends, demographic factors, technological changes, consolidation trends and legislative initiatives. Quantitative screens identify companies with at least 15% annual earnings growth, expanding profit margins and projected price/earnings ratios below their earnings growth rate. The managers conduct fundamental analysis to identify companies with a dominant market position and a strong management team. Before investing, the managers look for a specific catalyst for growth, such as a new product or business reorganization. The management team generally maintains personal contact with the senior management of the companies in which the fund invests. The fund may invest up to 10% of assets in foreign securities. It may also use certain derivatives (investments whose value is based on indexes or currencies). The fund may not invest more than 5% of assets, at time of purchase, in any one security. Under normal conditions, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal conditions, the fund may temporarily invest in U.S. government securities with maturities of up to three years and more than 10% of assets in cash or cash equivalents. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs (thus lowering performance) and increase your taxable distributions. ================================================================================ PORTFOLIO MANAGERS Team responsible for day-to-day investment management PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment. Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 31.55% 3.61% 7.35% 60.19% -13.11% 2001 total return as of March 31: -29.64% Best quarter: Q4 '99, 45.24% Worst quarter: Q3 '98, -20.97% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -13.11% -11.75% 5 year 15.29% 17.77% Life of fund - began 4/11/95 17.03% 19.14%* Index: Russell Midcap Growth Index, an unmanaged index containing those stocks from the Russell Midcap Index with a greater-than-average growth orientation. * Index figure as of 3/31/95. 8 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to movements in the stock market. Stocks of medium-capitalization companies may be more volatile than those of larger companies. Similarly, medium-capitalization stocks are generally traded in lower volumes than large-capitalization stocks. The fund's investment strategy will influence performance significantly. Medium-capitalization stocks could fall out of favor, causing the fund to underperform funds that focus on other types of stocks. Also, growth stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on value stocks. Similarly, if industries or individual securities do not perform as the management team expects, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. ================================================================================ YOUR EXPENSES [Clip Art] Operating expenses are paid from the fund's assets, and therefore are paid by shareholders indirectly. - -------------------------------------------------------------------------------- Annual operating expenses - -------------------------------------------------------------------------------- Management fee 0.80% Other expenses 0.37% Total fund operating expenses 1.17% Expense reimbursement (at least until 6/30/02) 0.27% Net annual operating expenses 0.90% The hypothetical example below shows what your expenses would be after the expense reimbursement (first year only) if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions, that the average annual return was 5% and that your shares were redeemed at the end of the time frames. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future. - -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10 - -------------------------------------------------------------------------------- $92 $345 $618 $1,396 FUND CODES - --------------------------------------- Ticker HMSGX CUSIP 410132401 Newspaper MdCapGr JH fund number 439 9 Small Capitalization Value Fund GOAL AND STRATEGY [Clip Art] The fund seeks capital appreciation. To pursue this goal, the fund normally invests at least 80% of assets in stocks of small-capitalization companies -- companies in the capitalization range of the Russell 2000 Index. On May 31, 2001, that range was $10 million to $4.9 billion. In managing the portfolio, the managers emphasize a value-oriented approach to individual stock selection. With the aid of proprietary financial models, the management team looks for companies that are selling at what appear to be substantial discounts to their long-term value. These companies often have identifiable catalysts for growth, such as new products, business reorganizations or mergers. The managers use fundamental financial analysis of individual companies to identify those with substantial cash flows, reliable revenue streams and strong competitive positions. The strength of companies' management teams is also a key selection factor. The fund diversifies across industry sectors. The fund may not invest more than 5% of assets, at time of purchase, in any one security. The fund invests primarily in stocks of U.S. companies, but may invest up to 15% of assets in a basket of foreign securities and bonds rated as low as CC/Ca and their unrated equivalents. (Bonds rated below BBB/Baa are considered junk bonds.) The fund may make limited use of certain derivatives (investments whose value is based on indexes or currencies). Under normal conditions, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal conditions, the fund may temporarily invest in investment- grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs (thus lowering performance) and increase your taxable distributions. ================================================================================ PORTFOLIO MANAGERS Timothy E. Quinlisk, CFA - --------------------------------------- Senior vice president of adviser Joined fund team in 1998 Joined adviser in 1998 Analyst at Hagler, Mastrouita & Hewitt (1997-1998) Analyst at State Street Global Advisors (1995-1997) Began business career in 1985 James S. Yu, CFA - --------------------------------------- Vice president of adviser Joined fund team in 2000 Joined adviser in 2000 Analyst at Merrill Lynch Asset Management (1998-2000) Analyst at Gabelli & Company (1995-1998) Began business career in 1990 R. Scott Mayo, CFA - --------------------------------------- Second vice president of adviser Joined fund team in 2000 Joined adviser in 1998 Analyst at Morgan Stanley (1998) Analyst at Grantham, Mayo & Van Otterloo (1993-1996) Began business career in 1993 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indices for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment. Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 15.60% 29.12% 0.29% 101.91% -4.30% 2001 total return as of March 31: -2.92% Best quarter: Q4 '99, 46.48% Worst quarter: Q3 '98, -22.63% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -4.30% -3.02% 22.83% 5 year 23.67% 10.31% 12.60% Life of fund - began 4/19/95 21.74% 12.80% 14.48% Index 1: Russell 2000 Index, an unmanaged index of 2,000 U.S. small-capitalization stocks. Index 2: Russell 2000 Value Index, an unmanaged index containing those stocks from the Russell 2000 Index with a value orientation. 10 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to movements in the stock market. Because the fund concentrates on small-capitalization companies, its performance may be more volatile than that of a fund that invests primarily in larger companies. Stocks of smaller companies are more risky than those of larger companies. Many of these companies are young and have a limited track record. Because their businesses frequently rely on narrow product lines and niche markets, they can suffer severely from isolated business setbacks. The fund's investment strategy will influence performance significantly. Small-capitalization stocks could fall out of favor, causing the fund to underperform funds that focus on other types of stocks. Also, value stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on growth stocks. Similarly, if industries or individual securities do not perform as the management team expects, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o In a down market, derivatives and other higher-risk securities could become harder to value or to sell at a fair price; this risk could also affect small-capitalization stocks, especially those with low trading volumes. o Certain derivatives could produce disproportionate losses. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o The credit rating of any bonds held by the fund could be downgraded, or the issuer could default. Bond prices generally fall when interest rates rise. Junk bond prices can fall on bad news about the economy, an industry or a company. ================================================================================ YOUR EXPENSES [Clip Art] Operating expenses are paid from the fund's assets, and therefore are paid by shareholders indirectly. - -------------------------------------------------------------------------------- Annual operating expenses - -------------------------------------------------------------------------------- Management fee 0.70% Other expenses 0.35% Total fund operating expenses 1.05% Expense reimbursement (at least until 6/30/02) 0.25% Net annual operating expenses 0.80% The hypothetical example below shows what your expenses would be after the expense reimbursement (first year only) if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions, that the average annual return was 5% and that your shares were redeemed at the end of the time frames. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future. - -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10 - -------------------------------------------------------------------------------- $82 $309 $554 $1,256 FUND CODES - --------------------------------------- Ticker JHFVX CUSIP 410132500 Newspaper SmCpVal JHfund number 437 11 Focused Small Cap Growth Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the fund normally invests at least 80% of assets in stocks of small-capitalization companies -- companies in the capitalization range of the Russell 2000 Growth Index. On May 31, 2001, that range was $10 million to $4.9 billion. The fund utilizes a focused investment strategy and will typically concentrate its investments in 50 to 70 companies. In managing the portfolio, the managers look for companies in the emerging growth phase of development that are not yet widely recognized. The fund also may invest in established companies that, because of new management, products or opportunities, offer the possibility of accelerating earnings. In choosing individual securities, the managers use fundamental financial analysis to identify rapidly growing companies. The managers favor companies that dominate their market niches or are poised to become market leaders. They look for strong senior management teams and coherent business strategies. They generally maintain personal contact with the senior management of the companies the fund invests in. The fund may invest in preferred stock and other types of equities, and may invest up to 10% of assets in foreign securities. The fund may also make limited use of certain derivatives (investments whose value is based on indexes or currencies). The fund may not invest more than 5% of assets, at time of purchase, in any one security. Under normal conditions, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal conditions, the fund may temporarily invest in U.S. government securities with maturities of up to three years and more than 10% of assets in cash or cash equivalents. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs (thus lowering performance) and increase your taxable distributions. ================================================================================ PORTFOLIO MANAGERS Bernice S. Behar, CFA - --------------------------------------- Senior vice president of adviser Joined team in 1996 Joined adviser in 1991 Began business career in 1986 Anurag Pandit, CFA - --------------------------------------- Vice president of adviser Joined fund team in 1996 Joined adviser in 1996 Equity analyst at Loomis Sayles (1992-1996) Began business career in 1984 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment. Past performance does not indicate future results. - -------------------------------------------------------------------------------- Class I year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 14.86% 16.54% 77.12% -23.10% 2001 total return as of March 31: -28.76% Best quarter: Q4 '99, 47.34% Worst quarter: Q3 '98, -21.25% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Class I Index 1 year -23.10% -22.43% Life of Class I - began 5/2/96 16.86% 4.58% Index: Russell 2000 Growth Index, an unmanaged index containing those stocks from the Russell 2000 Index with a greater-than-average growth orientation. 12 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to movements in the stock market. Because the fund concentrates on smaller companies, its performance may be more volatile than that of a fund that invests primarily in larger companies. In addition, the fund focuses on a limited number of companies, which could cause greater fluctuations in share price than would occur in a more diversified fund. Stocks of smaller companies are more risky than those of larger companies. Many of these companies are young and have a limited track record. Because their businesses frequently rely on narrow product lines and niche markets, they can suffer severely from isolated business setbacks. The fund's investment strategy will influence performance significantly. Small-company stocks could fall out of favor, causing the fund to underperform funds that focus on other types of stocks. Also, growth stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on value stocks. To the extent the fund invests in a given industry, its performance will be hurt if that industry performs poorly. Similarly, if the individual securities do not perform as the management team expects, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o In a down market, derivatives and other higher-risk securities could become harder to value or to sell at a fair price; this risk could also affect small-capitalization stocks, especially those with low trading volumes. o Certain derivatives could produce disproportionate losses. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. ================================================================================ YOUR EXPENSES [Clip Art] Operating expenses are paid from the fund's assets, and therefore are paid by shareholders indirectly. - -------------------------------------------------------------------------------- Annual operating expenses - -------------------------------------------------------------------------------- Management fee 0.80% Other expenses 1.28% Total fund operating expenses 2.08% Expense reimbursement (at least until 6/30/02) 1.14% Net annual operating expenses 0.94% The hypothetical example below shows what your expenses would be after the expense reimbursement (first year only) if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions, that the average annual return was 5% and that your shares were redeemed at the end of the time frames. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future. - -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10 - -------------------------------------------------------------------------------- $95 $541 $1,012 $2,317 FUND CODES Class I - --------------------------------------- Ticker JCGYX CUSIP 410132856 Newspaper -- JHfund number 418 13 International Equity Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the fund normally invests at least 80% of assets in stocks of foreign companies. The fund may invest up to 30% of assets in emerging markets as classified by Morgan Stanley Capital International (MSCI). The fund does not maintain a fixed allocation of assets, either with respect to securities type or geography. In managing the portfolio, the managers focus on a "bottom-up" analysis on the financial conditions and competitiveness of individual foreign companies. In analyzing specific companies for possible investment, the managers ordinarily look for several of the following characteristics that will enable the companies to compete successfully in their respective markets: o above-average per share earnings growth o high return on invested capital o a healthy balance sheet o sound financial and accounting policies and overall financial strength o strong competitive advantages o effective research, product development and marketing The managers consider whether to sell a particular security when any of those factors materially changes. The managers allocate the fund's assets among securities of countries that are expected to provide the best opportunities for meeting the fund's investment objective. Although the fund invests primarily in common stocks, it may invest in virtually any type of equity security. To manage risk, the fund does not invest more than 5% of assets, at time of purchase, in any one security. The fund may use certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal conditions, the fund may temporarily invest more than 20% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs (thus lowering performance) and increase your taxable distributions. ================================================================================ SUBADVISER Nicholas-Applegate Capital Management - --------------------------------------- U.S.-based team responsible for day-to-day investment management since December 2000 Supervised by the adviser Founded in 1984 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment. Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 8.49% -7.34% 18.77% 34.52% -25.60% 2001 total return as of March 31: -18.99% Best quarter: Q4 '99, 26.62% Worst quarter: Q3 '98, -17.16% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -25.60% -16.34% 5 year 3.62% 4.89% Life of fund - began 3/30/95 4.29% 5.86% Index: MSCI All Country World Ex-U.S. Free Index, an unmanaged index of freely traded stocks of foreign companies. 14 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to movements in the stock market. Foreign investments are more risky than domestic investments. Investments in foreign securities may be affected by fluctuations in currency exchange rates, incomplete or inaccurate financial information on companies, social instability and political actions ranging from tax code changes to governmental collapse. These risks are more significant in emerging markets. The fund's investment strategy will influence performance significantly. If the fund invests in countries or regions that experience economic downturns, performance could suffer. Similarly, if the individual securities or industries do not perform as the management team expects, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Emerging market securities, derivatives and other higher-risk securities can be hard to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses. ================================================================================ YOUR EXPENSES [Clip Art] Operating expenses are paid from the fund's assets, and therefore are paid by shareholders indirectly. - -------------------------------------------------------------------------------- Annual operating expenses - -------------------------------------------------------------------------------- Management fee 0.90% Other expenses 2.59% Total fund operating expenses 3.49% Expense reimbursement (at least until 6/30/02) 2.49% Net annual operating expenses 1.00% The hypothetical example below shows what your expenses would be after the expense reimbursement (first year only) if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions, that the average annual return was 5% and that your shares were redeemed at the end of the time frames. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future. - -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10 - -------------------------------------------------------------------------------- $102 $839 $1,598 $3,599 FUND CODES - --------------------------------------- Ticker JHIEX CUSIP 410132609 Newspaper IntlEq JHfund number 448 15 Your account - -------------------------------------------------------------------------------- WHO CAN BUY SHARES John Hancock Institutional Funds are offered without any sales charge to certain types of investors, as noted below: o Retirement and other benefit plans and their participants o Rollover assets for participants whose plans are invested in the fund o Certain trusts, endowment funds and foundations o Any state, county or city, or its instrumentality, department, authority or agency o Insurance companies, trust companies and bank trust departments buying shares for their own account o Investment companies not affiliated with the adviser o Clients of service agents and broker-dealers who have entered into an agreement with John Hancock Funds, Inc. o Investors who participate in fee-based, wrap and other investment platform programs o Any entity that is considered a corporation for tax purposes - -------------------------------------------------------------------------------- OPENING AN ACCOUNT 1 Read this prospectus carefully. 2 Determine if you are eligible, by referring to "Who can buy shares" on the left. 3 Determine how much you want to invest. The minimum initial investment is $10,000. There is no minimum investment for retirement plans with at least 350 eligible employees. 4 Complete the appropriate parts of the account application, carefully following the instructions. By applying for privileges now, you can avoid the delay and inconvenience of having to file an additional application if you want to add privileges later. You must submit additional documentation when opening trust, corporate or power of attorney accounts. 5 Make your initial investment using the table on the next page. 6 If you have questions or need more information, please contact your financial representative or call Signature Services at 1-888-972-8696. John Hancock Funds may pay significant compensation out of its own resources to your financial representative. Your broker or agent may charge you a fee to effect transactions in fund shares. 16 YOUR ACCOUNT - -------------------------------------------------------------------------------- Buying shares - -------------------------------------------------------------------------------- Opening an account Adding to an account By check [Clip Art] o Make out a check for the o Make out a check for the investment amount, payable to investment amount payable to "John Hancock Signature "John Hancock Signature Services, Inc." Services, Inc." o Deliver the check and your o Fill out the detachable completed application to your investment slip from an account financial representative, or statement. If no slip is mail them to Signature available, include a note Services (address below). specifying the fund name(s), your share class, your account number and the name(s) in which the account is registered. o Deliver the check and investment slip or note to your financial representative, or mail them to Signature Services (address below). By exchange [Clip Art] o Call your financial o Call your financial representative or Signature representative or Signature Services to request an Services to request an exchange. exchange. o You may only exchange for shares o You may only exchange for of other institutional funds or shares of other institutional Class I shares. funds or Class I shares. By wire [Clip Art] o Deliver your completed o Instruct your bank to wire the application to your financial amount of your investment to: representative or mail it to First Signature Bank & Trust Signature Services. Account # 900022260 Routing # 211475000 o Obtain your account number by calling your financial Specify the fund name(s), your representative or Signature share class, your account number Services. and the name(s) in which the account is registered. Your bank o Instruct your bank to wire the may charge a fee to wire funds. amount of your investment to: First Signature Bank & Trust Account # 900022260 Routing # 211475000 Specify the fund name(s), the share class, the new account number and the name(s) in which the account is registered. Your bank may charge a fee to wire funds. By phone [Clip Art] See "By exchange" and "By wire." o Verify that your bank or credit union is a member of the Automated Clearing House (ACH) system. o Complete the "To Purchase, Exchange or Redeem Shares via Telephone" and "Bank Information" sections on your account application. o Call Signature Services to verify that these features are in place on your account. o Call your financial representative or Signature Services with the fund name(s), your share class, your account number, the name(s) in which the account is registered and the amount of your investment. - -------------------------------------------------------------------------------- Address: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1001 Boston, MA 02217-1001 Phone Number: 1-888-972-8696 Or contact your financial representative for instructions and assistance. - -------------------------------------------------------------------------------- YOUR ACCOUNT 17 - -------------------------------------------------------------------------------- Selling shares - -------------------------------------------------------------------------------- Designed for To sell some or all of your shares By letter [Clip Art] o Sales of any amount; however, o Write a letter of instruction sales of $5 million or more indicating the fund name, your must be made by letter. account number, your share class, the name(s) in which the o Certain requests will require account is registered and the a Medallion signature dollar value or number of shares guarantee. Please refer to you wish to sell. "Selling shares in writing". o Include all signatures and any additional documents that may be required (see next page). o Mail the materials to Signature Services. o A check or wire will be sent according to your letter of instruction. By phone [Clip Art] o Sales of up to $5 million. o To place your request with a representative at John Hancock Funds, call Signature Services between 8 A.M. and 4 P.M. Eastern Time on most business days. o Redemption proceeds of up to $100,000 may be sent by wire or by check. A check will be mailed to the exact name(s) and address on the account. Redemption proceeds exceeding $100,000 must be wired to your designated bank account. By wire or electronic funds transfer (EFT) [Clip Art] o Requests by letter to sell any o To verify that the telephone amount. redemption privilege is in place on an account, or to request the o Requests by phone to sell up forms to add it to an existing to $5 million (accounts with account, call Signature telephone redemption Services. privileges). o Amounts of $5 million or more will be wired on the next business day. o Amounts up to $100,000 may be sent by EFT or by check. Funds from EFT transactions are generally available by the second business day. Your bank may charge a fee for this service. By exchange [Clip Art] o Sales of any amount. o Obtain a current prospectus for the fund into which you are exchanging by calling your financial representative or Signature Services. o You may only exchange for shares of other institutional funds or Class I shares. o Call your financial representative or Signature Services to request an exchange. 18 YOUR ACCOUNT Selling shares in writing In certain circumstances, you will need to make your request to sell shares in writing. You may need to include additional items with your request, as shown in the table below, unless they were previously provided to Signature Services and are still accurate. You may also need to include a Medallion signature guarantee, which protects you against fraudulent orders. You will need a signature guarantee if: o your address of record has changed within the past 30 days o you are selling more than $100,000 worth of shares and are requesting payment by check o you are selling more than $5 million worth of shares You will need to obtain your Medallion signature guarantee from a member of the Signature Guarantee Medallion Program. Most brokers and securities dealers are members of this program. A notary public CANNOT provide a signature guarantee. - -------------------------------------------------------------------------------- Seller Requirements for written requests [Clip Art] - -------------------------------------------------------------------------------- Owners of individual, joint or UGMA/UTMA o Letter of instruction. accounts (custodial accounts for minors). o On the letter, the signatures of all persons authorized to sign for the account, exactly as the account is registered. o Medallion signature guarantee if applicable (see above). Owners of corporate, sole proprietorship, o Letter of instruction. general partner or association accounts. o Corporate business/organization resolution, certified within the past 12 months, or a John Hancock Funds business/ organization certification form. o On the letter and the resolution, the signature of the person(s) authorized to sign for the account. o Medallion signature guarantee if applicable (see above). Owners or trustees of retirement plan, o Letter of instruction. pension trust and trust accounts. o On the letter, the signature(s) of the trustee(s). o Copy of the trust document certified within the past 12 months or a John Hancock Funds trust certification form. o Medallion signature guarantee if applicable (see above). Joint tenancy shareholders with rights of o Letter of instruction signed by survivorship whose co-tenants are deceased. surviving tenant. o Copy of death certificate. o Medallion signature guarantee if applicable (see above). Executors of shareholder estates. o Letter of instruction signed by executor. o Copy of order appointing executor, certified within the past 12 months. o Medallion signature guarantee if applicable (see above). Administrators, conservators, guardians and o Call 1-888-972-8696 for other sellers or account types not listed instructions. above. - -------------------------------------------------------------------------------- Address: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1001 Boston, MA 02217-1001 Phone Number: 1-888-972-8696 Or contact your financial representative for instructions and assistance. - -------------------------------------------------------------------------------- YOUR ACCOUNT 19 - -------------------------------------------------------------------------------- TRANSACTION POLICIES Valuation of shares The net asset value (NAV) per share for each fund is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4 P.M. Eastern Time). The funds use market prices in valuing portfolio securities, but may use fair-value estimates if reliable market prices are unavailable. The funds may also value securities at fair value if the value of these securities has been materially affected by events occurring after the close of a foreign market. The funds may trade foreign stock or other portfolio securities on U.S. holidays and weekends, even though the funds' shares will not be priced on those days. This may change a fund's NAV on days when you cannot buy or sell shares. Buy and sell prices When you buy shares, you pay the NAV. When you sell shares, you receive the NAV. Execution of requests Each fund is open on those days when the New York Stock Exchange is open, typically Monday through Friday. Buy and sell requests are executed at the next NAV to be calculated after Signature Services receives your request in good order. At times of peak activity, it may be difficult to place requests by phone. During these times, consider sending your request in writing. In unusual circumstances, any fund may temporarily suspend the processing of sell requests, or may postpone payment of proceeds for up to three business days or longer, as allowed by federal securities laws. Telephone transactions For your protection, telephone requests may be recorded in order to verify their accuracy. Also for your protection, telephone redemption transactions are not permitted on accounts whose names or addresses have changed within the past 30 days. Proceeds from telephone transactions can only be mailed to the address of record. Exchanges You may exchange Institutional Fund and Class I shares for shares of any other Institutional Fund or Class I shares. The registration for both accounts involved must be identical. To protect the interests of other investors in the fund, a fund may cancel the exchange privileges of any parties who, in the opinion of the fund, are using market timing strategies or making more than seven exchanges per owner or controlling party per calendar year. The funds reserve the right to require that previously exchanged shares and reinvested dividends be in a fund for 90 days before a shareholder is permitted a new exchange. A fund may also refuse any exchange order. A fund may change or cancel its exchange policies at any time, upon 60 days' notice to its shareholders. Certificated shares The funds no longer issue share certificates. Shares are electronically recorded. Any existing certificated shares can only be sold by returning the certificated shares to Signature Services, along with a letter of instruction or a stock power and a signature guarantee. Sales in advance of purchase payments When you place a request to sell shares for which the purchase money has not yet been collected, the request will be executed in a timely fashion, but a fund will not release the proceeds to you until your purchase payment clears. This may take up to ten business days after the purchase. - -------------------------------------------------------------------------------- DIVIDENDS AND ACCOUNT POLICIES Account statements In general, you will receive account statements as follows: o after every transaction (except a dividend reinvestment) that affects your account balance o after any changes of name or address of the registered owner(s) o in all other circumstances, at least quarterly Every year you should also receive, if applicable, a Form 1099 tax information statement, mailed by January 31. Dividends Active Bond Fund declares income dividends daily and pays them monthly. Your income dividends begin accruing the day after payment is received by the fund and continue through the day your shares are actually sold. Dividend Performers Fund declares and pays any income dividends quarterly. All other funds declare and pay any income dividends annually. Capital gains, if any, are typically distributed annually. Dividend reinvestments Dividends will be reinvested automatically in additional shares of the same fund on the dividend record date. Alternatively, you can choose to have your dividends and capital gains sent directly to your bank account or a check will be sent in the amount of more than $10. However, if the check is not deliverable or the combined dividend and capital gains amount is $10 or less, your proceeds will be reinvested. If five or more of your dividend or capital gains checks remain uncashed after 180 days, all subsequent dividends and capital gains will be reinvested. 20 YOUR ACCOUNT Taxability of dividends For investors who are not exempt from federal income taxes, dividends you receive from a fund, whether reinvested or taken as cash, are generally considered taxable. Dividends from a fund's short-term capital gains are taxable as ordinary income. Dividends from a fund's long-term capital gains are taxable at a lower rate. Whether gains are short-term or long-term depends on the fund's holding period. Some dividends paid in January may be taxable as if they had been paid the previous December. The Form 1099 that is mailed to you every January details your dividends and their federal tax category, although you should verify your tax liability with your tax professional. Taxability of transactions Any time you sell or exchange shares, it is considered a taxable event for you if you are not exempt from federal income taxes. Depending on the purchase price and the sale price of the shares you sell or exchange, you may have a gain or a loss on the transaction. You are responsible for any tax liabilities generated by your transactions. - -------------------------------------------------------------------------------- BUSINESS STRUCTURE The funds' board of trustees oversees each fund's business activities and retains the services of the various firms that carry out the fund's operations. The trustees have the power to change the funds' respective investment goals without shareholder approval. The investment adviser John Hancock Advisers, Inc., 101 Huntington Avenue, Boston, MA 02199-7603. The subadviser for the International Equity Fund Nicholas-Applegate Capital Management, 600 West Broadway, Suite 2900, San Diego, California 92101. Management fees The management fees paid to the investment adviser by the John Hancock institutional funds last fiscal year are as follows: - -------------------------------------------------------------------------------- Fund % of net assets - -------------------------------------------------------------------------------- Active Bond 0.00% Dividend Performers 0.25% Medium Capitalization Growth 0.42% Small Capitalization Value 0.02% Focused Small Cap Growth 0.00% International Equity 0.00% YOUR ACCOUNT 21 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS These tables detail the performance of each fund's share, including total return information showing how much an investment in the fund has increased or decreased each year. Active Bond Fund Figures audited by Deloitte & Touche LLP.
- ------------------------------------------------------------------------------------------------------------------------------ Period ended: 2/97 2/98 2/99 2/00 2/01 - ------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $8.64 $8.54 $8.83 $8.59 $8.14 Net investment income (loss)(1) 0.60 0.59 0.56 0.58 0.56 Net realized and unrealized gain (loss) on investments (0.09) 0.34 (0.02) (0.43) 0.47 Total from investment operations 0.51 0.93 0.54 0.15 1.03 Less distributions: Dividends from net investment income (0.60) (0.59) (0.56) (0.58) (0.56) Distributions in excess of net investment income -- --(2) --(2) --(2) -- Distributions from net realized gain on investments sold (0.01) (0.05) (0.22) (0.02) -- Total distributions (0.61) (0.64) (0.78) (0.60) (0.56) Net asset value, end of period $8.54 $8.83 $8.59 $8.14 $8.61 Total investment return(3,4) (%) 6.17 11.25 6.24 1.83 13.11 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 2,191 5,158 5,686 4,222 6,805 Ratio of expenses to average net assets (%) 0.60 0.60 0.60 0.60 0.60 Ratio of adjusted expenses to average net assets(5,6) (%) 4.05 2.64 2.33 2.93 2.03 Ratio of net investment income (loss) to average net assets (%) 7.10 6.78 6.36 6.88 6.74 Portfolio turnover rate (%) 136 230 356 301 327
(1) Based on the average of the shares outstanding at the end of each month. (2) Less than $0.01 per share. (3) Total investment return assumes dividend reinvestment. (4) Total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Does not take into consideration expense redutions during the periods shown. (6) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the fund grow. - -------------------------------------------------------------------------------- The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for the Fund for the years ended February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would have been 2.72%, 9.21%, 4.51%, (0.50%) and 11.68%, respectively. 22 FINANCIAL HIGHLIGHTS Dividend Performers Fund Figures audited by Deloitte & Touche LLP.
- ------------------------------------------------------------------------------------------------------------------------- Period ended: 2/97 2/98 2/99 2/00 2/01 - ------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.15 $11.91 $14.92 $14.46 $13.51 Net investment income (loss)(1) 0.21 0.18 0.15 0.11 0.10 Net realized and unrealized gain (loss) on investments 1.92 3.92 1.04 0.60 0.45 Total from investment operations 2.13 4.10 1.19 0.71 0.55 Less distributions: Dividends from net investment income (0.18) (0.17) (0.15) (0.11) (0.11) Distributions from net realized gain on investments sold (0.19) (0.92) (1.50) (1.55) (2.81) Total distributions (0.37) (1.09) (1.65) (1.66) (2.92) Net asset value, end of period $11.91 $14.92 $14.46 $13.51 $11.14 Total investment return(2,3) (%) 21.26 35.55 7.97 4.17 2.94 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 8,668 20,884 17,743 14,863 6,202 Ratio of expenses to average net assets (%) 0.70 0.70 0.70 0.70 0.70 Ratio of adjusted expenses to average net assets(4,5) (%) 1.89 1.02 0.95 1.05 1.08 Ratio of net investment income (loss) to average net assets (%) 1.94 1.31 0.95 0.71 0.73 Portfolio turnover rate (%) 37 77 64 46 58
(1) Based on the average of the shares outstanding at the end of each month. (2) Total investment return assumes dividend reinvestment. (3) Total returns would have been lower had certain expenses not been reduced during the periods shown. (4) Does not take into consideration expense redutions during the periods shown. (5) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the fund grow. - -------------------------------------------------------------------------------- The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for the fund for the years ended February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would have been 20.07%, 35.23%, 7.72%, 3.82% and 2.56%, respectively. FINANCIAL HIGHLIGHTS 23 Medium Capitalization Growth Fund Figures audited by Deloitte & Touche LLP.
- ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 2/97 2/98 2/99 2/00 2/01 - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $10.69 $12.67 $13.51 $10.99 $21.10 Net investment income (loss)(1) 0.01 --(2) (0.02) (0.05) (0.07) Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.02 2.06 (0.68) 10.71 (7.44) Total from investment operations 2.03 2.06 (0.70) 10.66 (7.51) Less distributions: Dividends from net investment income -- --(2) -- -- -- Distributions from net realized gain on investments sold (0.05) (1.22) (1.72) (0.55) (3.33) Distributions in excess of net realized gain on investments sold -- -- (0.10) -- -- Total distributions (0.05) (1.22) (1.82) (0.55) (3.33) Net asset value, end of period $12.67 $13.51 $10.99 $21.10 $10.26 Total investment return(3,4) (%) 19.00 17.39 (5.34) 98.13 (38.23) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 29,085 40,302 16,687 36,893 11,499 Ratio of expenses to average net assets (%) 0.90 0.90 0.90 0.90(7) 0.90 Ratio of adjusted expenses to average net assets(5,6) (%) 1.42 1.10 1.11 1.28 1.15 Ratio of net investment income (loss) to average net assets (%) 0.06 0.03 (0.13) (0.37) (0.40) Portfolio turnover rate (%) 281 341 116 153 181
(1) Based on the average of the shares outstanding at the end of each month. (2) Less than $0.01 per share. (3) Total investment return assumes dividend reinvestment. (4) Total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Does not take into consideration expense reductions during the periods shown. (6) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the fund grow. (7) Expense ratio does not include interest expense due to bank loans, which amounted to 0.01% for the year ended February 29, 2000. - -------------------------------------------------------------------------------- The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for the Fund for the years ended February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would have been 18.48%, 17.19%, (5.55%), 97.75% and (38.48%), respectively. 24 FINANCIAL HIGHLIGHTS Small Capitalization Value Fund Figures audited by Deloitte & Touche LLP.
- -------------------------------------------------------------------------------------------------------------------------------- Period ended: 2/97 2/98 2/99 2/00 2/01 - -------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $9.09 $9.38 $11.74 $9.16 $18.09 Net investment income (loss)(1) 0.14 0.07 0.05 0.05 (0.04) Net realized and unrealized gain (loss) on investments 1.08 3.65 (1.23) 10.96 (2.18) Total from investment operations 1.22 3.72 (1.18) 11.01 (2.22) Less distributions: Dividends from net investment income (0.12) (0.10) (0.04) (0.06) (0.03) Distributions from net realized gain on investments sold (0.81) (1.26) (1.20) (2.02) (3.71) Distributions in excess of net realized gain on investments sold -- -- (0.16) -- -- Total distributions (0.93) (1.36) (1.40) (2.08) (3.74) Net asset value, end of period $9.38 $11.74 $9.16 $18.09 $12.13 Total investment return(2,3) (%) 13.78 41.81 (9.46) 124.33 (10.14) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 6,011 9,549 7,418 24,259 30,183 Ratio of expenses to average net assets (%) 0.80 0.80 0.80 0.80 0.80 Ratio adjusted expenses to average net assets(4,5) (%) 1.83 1.42 1.46 1.48 1.04 Ratio of net investment income (loss) to average net assets (%) 1.46 0.62 0.45 0.37 (0.25) Portfolio turnover rate (%) 96 216 126 104 109
(1) Based on the average of the shares outstanding at the end of each month. (2) Total investment return assumes dividend reinvestment. (3) Total returns would have been lower had certain expenses not been reduced during the periods shown. (4) Does not take into consideration expense reductions during the periods shown. (5) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the fund grow. - -------------------------------------------------------------------------------- The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for the fund for the years ended February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would have been 12.75%, 41.19%, (10.12%), 123.65% and (10.38%), respectively. FINANCIAL HIGHLIGHTS 25 Focused Small Cap Growth Fund Figures audited by Deloitte & Touche LLP.
- ------------------------------------------------------------------------------------------------------------------------------------ Class I - Period ended: 2/97(1) 2/98 2/99 2/00 2/01(2) - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $8.50 $9.24 $11.74 $11.65 $24.43 Net investment income (loss)(3) 0.03 (0.03) (0.07) (0.09) (0.10) Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.73 2.53 0.61 15.13 (11.92) Total from investment operations 0.76 2.50 0.54 15.04 (12.02) Less distributions: Dividends from net investment income (0.02) --(4) -- -- -- Distributions from net realized gain on investments sold -- -- (0.63) (2.26) (1.92) Total distributions (0.02) --(4) (0.63) (2.26) (1.92) Net asset value, end of period $9.24 $11.74 $11.65 $24.43 10.49 Total investment return (5,6) (%) 8.89(7) 27.07 4.67 136.18 (50.27) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 999 3,102 2,453 8,908 5,458 Ratio of expenses to average net assets (%) 0.90(8) 0.90 0.90 0.90 0.90 Ratio of adjusted expenses to average net assets(9,10) (%) 16.24(8) 4.05 4.12 3.19 2.04 Ratio of net investment income (loss) to average net assets (%) 0.35(8) (0.25) (0.60) (0.57) (0.56) Portfolio turnover rate (%) 92 117 125 238 242
(1) Began operations on May 2, 1996. (2) Effective November 15, 2000, existing shares of the fund were designated Class I shares. (3) Based on the average of the shares outstanding at the end of each month. (4) Less than $0.01 per share. (5) Total investment return assumes dividend reinvestment. (6) Total returns would have been lower had certain expenses not been reduced during the periods shown. (7) Not annualized. (8) Annualized. (9) Does not take into consideration expense redutions during the periods shown. (10) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the fund grow. - -------------------------------------------------------------------------------- The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for the Fund for the years ended February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would have been (6.45%), 23.92%, 1.45%, 133.89% and (51.41%), respectively. 26 FINANCIAL HIGHLIGHTS International Equity Fund Figures audited by Deloitte & Touche LLP.
- ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 2/97 2/98 2/99 2/00 2/01 - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $9.24 $9.35 $9.63 $10.18 $13.33 Net investment income (loss)(1) 0.12 0.06 0.07 0.07 0.04 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.14 0.23 0.59 3.83 (4.63) Total from investment operations 0.26 0.29 0.66 3.90 (4.59) Less distributions: Dividends from net investment income (0.10) (0.01) (0.07) (0.07) (0.04) Distributions in excess of net investment income -- -- (0.04) (0.04) -- Distributions from net realized gain on investments sold (0.05) -- -- (0.64) (0.47) Total distributions (0.15) (0.01) (0.11) (0.75) (0.51) Net asset value, end of period $9.35 $9.63 $10.18 $13.33 $8.23 Total investment return(2,3) (%) 2.79 3.07 6.88 38.84 (34.85) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 4,204 7,983 7,805 12,848 5,859 Ratio of expenses to average net assets (%) 1.00 1.00 1.00 1.00 1.00 Ratio of adjusted expenses to average net assets(4,5) (%) 3.32 2.02 2.73 2.86 3.46 Ratio of net investment income (loss) to average net assets (%) 1.26 0.60 0.69 0.59 0.43 Portfolio turnover rate (%) 68 125 83 139 238
(1) Based on the average of the shares outstanding at the end of each month. (2) Total investment return assumes dividend reinvestment. (3) Total returns would have been lower had certain expenses not been reduced during the periods shown. (4) Does not take into consideration expense reductions during the periods shown. (5) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the fund grow. - -------------------------------------------------------------------------------- The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for the fund for the years ended February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would have been 0.47%, 2.05%, 5.15%, 36.98 and (37.31%), respectively. FINANCIAL HIGHLIGHTS 27 For more information - -------------------------------------------------------------------------------- Two documents are available that offer further information on the John Hancock institutional funds: Annual/Semiannual Report to Shareholders Includes financial statements, a discussion of the market conditions and investment strategies that significantly affected performance, as well as the auditors' report (in annual report only). Statement of Additional Information (SAI) The SAI contains more detailed information on all aspects of the funds. The current annual report is included in the SAI. A current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into (is legally a part of) this prospectus. To request a free copy of the current annual/semiannual report or the SAI, please contact John Hancock: By mail: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1001 Boston, MA 02217-1001 By phone: 1-888-972-8696 By EASI-Line: 1-800-597-1897 By TDD: 1-800-462-0825 On the Internet: www.jhfunds.com Or you may view or obtain these documents from the SEC: In person: at the SEC's Public Reference Room in Washington, DC. For access to the Reference Room call 1-202-942-8090 By mail: Public Reference Section Securities and Exchange Commission Washington, DC 20549-0102 (duplicating fee required) By electronic request: publicinfo@sec.gov (duplicating fee required) On the Internet: www.sec.gov SEC file number: 811-8852 [LOGO](R) John Hancock Funds, Inc. MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 Mutual Funds Institutional Services Private Managed Accounts Retirement Plans Insurance Services (C)2001 JOHN HANCOCK FUNDS, INC. KB0PN 7/01 JOHN HANCOCK INSTITUTIONAL SERIES TRUST 101 Huntington Avenue Boston, Massachusetts 02199 John Hancock Active Bond Fund John Hancock Dividend Performers Fund John Hancock Medium Capitalization Growth Fund John Hancock Small Capitalization Value Fund John Hancock Focused Small Cap Growth Fund-Class I (formerly Small Capitalization Growth Fund) John Hancock International Equity Fund John Hancock Independence Diversified Core Equity Fund II-Class I John Hancock Independence Medium Capitalization Fund John Hancock Independence Balanced Fund (each, a "Fund" and collectively, the "Funds") Statement of Additional Information July 1, 2001 This Statement of Additional Information provides information about the Funds in addition to the information that is contained in the John Hancock Series Funds' current Prospectus and in the Independence Funds' current Prospectus (together, the "Prospectuses"). This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Funds' Prospectuses, copies of which can be obtained free of charge by writing or telephoning: John Hancock Signature Services, Inc. John Hancock Way, Suite 1001 Boston, Massachusetts 02217-1001 1-800-755-4371 TABLE OF CONTENTS Page Organization of the Funds 2 Investment Objectives and Policies 3 -The John Hancock Series Funds 3 -The Independence Funds 3 Investment Restrictions 16 Those Responsible for Management 19 Investment Advisory and Other Services 29 Distribution Contract 34 Sales Compensation 34 Net Asset Value 34 Additional Services and Programs 35 Purchases and Redemptions Through Third Parties 35 Special Redemptions 36 Description of the Funds' Shares 36 Tax Status 37 Calculation of Performance 42 Brokerage Allocation 44 Transfer Agent Services 46 Custody of Portfolio 46 Independent Auditors 46 Appendix A--Description of Securities Ratings A-1 Financial Statements F-1 ORGANIZATION OF THE FUNDS Each Fund is a series of John Hancock Institutional Series Trust (the "Trust") an open-end investment management company organized as a Massachusetts business trust on October 31, 1994 under the laws of the Commonwealth of Massachusetts. Focused Small Cap Growth Fund, Dividend Performers Fund, Active Bond Fund, Medium Capitalization Growth Fund, Small Capitalization Value Fund and International Equity Fund are sometimes referred to herein collectively as the "John Hancock Series Funds." Independence Diversified Core Equity Fund II, Independence Medium Capitalization Fund and Independence Balanced Fund are sometimes referred to herein collectively as the "Independence Funds." Prior to July 1, 2001, Focused Small Cap Growth Fund was called Small Capitalization Growth Fund. The investment adviser of each Fund is John Hancock Advisers, Inc. (the "Adviser"). The Adviser is an indirect wholly-owned subsidiary of John Hancock Life Insurance Company (formerly John Hancock Mutual Life Insurance Company) (the "Life Company"), a Massachusetts life insurance company chartered in 1862, with national headquarters at John Hancock Place, Boston, Massachusetts. The Life Company is wholly owned by John Hancock Financial Services, Inc., a Delaware corporation organized in February, 2000. The investment sub-adviser of International Equity Fund is Nicholas-Applegate Capital Management ("Nicholas-Applegate") (the "Sub-Adviser"). The investment sub-adviser of each Independence Fund is Independence Investment LLC ("Independence") (formerly Independence Investment Associates, Inc.). Together, Independence and Nicholas-Applegate are sometimes referred to herein collectively as the "Sub-Advisers" or, individually, as the "Sub-Adviser." The Sub-Advisers are responsible for providing investment advice to their respective funds, subject to the review of the Trustees and overall supervision of the Adviser. Independence is an affiliate of the Life Company. 2 INVESTMENT OBJECTIVES AND POLICIES The following information supplements the discussion of each Fund's investment objective and policies as discussed in the Prospectuses. There is no assurance that any Fund will achieve its investment objective. Each Fund has adopted certain investment restrictions that are detailed under "Investment Restrictions" in this Statement of Additional Information where they are classified as fundamental or nonfundamental. Those restrictions designated as fundamental may not be changed without shareholder approval. Each Fund's investment objective, investment policies and nonfundamental restrictions, however, may be changed by a vote of the Trustees without shareholder approval. If there is a change in a Fund's investment objective, shareholders should consider whether the Fund remains an appropriate investment in light of their then current financial position and needs. A. The John Hancock Series Funds. For a further description of the John Hancock Series Funds' investment objectives, policies and restrictions see "Goal and Strategy" and "Main Risks" in the John Hancock Series Funds' Prospectus and "Investment Restrictions" in this Statement of Additional Information. Effective November 15, 2000, existing shares of Focused Small Cap Growth Fund were designated as "Class I" shares. See Appendix A to this Statement of Additional Information for a description of the quality categories of corporate bonds in which certain of the John Hancock Series Funds may invest. B. The Independence Funds. For a further description of the Independence Funds' investment objectives, policies and restrictions see "Goal and Strategy" and "Main Risks" in their respective Prospectuses and "Investment Restrictions" in this Statement of Additional Information. Effective October 1, 1999, existing shares of Independence Diversified Core Equity Fund II were designated as "Class I" shares. Common stocks. Dividend Performers Fund, Medium Capitalization Growth Fund, International Equity Fund, Small Capitalization Value Fund, Focused Small Cap Growth Fund and each Independence Fund may invest in common stocks. Common stocks are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits of the corporation, if any, without preference over any other shareholder or class of shareholders, including holders of such entity's preferred stock and other senior equity. Ownership of common stock usually carries with it the right to vote and, frequently, an exclusive right to do so. Common stocks have the potential to outperform fixed-income securities over the long term. Common stocks provide the most potential for growth, yet are the more volatile of the two asset classes. Debt securities. Active Bond Fund and Independence Balanced Fund may regularly invest in debt obligations. Small Capitalization Value Fund invests primarily in U.S. stocks, but may invest up to 15% of total assets in a combination of foreign securities and/or bonds rated as low as CC/Ca and their unrated equivalents. Under normal conditions, Dividend Performers Fund, Medium Capitalization Growth Fund, and Focused Small Cap Growth Fund will not invest in any fixed income securities. However, in abnormal conditions, Dividend Performers Fund, Medium Capitalization Growth Fund, and Focused Small Cap Growth Fund may temporarily invest in U.S. Government securities and U.S. Government agency securities with maturities of up to three years, and may also invest more than 10% of total assets in cash and/or cash equivalents (including U.S. Government securities maturing in 90 days or less.) Debt securities of corporate and governmental issuers in which the Funds may invest are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk) and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). 3 Preferred stocks. Dividend Performers Fund, International Equity Fund, Medium Capitalization Growth Fund, Small Capitalization Value Fund, Focused Small Cap Growth Fund and each Independence Fund may invest in preferred stocks. Preferred stock generally has a preference to dividends and, upon liquidation, over an issuer's common stock but ranks junior to debt securities in an issuer's capital structure. Preferred stock generally pays dividends in cash (or additional shares of preferred stock) at a defined rate but, unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer's board of directors. Dividends on preferred stock may be cumulative, meaning that, in the event the issuer fails to make one or more dividend payments on the preferred stock, no dividends may be paid on the issuer's common stock until all unpaid preferred stock dividends have been paid. Preferred stock also may be subject to optional or mandatory redemption provisions. Convertible securities. Small Capitalization Value Fund, International Equity Fund and Independence Balanced Fund may invest in convertible securities which may include corporate notes or preferred stock. Active Bond Fund may invest in convertible debt securities. Dividend Performers Fund, Medium Capitalization Growth Fund, and Focused Small Cap Growth Fund may invest in convertible preferred stocks. Investments in convertible securities are not subject to the rating criteria with respect to non-convertible debt obligations. As with all debt securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. The market value of convertible securities can also be heavily dependent upon the changing value of the equity securities into which such securities are convertible, depending on whether the market price of the underlying security exceeds the conversion price. Convertible securities generally rank senior to common stocks in an issuer's capital structure and consequently entail less risk than the issuer's common stock. However, the extent to which such risk is reduced depends upon the degree to which the convertible security sells above its value as a fixed-income security. Investments in Foreign Securities and Emerging Countries. Each of the Funds may invest in the securities of foreign issuers to the following extent: o Each Independence Fund and Dividend Performers Fund may invest in U.S. dollar denominated securities of foreign issuers and in American Depositary Receipts. Independence Balanced Fund may also invest in Yankee Bonds. o Medium Capitalization Growth Fund and Focused Small Cap Growth Fund may invest up to 10% of total assets in foreign securities. Foreign equities include but are not limited to common stocks, convertible preferred stocks, preferred stocks, warrants, American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), and European Depositary Receipts ("EDRs"). o Small Capitalization Value Fund invests primarily in U.S. stocks, but may invest up to 15% of total assets in a combination of foreign securities and/or bonds rated as low as CC/Ca and their unrated equivalents. o Active Bond Fund may invest up to 25% of total assets in Yankee Bonds, U.S. dollar (excluding U.S. dollar denominated Canadian securities) and foreign currency denominated securities of foreign issuers. o International Equity Fund normally invests at least 80% of total assets in a diversified portfolio of foreign stocks from both developed and emerging countries. The fund may invest up to 30% of total assets in emerging markets as classified by Morgan Stanley Capital International ("MSCI"). Foreign equities include but are not limited to common stocks, convertible preferred stocks, preferred stocks, warrants, ADRs, GDRs and EDRs. 4 Risks of Foreign Securities. Investments in foreign securities may involve a greater degree of risk than those in domestic securities. There is generally less publicly available information about foreign companies in the form of reports and ratings similar to those that are published about issuers in the United States. Also, foreign issuers are generally not subject to uniform accounting, auditing and financial reporting requirements comparable to those applicable to United States issuers. Because foreign securities may be denominated in currencies other than the U.S. dollar, changes in foreign currency exchange rates will affect the Fund's net asset value, the value of dividends and interest earned, gains and losses realized on the sale of securities, and any net investment income and gains that the Fund distributes to shareholders. Securities transactions undertaken in some foreign markets may not be settled promptly so that the Fund's investments on foreign exchanges may be less liquid and subject to the risk of fluctuating currency exchange rates pending settlement. Foreign securities will be purchased in the best available market, whether through over-the-counter markets or exchanges located in the countries where principal offices of the issuers are located. Foreign securities markets are generally not as developed or efficient as those in the United States. While growing in volume, they usually have substantially less volume than the New York Stock Exchange, and securities of some foreign issuers are less liquid and more volatile than securities of comparable United States issuers. Fixed commissions on foreign exchanges are generally higher than negotiated commissions on United States exchanges, although the Fund will endeavor to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of securities exchanges, brokers and listed issuers than in the United States. With respect to certain foreign countries, there is the possibility of adverse changes in investment or exchange control regulations, expropriation, nationalization or confiscatory taxation limitations on the removal of funds or other assets of the Fund, political or social instability, or diplomatic developments which could affect United States investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the United States' economy in terms of growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. The dividends, in some cases capital gains and interest payable on certain of the Fund's foreign portfolio securities, may be subject to foreign withholding or other foreign taxes, thus reducing the net amount of income or gains available for distribution to the Fund's shareholders. These risks may be intensified in the case of investments in emerging markets or countries with limited or developing capital markets. These countries are located in the Asia-Pacific region, Eastern Europe, Latin and South America and Africa. Security prices in these markets can be significantly more volatile than in more developed countries, reflecting the greater uncertainties of investing in less established markets and economies. Political, legal and economic structures in many of these emerging market countries may be undergoing significant evolution and rapid development, and they may lack the social, political, legal and economic stability characteristic of more developed countries. Emerging market countries may have failed in the past to recognize private property rights. They may have relatively unstable governments, present the risk of nationalization of businesses, restrictions on foreign ownership, or prohibitions on repatriation of assets, and may have less protection of property rights than more developed countries. Their economies may be predominantly based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates. Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of substantial holdings difficult or impossible at times. The Fund may be required to establish special custodial or other arrangements before making certain investments in those countries. Securities of issuers located in these countries may have limited marketability and may be subject to more abrupt or erratic price movements. 5 The U.S. Government has from time to time in the past imposed restrictions, through taxation and otherwise, on foreign investments by U.S. investors such as the Fund. If such restrictions should be reinstituted, it might become necessary for the Fund to invest all or substantially all of its assets in U.S. securities. In such event, the Fund would review its investment objective and investment policies to determine whether changes are appropriate. The Fund's ability and decisions to purchase or sell portfolio securities may be affected by laws or regulations relating to the convertibility and repatriation of assets. Because the shares of the Fund are redeemable on a daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to give reasonable assurance that it will be able to obtain U.S. dollars. Under present conditions, it is not believed that these considerations will have any significant effect on its portfolio strategy. Foreign Currency Transactions. Each John Hancock Series Fund, other than Dividend Performers Fund, may engage in foreign currency transactions. Foreign currency transactions may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or selling currency prevailing in the foreign exchange market. Each John Hancock Series Fund, other than Dividend Performers Fund, may also enter into forward foreign currency exchange contracts to hedge against fluctuations in currency exchange rates affecting a particular transaction or portfolio position. Forward contracts are agreements to purchase or sell a specified currency at a specified future date and price set at the time of the contract. Transaction hedging is the purchase or sale of forward foreign currency contracts with respect to specific receivables or payables of a Fund accruing in connection with the purchase and sale of its portfolio securities quoted or denominated in the same or related foreign currencies. Portfolio hedging is the use of forward foreign currency contracts to offset portfolio security positions denominated or quoted in the same or related foreign currencies. A Fund may elect to hedge less than all of its foreign portfolio positions as deemed appropriate by the Adviser. The Funds will not engage in speculative forward foreign currency exchange transactions. If a Fund purchases a forward contract, the Fund will segregate cash or liquid securities in a separate account of the Fund in an amount equal to the value of the Fund's total assets committed to the consummation of such forward contract. The assets in the segregated account will be valued at market daily and if the value of the securities in the separate account declines, additional cash or securities will be placed in the account so that the value of the account will be equal the amount of the Fund's commitment with respect to such contracts. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency rises. Moreover, it may not be possible for the Funds to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. Repurchase Agreements. Each Fund may enter into repurchase agreements. In a repurchase agreement the Fund buys a security for a relatively short period (usually not more than 7 days) subject to the obligation to sell it back to the issuer at a fixed time and price plus accrued interest. The Fund will enter into repurchase agreements only with member banks of the Federal Reserve System and with "primary dealers" in U.S. Government securities. The Adviser will continuously monitor the creditworthiness of the parties with whom the Fund enters into repurchase agreements. The Fund has established a procedure providing that the securities serving as collateral for each repurchase agreement must be delivered to the Fund's custodian either physically or in book-entry form and that the collateral must be marked to market daily to ensure that each repurchase agreement is fully collateralized at all times. In the event of bankruptcy or other default by a seller of a repurchase agreement, the Fund could experience delays in liquidating the underlying securities during the period in which the Fund seeks to enforce its rights thereto, possible subnormal levels of income, decline in value of the underlying securities or lack of access to income during this period as well as the expense of enforcing its rights. 6 Reverse Repurchase Agreements and Other Borrowings. Each Fund may also enter into reverse repurchase agreements which involve the sale of U.S. Government securities held in its portfolio to a bank with an agreement that a Fund will buy back the securities at a fixed future date at a fixed price plus an agreed amount of "interest" which may be reflected in the repurchase price. Reverse repurchase agreements are considered to be borrowings by a Fund. Reverse repurchase agreements involve the risk that the market value of securities purchased by each Fund with proceeds of the transaction may decline below the repurchase price of the securities sold by a Fund which it is obligated to repurchase. Each Fund will also continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will reacquire those securities upon effecting its repurchase. To minimize various risks associated with reverse repurchase agreements, a Fund will establish a separate account consisting of liquid securities, of any type or maturity, in an amount at least equal to the repurchase prices of the securities (plus any accrued interest thereon) under such agreements. In addition, a Fund will not enter into reverse repurchase agreements or other borrowings except from banks temporarily for extraordinary or emergency purposes (not for leveraging) in amounts not to exceed 33 1/3% of a Fund's total assets (including the amount borrowed) taken at market value. Each Fund will not use leverage to attempt to increase income. Each Fund will enter into reverse repurchase agreements only with federally insured banks which are approved in advance as being creditworthy by the Trustees. Under the procedures established by the Trustees, the Adviser will monitor the creditworthiness of the banks involved. Restricted Securities. Each Fund may purchase securities that are not registered ("restricted securities") under the Securities Act of 1933 ("1933 Act"), including commercial paper issued in reliance on Section 4(2) of the 1933 Act and securities offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. Each Fund will not invest more than 15% of its net assets in illiquid investments. If the Trustees determine, based upon a continuing review of the trading markets for specific Section 4(2) paper or Rule 144A securities, that they are liquid, they will not be subject to the 15% limit on illiquid investments. The Trustees may adopt guidelines and delegate to the Adviser the daily function of determining the monitoring and liquidity of restricted securities. The Trustees, however, will retain sufficient oversight and be ultimately responsible for the determinations. The Trustees will carefully monitor the Fund's investments in these securities, focusing on such important factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in the Fund if qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Options on Securities, Securities Indices and Currency. Active Bond Fund may purchase and write (sell) call and put options on any securities in which it may invest or on any securities index based on securities in which it may invest. International Equity Fund may purchase and write (sell ) call and put options on any securities in which it may invest, on any securities index based on securities in which it may invest or on any currency in which Fund investments may be demoninated. Each of Dividend Performers Fund, Small Capitalization Value Fund, Focused Small Cap Growth Fund and Medium Capitalization Growth Fund may purchase and write (sell) call and put options on any securities index based on securities in which it may invest. These options may be listed on national domestic securities exchanges or foreign securities exchanges or traded in the over-the-counter market. Each Fund may write covered put and call options and purchase put and call options as a substitute for the purchase or sale of securities (or, with respect to International Equity Fund, currency) or to protect against declines in the value of portfolio securities and against increases in the cost of securities to be acquired. 7 Writing Covered Options. A call option on a security or currency written by a Fund obligates the Fund to sell specified securities or currency to the holder of the option at a specified price if the option is exercised at any time before the expiration date. A put option on securities or currency written by a Fund obligates the Fund to purchase specified securities or currency from the option holder at a specified price if the option is exercised at any time before the expiration date. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security. Writing covered call options may deprive a Fund of the opportunity to profit from an increase in the market price of the securities or foreign currency assets in its portfolio. Writing covered put options may deprive a Fund of the opportunity to profit from a decrease in the market price of the securities or foreign currency assets to be acquired for its portfolio. All call and put options written by the Fund are covered. A written call option or put option may be covered by (i) maintaining cash or liquid securities, either of which may be quoted or denominated in any currency, in a segregated account with a value at least equal to the Fund's obligation under the option, (ii) entering into an offsetting forward commitment and/or (iii) purchasing an offsetting option or any other option which, by virtue of its exercise price or otherwise, reduces the Fund's net exposure on its written option position. A written call option on securities is typically covered by maintaining the securities that are subject to the option in a segregated account. Each Fund may cover call options on a securities index by owning securities whose price changes are expected to be similar to those of the underlying index. Each Fund may terminate its obligations under an exchange traded call or put option by purchasing an option identical to the one it has written. Obligations under over-the-counter options may be terminated only by entering into an offsetting transaction with the counterparty to such option. Such purchases are referred to as "closing purchase transactions." Purchasing Options. A Fund would normally purchase call options in anticipation of an increase, or put options in anticipation of a decrease ("protective puts"), in the market value of securities or currencies of the type in which it may invest. A Fund may also sell call and put options to close out its purchased options. The purchase of a call option would entitle a Fund, in return for the premium paid, to purchase specified securities or currency at a specified price during the option period. A Fund would ordinarily realize a gain on the purchase of a call option if, during the option period, the value of such securities or currency exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the call option. The purchase of a put option would entitle a Fund, in exchange for the premium paid, to sell specified securities or currency at a specified price during the option period. The purchase of protective puts is designed to offset or hedge against a decline in the market value of the Fund's portfolio securities or the currencies in which they are denominated. Put options may also be purchased by a Fund for the purpose of affirmatively benefiting from a decline in the price of securities or currencies which it does not own. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities or currency decreased below the exercise price sufficiently to cover the premium and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of put options may be offset by countervailing changes in the value of a Fund's portfolio securities. Each Fund's options transactions will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on which such options are traded. These limitations govern the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert, regardless of whether the options are written or 8 purchased on the same or different exchanges, boards of trade or other trading facilities or are held or written in one or more accounts or through one or more brokers. Thus, the number of options which the Fund may write or purchase may be affected by options written or purchased by other investment advisory clients of the Adviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions. Risks Associated with Options Transactions. There is no assurance that a liquid secondary market on a domestic or foreign options exchange will exist for any particular exchange-traded option or at any particular time. If the Fund is unable to effect a closing purchase transaction with respect to covered options it has written, the Fund will not be able to sell the underlying securities or currencies or dispose of assets held in a segregated account until the options expire or are exercised. Similarly, if the Fund is unable to effect a closing sale transaction with respect to options it has purchased, it would have to exercise the options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities or currencies. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options). If trading were discontinued, the secondary market on that exchange (or in that class or series of options) would cease to exist. However, outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. A Fund's ability to terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. The Adviser will determine the liquidity of each over-the-counter option in accordance with guidelines adopted by the Trustees. The writing and purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The successful use of options depends in part on the Adviser's ability to predict future price fluctuations and, for hedging transactions, the degree of correlation between the options and securities or currency markets. Futures Contracts and Options on Futures Contracts. International Equity Fund may purchase and sell futures contracts based on various securities (such as U.S. Government securities) and securities indices, foreign currencies and any other financial instruments and indices and purchase and write call and put options on these futures contracts. Active Bond Fund may purchase and sell futures contracts based on various securities (such as U.S. Government securities) and securities indices, and any other financial instruments and indices and purchase and write call and put options on these futures contracts. Dividend Performers Fund, Small Capitalization Value Fund, Focused Small Cap Growth Fund and Medium Capitalization Growth Fund may purchase and sell futures contracts based on securities indices and purchase and write call and put options on these futures contracts. Each Fund may purchase and sell futures and options on futures for hedging or other non-speculative purposes. Each Fund may also enter into closing purchase and sale transactions with respect to any of these contracts and options. All futures contracts entered into by a Fund are traded on U.S. or foreign exchanges or boards of trade that are licensed, regulated or approved by the Commodity Futures Trading Commission ("CFTC"). 9 Futures Contracts. A futures contract may generally be described as an agreement between two parties to buy and sell particular financial instruments or currencies for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contract). Positions taken in the futures markets are not normally held to maturity but are instead liquidated through offsetting transactions which may result in a profit or a loss. While futures contracts on securities or currency will usually be liquidated in this manner, the Fund may instead make, or take, delivery of the underlying securities or currency whenever it appears economically advantageous to do so. A clearing corporation associated with the exchange on which futures contracts are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date. Hedging and Other Strategies. Hedging is an attempt to establish with more certainty than would otherwise be possible the effective price or rate of return on portfolio securities or securities that a Fund proposes to acquire or the exchange rate of currencies in which the portfolio securities are quoted or denominated. When securities prices are falling, a Fund can seek to offset a decline in the value of its current portfolio securities through the sale of futures contracts. When securities prices are rising, a Fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later be available in the market when it effects anticipated purchases. A Fund may seek to offset anticipated changes in the value of a currency in which its portfolio securities, or securities that it intends to purchase, are quoted or denominated by purchasing and selling futures contracts on such currencies. A Fund may, for example, take a "short" position in the futures market by selling futures contracts in an attempt to hedge against an anticipated decline in market prices or foreign currency rates that would adversely affect the value of the Fund's portfolio securities. Such futures contracts may include contracts for the future delivery of securities held by a Fund or securities with characteristics similar to those of the Fund's portfolio securities. Similarly, a Fund may sell futures contracts on any currencies in which its portfolio securities are quoted or denominated or in one currency to hedge against fluctuations in the value of securities denominated in a different currency if there is an established historical pattern of correlation between the two currencies. If, in the opinion of the Adviser, there is a sufficient degree of correlation between price trends for the Fund's portfolio securities and futures contracts based on other financial instruments, securities indices or other indices, the Fund may also enter into such futures contracts as part of its hedging strategy. Although under some circumstances prices of securities in the Fund's portfolio may be more or less volatile than prices of such futures contracts, the Adviser will attempt to estimate the extent of this volatility difference based on historical patterns and compensate for any differential by having the Fund enter into a greater or lesser number of futures contracts or by attempting to achieve only a partial hedge against price changes affecting the Fund's portfolio securities. When a short hedging position is successful, any depreciation in the value of portfolio securities will be substantially offset by appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of the Fund's portfolio securities would be substantially offset by a decline in the value of the futures position. On other occasions, a Fund may take a "long" position by purchasing futures contracts. This would be done, for example, when the Fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices or currency rates then available in the applicable market to be less favorable than prices that are currently available. Subject to the limitations imposed on the funds, as described above, a Fund may also purchase futures contracts as a substitute for transactions in securities or foreign currency, to alter the investment characteristics of or currency exposure associated with portfolio securities or to gain or increase its exposure to a particular securities market or currency. 10 Options on Futures Contracts. The purchase of put and call options on futures contracts will give a Fund the right (but not the obligation) for a specified price to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, a Fund obtains the benefit of the futures position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs. The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of a Fund's assets. By writing a call option, a Fund becomes obligated, in exchange for the premium (upon exercise of the option) to sell a futures contract if the option is exercised, which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates a premium which may partially offset an increase in the price of securities that the Fund intends to purchase. However, a Fund becomes obligated (upon exercise of the option) to purchase a futures contract if the option is exercised, which may have a value lower than the exercise price. The loss incurred by each Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option of the same series. There is no guarantee that such closing transactions can be effected. A Fund's ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market. Other Considerations. Each John Hancock Series Fund will engage in futures and related options transactions either for bona fide hedging or for other non-speculative purposes as permitted by the CFTC. These purposes may include using futures and options on futures as substitute for the purchase or sale of securities or currencies to increase or reduce exposure to particular markets. To the extent that a Fund is using futures and related options for hedging purposes, futures contracts will be sold to protect against a decline in the price of securities (or the currency in which they are quoted or denominated) that the Fund owns or futures contracts will be purchased to protect the Fund against an increase in the price of securities or the currency in which they are quoted or denominated) it intends to purchase. Each Fund will determine that the price fluctuations in the futures contracts and options on futures used for hedging purposes are substantially related to price fluctuations in securities held by the Fund or securities or instruments which it expects to purchase. As evidence of its hedging intent, each Fund expects that on 75% or more of the occasions on which it takes a long futures or option position (involving the purchase of futures contracts), the Fund will have purchased, or will be in the process of purchasing, equivalent amounts of related securities in the cash market at the time when the futures or option position is closed out. However, in particular cases, when it is economically advantageous for the Fund to do so, a long futures position may be terminated or an option may expire without the corresponding purchase of securities or other assets. To the extent that a Fund engages in nonhedging transactions in futures contracts and options on futures, the aggregate initial margin and premiums required to establish these nonhedging positions will not exceed 5% of the net asset value of the Fund's portfolio, after taking into account unrealized profits and losses on any such positions and excluding the amount by which such options were in-the-money at the time of purchase. The Fund will engage in transactions in futures contracts and related options only to the extent such transactions are consistent with the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for maintaining its qualification as a regulated investment company for federal income tax purposes. Transactions in futures contracts and options on futures involve brokerage costs, require margin deposits and, in the case of contracts and options obligating a Fund to purchase securities or currencies, require the Fund to establish a segregated account consisting of cash or liquid securities in an amount equal to the underlying value of such contracts and options. 11 While transactions in futures contracts and options on futures may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance for a Fund than if it had not entered into any futures contracts or options transactions. Perfect correlation between a Fund's futures positions and portfolio positions will be impossible to achieve. In the event of an imperfect correlation between a futures position and a portfolio position which is intended to be protected, the desired protection may not be obtained and the Fund may be exposed to risk of loss. In addition, it is not possible to hedge fully or protect against currency fluctuations affecting the value of securities denominated in foreign currencies because the value of such securities is likely to fluctuate as a result of independent factors not related to currency fluctuations. Some futures contracts or options on futures may become illiquid under adverse market conditions. In addition, during periods of market volatility, a commodity exchange may suspend or limit trading in a futures contract or related option, which may make the instrument temporarily illiquid and difficult to price. Commodity exchanges may also establish daily limits on the amount that the price of a futures contract or related option can vary from the previous day's settlement price. Once the daily limit is reached, no trades may be made that day at a price beyond the limit. This may prevent the Fund from closing out positions and limiting its losses. Forward Commitment and When-Issued Securities. Each Fund may purchase securities on a when-issued or forward commitment basis. "When-issued" refers to securities whose terms are available and for which a market exists, but which have not been issued. A Fund will engage in when-issued transactions with respect to securities purchased for its portfolio in order to obtain what is considered to be an advantageous price and yield at the time of the transaction. For when-issued transactions, no payment is made until delivery is due, often a month or more after the purchase. In a forward commitment transaction, a Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. When a Fund engages in forward commitment and when-issued transactions, it relies on the seller to consummate the transaction. The failure of the issuer or seller to consummate the transaction may result in the Funds losing the opportunity to obtain a price and yield considered to be advantageous. The purchase of securities on a when-issued and forward commitment basis also involves a risk of loss if the value of the security to be purchased declines prior to the settlement date. On the date a Fund enters into an agreement to purchase securities on a when-issued or forward commitment basis, the Fund will segregate in a separate account cash or liquid securities, of any type or maturity, equal in value to the Fund's commitment. These assets will be valued daily at market, and additional cash or securities will be segregated in a separate account to the extent that the total value of the assets in the account declines below the amount of the when-issued commitments. Alternatively, a Fund may enter into offsetting contracts for the forward sale of other securities that it owns. Warrants. Each John Hancock Series Fund may invest in warrants. Warrants entitle the holder to buy equity securities at a specific price for a specific period of time. Warrants tend to be more volatile than their underlying securities. Also, the value of the warrant does not necessarily change with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to the expiration date. Government Securities. Each Fund may invest in government securities. However, under normal conditions, Dividend Performers Fund, Focused Small Cap Growth Fund and Medium Capitalization Growth Fund will not invest in any fixed income securities, with the exception of cash equivalents (which include U.S. Government securities maturing in 90 days or less). In abnormal conditions, these funds may temporarily invest in U.S. Government securities and U.S. Government agency securities with maturities of up to three years, and may also invest more than 10% of total assets in cash and/or cash equivalents. Certain U.S. Government securities, including U.S. Treasury bills, notes and bonds, and 12 Government National Mortgage Association certificates ("GNMA"), are supported by the full faith and credit of the United States. Certain other U.S. Government securities, issued or guaranteed by Federal agencies or government sponsored enterprises, are not supported by the full faith and credit of the United States, but may be supported by the right of the issuer to borrow from the U.S. Treasury. These securities include obligations of the Federal Home Loan Mortgage Corporation ("FHLMC"), and obligations supported by the credit of the instrumentality, such as Federal National Mortgage Association Bonds ("FNMA"). No assurance can be given that the U.S. Government will provide financial support to such Federal agencies, authorities, instrumentalities and government sponsored enterprises in the future. Mortgage-Backed Securities. Active Bond Fund and each Independence Fund may invest in mortgage pass-through certificates and multiple-class pass-through securities, such as real estate mortgage investment conduits ("REMIC") pass-through certificates, collateralized mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"), and other types of "Mortgage-Backed securities" that may be available in the future. Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through securities represent participation interests in pools of residential mortgage loans and are issued by U.S. Governmental or private lenders and guaranteed by the U.S. Government or one of its agencies or instrumentalities, including but not limited to the GNMA, the FNMA and the FHLMC. GNMA certificates are guaranteed by the full faith and credit of the U.S. Government for timely payment of principal and interest on the certificates. FNMA certificates are guaranteed by FNMA, a federally chartered and privately owned corporation, for full and timely payment of principal and interest on the certificates. FHLMC certificates are guaranteed by FHLMC, a corporate instrumentality of the U.S. Government, for timely payment of interest and the ultimate collection of all principal of the related mortgage loans. Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations. CMOs and REMIC pass-through or participation certificates may be issued by, among others, U.S. Government agencies and instrumentalities as well as private lenders. CMOs and REMIC certificates are issued in multiple classes and the principal of and interest on the mortgage assets may be allocated among the several classes of CMOs or REMIC certificates in various ways. Each class of CMOs or REMIC certificates, often referred to as a "tranche," is issued at a specific adjustable or fixed interest rate and must be fully retired no later than its final distribution date. Generally, interest is paid or accrues on all classes of CMOs or REMIC certificates on a monthly basis. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but also may be collateralized by other mortgage assets such as whole loans or private mortgage pass-through securities. Debt service on CMOs is provided from payments of principal and interest on collateral of mortgaged assets and any reinvestment income thereon. A REMIC is a CMO that qualifies for special tax treatment under the Code and invests in certain mortgages primarily secured by interests in real property and other permitted investments. Investors may purchase "regular" and "residual" interest shares of beneficial interest in REMIC trusts although the Funds do not intend to invest in residual interests. Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class mortgage-backed securities. SMBS are usually structured with two classes that receive different proportions of interest and principal distributions on a pool of mortgage assets. A typical SMBS will have one class receiving some of the interest and most of the principal, while the other class will receive most of the interest and the remaining principal. In the most extreme case, one class will receive all of the interest (the "interest only" class) while the other class will receive all of the principal (the "principal only" class). The yields and market risk of interest only and principal only SMBS, respectively, may be more volatile than those of other fixed income securities. The staff of the SEC considers privately issued SMBS to be illiquid. 13 Structured or Hybrid Notes. Funds that may invest in mortgage-backed securities may invest in "structured" or "hybrid" notes. The distinguishing feature of a structured or hybrid note is that the amount of interest and/or principal payable on the note is based on the performance of a benchmark asset or market other than fixed-income securities or interest rates. Examples of these benchmarks include stock prices, currency exchange rates and physical commodity prices. Investing in a structured note allows a Fund to gain exposure to the benchmark market while fixing the maximum loss that the Fund may experience in the event that market does not perform as expected. Depending on the terms of the note, a Fund may forego all or part of the interest and principal that would be payable on a comparable conventional note; a Fund's loss cannot exceed this foregone interest and/or principal. An investment in structured or hybrid notes involves risks similar to those associated with a direct investment in the benchmark asset. Risk Factors Associated with Mortgage-Backed Securities. Investing in Mortgage-Backed Securities involves certain risks, including the failure of a counter-party to meet its commitments, adverse interest rate changes and the effects of prepayments on mortgage cash flows. In addition, investing in the lowest tranche of CMOs and REMIC certificates involves risks similar to those associated with investing in equity securities. Further, the yield characteristics of Mortgage-Backed Securities differ from those of traditional fixed income securities. The major differences typically include more frequent interest and principal payments (usually monthly), the adjustability of interest rates, and the possibility that prepayments of principal may be made substantially earlier than their final distribution dates. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic, social and other factors and cannot be predicted with certainty. Both adjustable rate mortgage loans and fixed rate mortgage loans may be subject to a greater rate of principal prepayments in a declining interest rate environment and to a lesser rate of principal prepayments in an increasing interest rate environment. Under certain interest rate and prepayment rate scenarios, a Fund may fail to recoup fully its investment in Mortgage-Backed Securities notwithstanding any direct or indirect governmental, agency or other guarantee. When a Fund reinvests amounts representing payments and unscheduled prepayments of principal, it may receive a rate of interest that is lower than the rate on existing adjustable rate mortgage pass-through securities. Thus, Mortgage-Backed Securities, and adjustable rate mortgage pass-through securities in particular, may be less effective than other types of U.S. Government securities as a means of "locking in" interest rates. Conversely, in a rising interest rate environment, a declining prepayment rate will extend the average life of many Mortgage-Backed Securities. This possibility is often referred to as extension risk. Extending the average life of a Mortgage-Backed Security increases the risk of depreciation due to future increases in market interest rates. Risk Associated With Specific Types of Derivative Debt Securities. Different types of derivative debt securities are subject to different combinations of prepayment, extension and/or interest rate risk. Conventional mortgage pass-through securities and sequential pay CMOs are subject to all of these risks, but are typically not leveraged. Thus, the magnitude of exposure may be less than for more leveraged Mortgage-Backed Securities. The risk of early prepayments is the primary risk associated with interest only debt securities ("IOs"), super floaters, other leveraged floating rate instruments and Mortgage-Backed Securities purchased at a premium to their par value. In some instances, early prepayments may result in a complete loss of investment in certain of these securities. The primary risks associated with certain other derivative debt securities are the potential extension of average life and/or depreciation due to rising interest rates. 14 These securities include floating rate securities based on the Cost of Funds Index ("COFI floaters"), other "lagging rate" floating rate securities, floating rate securities that are subject to a maximum interest rate ("capped floaters"), Mortgage-Backed Securities purchased at a discount, leveraged inverse floating rate securities ("inverse floaters"), principal only debt securities ("POs"), certain residual or support tranches of CMOs and index amortizing notes. Index amortizing notes are not Mortgage-Backed Securities, but are subject to extension risk resulting from the issuer's failure to exercise its option to call or redeem the notes before their stated maturity date. Leveraged inverse IOs combine several elements of the Mortgage-Backed Securities described above and thus present an especially intense combination of prepayment, extension and interest rate risks. Planned amortization class ("PAC") and target amortization class ("TAC") CMO bonds involve less exposure to prepayment, extension and interest rate risk than other Mortgage-Backed Securities, provided that prepayment rates remain within expected prepayment ranges or "collars." To the extent that prepayment rates remain within these prepayment ranges, the residual or support tranches of PAC and TAC CMOs assume the extra prepayment, extension and interest rate risk associated with the underlying mortgage assets. Other types of floating rate derivative debt securities present more complex types of interest rate risks. For example, range floaters are subject to the risk that the coupon will be reduced to below market rates if a designated interest rate floats outside of a specified interest rate band or collar. Dual index or yield curve floaters are subject to depreciation in the event of an unfavorable change in the spread between two designated interest rates. X-reset floaters have a coupon that remains fixed for more than one accrual period. Thus, the type of risk involved in these securities depends on the terms of each individual X-reset floater. Ratings as Investment Criteria. In general, the ratings of Moody's and S&P represent the opinions of these agencies as to the quality of the securities which they rate. It should be emphasized however, that ratings are relative and subjective and are not absolute standards of quality. These ratings will be used by the Funds as initial criteria for the selection of portfolio securities. Among the factors which will be considered are the long-term ability of the issuer to pay principal and interest and general economic trends. Appendix A contains further information concerning the rating of Moody's and S&P and their significance. Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither of these events will require the sale of the securities by the Fund, but the Adviser will consider the event in its determination of whether the Fund should continue to hold the securities. Lower Rated High Yield Debt Obligations. Active Bond Fund and Small Capitalization Value Fund may invest in high yielding, fixed income securities rated below investment grade (e.g., rated below Baa by Moody's Investors Service, Inc. ("Moody's") or below BBB by Standard & Poor's Ratings Group ("S&P")). Active Bond Fund will not invest in securities rated below Ca by Moody's or CC by S&P. Small Capitalization Value Fund may invest up to 15% of its net assets in securities rated as low as Ca by Moody's or CC by S & P and their equivalents. Ratings are based largely on the historical financial condition of the issuer. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition, which may be better or worse than the rating would indicate. See Appendix A to this Statement of Additional Information which describes the characteristics of corporate bonds in the various ratings categories. The Funds may invest in comparable quality unrated securities which, in the opinion of the Adviser or Subadviser, offer comparable yields and risks to those securities which are rated. Debt obligations rated in the lower ratings categories, or which are unrated, involve greater volatility of price and risk of loss of principal and income. In addition, lower ratings reflect a greater possibility of an adverse change in financial condition affecting the ability of the issuer to make payments of interest and principal. The high yield fixed income market is relatively new and its growth occurred during a period of economic expansion. The market has not yet been fully tested by an economic recession. 15 The market price and liquidity of lower rated fixed income securities generally respond to short term corporate and market developments to a greater extent than do the price and liquidity of higher rated securities because such developments are perceived to have a more direct relationship to the ability of an issuer of such lower rated securities to meet its ongoing debt obligations. Reduced volume and liquidity in the high yield bond market or the reduced availability of market quotations will make it more difficult to dispose of the bonds and to value accurately the Funds' assets. The reduced availability of reliable, objective data may increase the Funds' reliance on management's judgment in valuing high yield bonds. In addition, the Funds' investments in high yield securities may be susceptible to adverse publicity and investor perceptions, whether or not justified by fundamental factors. A Fund's investments, and consequently its net asset value, will be subject to the market fluctuations and risks inherent in all securities. Lending of Securities. The Funds may lend portfolio securities to brokers, dealers, and financial institutions if the loan is collateralized by cash or U.S. Government securities according to applicable regulatory requirements. The Funds may reinvest any cash collateral in short-term securities and money market funds. When a Fund lends portfolio securities, there is a risk that the borrower may fail to return the securities involved in the transaction. As a result, the Fund may incur a loss or, in the event of the borrower's bankruptcy, the Fund may be delayed in or prevented from liquidating the collateral. Each Fund can lend portfolio securities having a total value of 33 1/3% of its total assets. Short-Term Trading. Each John Hancock Series Fund may engage in short-term trading. These Funds intend to use short-term trading of securities as a means of managing their portfolio to achieve their respective investment objective. In reaching a decision to sell one security and purchase another security at approximately the same time, the Funds will take into account a number of factors, for fixed income funds. These include the quality ratings, interest rates, yields, maturity dates, call prices, and refunding and sinking fund provisions of the securities under consideration, as well as historical yield spreads and current economic information. Equity funds may engage in short-term trading for special situations. These special situations may include arbitrage opportunities, extraordinary positive or negative earnings surprises, takeover situations, spin-offs, asset plays, management changes or a reorganization. The success of short-term trading will depend upon the ability of the Funds to evaluate particular securities, to anticipate relevant market factors, including trends of interest rates and earnings and variations from such trends, to obtain relevant information, to evaluate it promptly, and to take advantage of its evaluations by completing transactions on a favorable basis. It is expected that the expenses involved in short-term trading, which would not be incurred by an investment company which does not use this portfolio technique, will be less than the profits and other benefits which will accrue to shareholders. INVESTMENT RESTRICTIONS Fundamental Investment Restrictions. Each Fund has adopted the following investment restrictions which may not be changed without the approval of a majority of the applicable Fund's outstanding voting securities which, as used in the Prospectuses and this Statement of Additional Information means the approval by the lesser of (1) the holders of 67% or more of a Fund's shares represented at a meeting if more than 50% of a Fund's outstanding shares are present in person or by proxy or (2) more than 50% of the outstanding shares. 16 A Fund may not: 1. Issue senior securities, except as permitted by paragraphs 3, 6 and 7 below. For purposes of this restriction, the issuance of shares of beneficial interest in multiple classes or series, the deferral of trustees' fees, the purchase or sale of options, futures contracts, forward commitments and repurchase agreements entered into in accordance with the Fund's investment policies or within the meaning of paragraph 6 below, are not deemed to be senior securities. 2. Purchase securities on margin or make short sales [see non-fundamental investment restriction (d)], or unless, by virtue of its ownership of other securities, the Fund has the right to obtain securities equivalent in kind and amount to the securities sold and, if the right is conditional, the sale is made upon the same conditions, except (i) in connection with arbitrage transactions, (ii) for hedging the Fund's exposure to an actual or anticipated market decline in the value of its securities, (iii) to profit from an anticipated decline in the value of a security, and (iv) obtaining such short-term credits as may be necessary for the clearance of purchases and sales of securities. 3. Borrow money, except for the following extraordinary or emergency purposes: (i) from banks for temporary or short-term purposes or for the clearance of transactions in amounts not to exceed 33 1/3% of the value of the Fund's total assets (including the amount borrowed) taken at market value; (ii) in connection with the redemption of Fund shares or to finance failed settlements of portfolio trades without immediately liquidating portfolio securities or other assets; (iii) in order to fulfill commitments or plans to purchase additional securities pending the anticipated sale of other portfolio securities or assets; and (iv) in the case of Focused Small Cap Growth Fund, in connection with entering into reverse repurchase agreements and dollar rolls, but only if after each such borrowing there is asset coverage of at least 300% as defined in the 1940 Act. A Fund, other than Focused Small Cap Growth Fund, may not borrow money for the purpose of leveraging the Funds' assets. For purposes of this investment restriction, the deferral of Trustees' fees and transactions in short sales, futures contracts, options on futures contracts, securities or indices and forward commitment transactions shall not constitute borrowing. Focused Small Cap Growth Fund has no current intention of entering into reverse repurchase agreements or dollar rolls. 4. Act as an underwriter, except to the extent that in connection with the disposition of portfolio securities, the Fund may be deemed to be an underwriter for purpose of the 1933 Act. 5. Purchase or sell real estate except that the Fund may (i) acquire or lease office space for its own use, (ii) invest in securities of issuers that invest in real estate or interests therein, (iii) invest in securities that are secured by real estate or interests therein, (iv) purchase and sell mortgage-related securities and (v) hold and sell real estate acquired by the Fund as a result of the ownership of securities. 6. Invest in commodities, except the Fund may purchase and sell options on securities, securities indices and currency, futures contracts on securities, securities indices and currency and options on such futures, forward foreign currency exchange contracts, forward commitments, securities index put or call warrants and repurchase agreements entered into in accordance with the Fund's investment policies [see non-fundamental investment restriction (f)]. 7. Make loans, except that the Fund (1) may lend portfolio securities in accordance with the Fund's investment policies up to 33 1/3% of the Fund's total assets taken at market value, (2) enter into repurchase agreements, and (3) purchase all or a portion of an issue of debt securities, bank loan participation interests, bank certificates of deposit, bankers' acceptances, debentures or other securities, whether or not the purchase is made upon the original issuance of the securities. 17 8. Purchase the securities of issuers conducting their principal activity in the same industry if, immediately after such purchase, the value of its investments in such industry would exceed 25% of its total assets taken at market value at the time of such investment. This limitation does not apply to investments in obligations of the U.S. Government or any of its agencies, instrumentalities or authorities. 9. For each Fund with respect to 75% of total assets [see non-fundamental investment restriction (e)], purchase securities of an issuer (other than the U.S. Government, its agencies, instrumentalities or authorities), if: (a) such purchase would cause more than 5% of the Fund's total assets taken at market value to be invested in the securities of such issuer; or (b) such purchase would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund. Non-Fundamental Investment Restrictions. The following investment restrictions are designated as non-fundamental and may be changed by the Trustees without shareholder approval. A Fund may not: (a) Purchase a security if, as a result, (i) more than 10% of the Fund's total assets would be invested in the securities of other investment companies, (ii) the Fund would hold more than 3% of the total outstanding voting securities of any one investment company, or (iii) more than 5% of the Fund's total assets would be invested in the securities of any one investment company. These limitations do not apply to (a) the investment of cash collateral, received by the Fund in connection with lending the Fund's portfolio securities, in the securities of open-end investment companies or (b) the purchase of shares of any investment company in connection with a merger, consolidation, reorganization or purchase of substantially all of the assets of another investment company. Subject to the above percentage limitations the Fund may, in connection with the John Hancock Group of Funds Deferred Compensation Plan for Independent Trustees/Directors, purchase securities of other investment companies within the John Hancock Group of Funds. (b) Invest more than 15% of the net assets of the Fund, taken at market value, in illiquid securities. (c) Invest for the purpose of exercising control over or management of any company. In addition: (d) Dividend Performers Fund, International Equity Fund, Medium Capitalization Growth Fund, Focused Small Cap Growth Fund, and Small Capitalization Value Fund may not make short sales. (e) Dividend Performers Fund, International Equity Fund, Medium Capitalization Growth Fund, Small Capitalization Value Fund, and Focused Small Cap Growth Fund may not invest more than 5% of total assets at time of purchase in any one security (other than U.S. Government securities). 18 (f) Dividend Performers Fund, Medium Capitalization Growth Fund, Small Capitalization Value Fund, and Focused Small Cap Growth Fund may only purchase or sell stock index options, stock index futures, and stock index options on futures. (g) Under normal conditions, Active Bond Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Small Capitalization Value Fund, and Focused Small Cap Growth Fund may not invest more than 10% of total assets in cash and/or cash equivalents (except cash segregated in relation to futures, forward and option contracts). (h) Under normal conditions Dividend Performers Fund, Medium Capitalization Growth Fund, and Focused Small Cap Growth Fund will not invest in any fixed income securities. However, in abnormal conditions, these funds may temporarily invest in U.S. Government securities and U.S. Government agency securities with maturities of up to three years, and may also invest more than 10% of total assets in cash and/or cash equivalents (including U.S. Government securities maturing in 90 days or less). (i) International Equity Fund normally invests at least 80% of total assets in a diversified portfolio of foreign stocks from both developed and emerging countries. The Fund may invest up to 30% of total assets in emerging markets as classified by Morgan Stanley Capital International ("MSCI"). Foreign equities include but are not limited to common stocks, convertible preferred stocks, preferred stocks, warrants, ADRs, GDRs and EDRs. (j) Small Capitalization Value Fund invests primarily in U.S. stocks, buy may invest up to 15% of total assets in a combination of foreign securities and/or bonds rated as low as CC/Ca and their unrated equivalents. (k) Medium Capitalization Growth Fund and Focused Small Cap Growth Fund may invest up to 10% of total assets in foreign securities. Foreign equities include but are not limited to common stocks, convertible preferred stocks, preferred stocks, warrants, ADRs, GDRs and EDRs. If a percentage restriction on investment or utilization of assets as set forth above is adhered to at the time an investment is made, a later change in percentage resulting from changes in the values of a Fund's assets will not be considered a violation of the restriction. The Funds will invest only in countries on the Adviser's Approved Country Listing. The Approved Country Listing is a list maintained by the Adviser's investment department that outlines all countries, including the United States, that have been approved for investment by Funds managed by the Adviser. THOSE RESPONSIBLE FOR MANAGEMENT The business of the Funds is managed by the Trustees who elect officers who are responsible for the day-to-day operations of the Funds and who execute policies formulated by the Trustees. Several of the officers and Trustees of the Funds are also officers or directors of the Funds' Adviser and/or one or more or the Subadvisers, or officers and/or directors of the Funds' principal distributor, John Hancock Funds, Inc. ("John Hancock Funds"). 19
Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- Maureen R. Ford * Trustee, Chairman, President Executive Vice President John 101 Huntington Avenue and Chief Executive Officer Hancock Financial Services, Inc., Boston, MA 02199 (1,2) John Hancock Life Insurance March 1950 Company; Chairman, Director, President and Chief Executive Officer, John Hancock Advisers, Inc. (the "Adviser") and The Berkeley Financial Group, Inc. ("The Berkeley Group"); Chairman, Director and Chief Executive Officer, John Hancock Funds, Inc. ("John Hancock Funds"); Chairman, Director and President, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc."); Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation (SAMCorp.); Director, Independence Investment LLC and Independence Fixed Income LLC; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). John M. DeCiccio* Trustee Executive Vice President and Chief P.O. Box 111 Investment Officer John Hancock Boston, MA 02117 Financial Services, Inc.; Director, July 1948 Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, Inc., Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, The Berkeley Group, the Adviser, John Hancock Funds, Massachusetts Business Development Corporation; Director, Insurance Agency Inc. (until 1999) and John Hancock Signature Services, Inc. (until 1997). - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser. 20 Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- James F. Carlin Trustee Chairman and CEO, Alpha Analytical 101 Huntington Avenue Laboratories (chemical analysis), Boston, MA 02199 Carlin Consolidated, Inc. April 1940 (management/investments); Trustee, Massachusetts Health and Education Tax Exempt Trust; Director, Uno Restaurant Corp., Arbella Mutual (insurance) (until September 2000), HealthPlan Services, Inc. (until February 1999), Flagship Healthcare, Inc. (until November 1999), Carlin Insurance Agency, Inc. (until April 1999), Chairman, Massachusetts Board of Higher Education (until July 1999) and Trustee of 35 funds managed by the Adviser. William H. Cunningham Trustee Former Chancellor, University of 101 Huntington Avenue Texas System and former President Boston, MA 02199 of the University of Texas, Austin, January 1944 Texas; James L. Bayless Chair of Free Enterprise; Director, LaQuinta Motor Inns, Inc. (hotel management company) (1985-1998); Jefferson-Pilot Corporation (diversified life insurance company) Billing Concepts, Southwest Airlines and Introgen ; Advisory Director, Chase Bank (formerly Texas Commerce Bank - Austin). Ronald R. Dion Trustee Chairman and Chief Executive 101 Huntington Avenue Officer, R.M. Bradley & Co., Inc.; Boston, MA 02199 Director, The New England Council March 1946 and Massachusetts Roundtable; Trustee, North Shore Medical Center, Director, BJ's Wholesale Club, Inc. and a corporator of the Eastern Bank; Trustee, Emmanuel College. Charles L. Ladner Trustee Chairman and Trustee, Dunwoody 101 Huntington Avenue Village, Inc.; Senior Vice Boston, MA 02199 President and Chief Financial February 1938 Officer, UGI Corporation (Public Utility Holding Company) (retired 1998); Vice President and Director for AmeriGas, Inc. (retired 1998); Vice President of AmeriGas Partners, L.P. (until 1997); Director, EnergyNorth, Inc. (until 1995). - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser. 21 Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- Steven R. Pruchansky Trustee (1) Chairman and Chief Executive 101 Huntington Avenue Officer, Mast Holdings, Inc. (since Boston, MA 02199 June 1, 2000); Director and August 1944 President, Mast Holdings, Inc. (until May 31, 2000); Director, First Signature Bank & Trust Company (until August 1991); Director, Mast Realty Trust (until 1994); President, Maxwell Building Corp. (until 1991). Norman H. Smith Trustee Lieutenant General, United States 101 Huntington Avenue Marine Corps; Deputy Chief of Staff Boston, MA 02199 for Manpower and Reserve Affairs, March 1933 Headquarters Marine Corps; Commanding General III Marine Expeditionary Force/3rd Marine Division (retired 1991). John P. Toolan Trustee Director, The Smith Barney Muni 101 Huntington Avenue Bond Funds, The Smith Barney Boston, MA 02199 Tax-Free Money Funds, Inc., Vantage September 1930 Money Market Funds (mutual funds), The Inefficient-Market Fund, Inc. (closed-end investment company) and Smith Barney Trust Company of Florida; Chairman, Smith Barney Trust Company (retired December, 1991); Director, Smith Barney, Inc., Mutual Management Company and Smith Barney Advisers, Inc. (investment advisers) (retired 1991); Senior Executive Vice President, Director and member of the Executive Committee, Smith Barney, Harris Upham & Co., Incorporated (investment bankers) (until 1991). William L. Braman Executive Vice President and Executive Vice President and Chief 101 Huntington Avenue Chief Investment Officer (2) Investment Officer, the Adviser and Boston, MA 02199 each of the John Hancock Funds; December 1953 Executive Vice President and Chief Investment Officer, Barring Asset Management, London UK (until May 2000). - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser. 22 Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- Richard A. Brown Senior Vice President and Senior Vice President and Chief 101 Huntington Avenue Chief Financial Officer (2) Financial Officer of the Adviser, Boston, MA 02199 John Hancock Funds, and The April 1949 Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until January 2001). Susan S. Newton Senior Vice President, Senior Vice President and Chief 101 Huntington Avenue Secretary and Chief Legal Legal Officer the Adviser; John Boston, MA 02199 Officer Hancock Funds; Vice President, March 1950 Signature Services (until May 2000), The Berkeley Group, NM Capital and SAMCorp. Thomas H. Connors Vice President and Compliance Vice President and Compliance 101 Huntington Avenue Officer Officer, the Adviser; Vice Boston, MA 02199 President, John Hancock Funds. September 1959 - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser.
23 The following table provides information regarding the compensation paid by the Fund and other investment companies in the John Hancock Fund Complex to the Independent Trustees for their services. Mr. DeCiccio and Ms. Ford, each a non-Independent Trustee, and each of the officers of the Fund are interested persons of the Adviser, and/or affiliates are compensated by the Adviser and receive no compensation from the Fund for their services. Total Compensation from all Aggregate Compensation Funds in John Hancock Fund Trustees from the Funds(1) Complex to Trustees (2) - -------- ---------------------- --------------------------- James F. Carlin $ 2,217 $ 72,000 William H. Cunningham* 2,221 72,100 Ronald R. Dion* 2,217 72,000 Charles L. Ladner 2,333 75,100 Steven R. Pruchansky* 2,329 75,000 Norman H. Smith* 2,440 78,000 John P. Toolan* 2,191 70,250 -------- ---------- Total $15,948 $514,450 (1) Compensation is for the fiscal year ended February 28, 2001. (2) Total compensation paid by the John Hancock Fund Complex to the Independent Trustees is for the calendar year ended December 31, 2000 As of that date, there were sixty-nine funds in the John Hancock Fund Complex, with each of these Independent Trustees serving on thirty four funds. (*) As of December 31, 2000, the value of the aggregate accrued deferred compensation from all Funds in the John Hancock fund complex for Mr. Cunningham was $514,062, for Mr. Dion was $80,629, for Ms. McCarter was $179,156 (resigned as of October 1, 1998) for Mr. Pruchansky was $123,670, for Mr. Smith was $182,867 and for Mr. Toolan was $623,506 under the John Hancock Deferred Compensation Plan for Independent Trustees (the "Plan"). All of the officers listed are officers or employees of the Adviser or affiliated companies. Some of the Trustees and officers may also be officers and/or Directors and/or Trustees of one or more other funds for which the Adviser serves as investment adviser. As of June 4, 2001, the officers and Trustees of the Fund as a group beneficially owned less than 1% of the outstanding shares of the Fund. As of that date, the following shareholders of record beneficially owned 5% or more of the outstanding shares of the Fund. 24 Percentage of Total Name and Address of Shareholder Fund Outstanding Shares - ------------------------------- ---- ------------------- The Investment Incentive Plan Active Bond 24.36% 101 Huntington Avenue Boston MA 02199-7603 The Chase Manhattan Bank Active Bond 33.80% 450 West 33rd Street New York NY 10001 Manistique Papers, Inc. Active Bond 6.65% 453 S Mackinac Avenue Manistique, MI Sterling Trust Company Active Bond 9.23% FBO SIPEX Tax Deferred Savings Plan 1380 Lawrence Street Denver CO Sterling Trust Company Active Bond 6.49% FBO Arden Group 401 (k) Retirement Savings Plan 1380 Lawrence Street Denver CO Gilbane International Equity 44.16% Gilbane Profit Sharing Plan 7 Jackson Walkway Providence RI 02902-3623 Sterling Trust Company International Equity 12.45% FBO Southern Industrial 401(k) Plan 1380 Lawrence Street Denver CO The Investment Incentive Plan International Equity 18.65% 101 Huntington Avenue Boston MA 02199-7603 Sterling Trust Company International Equity 7.63% FBO Texon USA, Inc. Savings Plan for Employees of Texon USA Inc. 1380 Lawrence Street Denver CO Miter & Co Independence Diversified Core 7.10% c/o Marshall & Iisley Trust Co. Equity Fund II-Class I P.O. Box 2977 Milwaukee WI 53201 25 Percentage of Total Name and Address of Shareholder Fund Outstanding Shares - ------------------------------- ---- ------------------- Northern Trust Independence Diversified Core 10.79% FBO AM Castle and Co Pension Plan Equity Fund II-Class I P.O. Box 92956 Chicago IL NABANK Independence Diversified Core 6.18% P.O. Box 2180 Equity Fund II-Class I Tulsa OK 74101 Peter Kamin Independence Diversified Core 5.50% Knowles Electronics Inc. Equity Fund II-Class I Pension Trust 1151 Maplewood Drive Itasca IL Sterling Trust Company Independence Diversified Core 5.85% FBO BAO Retirement & Savings Plan Equity Fund II-Class I 1380 Lawrence Street Denver CO Independence Investment Associates Independence Medium Capitalization 7.65% 53 State Street Boston MA 02109-2809 Hancock Investment Subsidiaries Independence Medium Capitalization 14.42% 401K Plan & Trust Independence Investment Assoc Ttee 53 State Street Boston MA 02109-2809 Gilbane Independence Medium Capitalization 6.91% 7 Jackson Walkway Providence RI 02903-323 The Investment Incentive Plan Dividend Performers 56.09% 101 Huntington Avenue Boston MA 02199-7603 The Chase Manhattan Bank Dividend Performers 11.70% 450 West 33rd Street New York NY 10001 26 Percentage of Total Name and Address of Shareholder Fund Outstanding Shares - ------------------------------- ---- ------------------- Sterling Trust Company Dividend Performers 11.39% FBO Texon USA, Inc. Savings Plan for Employees of Texon USA Inc. 1380 Lawrence Street Denver CO CG Enterprises Inc Dividend Performers 7.95% 12001 Guilford Road Annapolis Junction MD 20701 Liguori Deferred Savings Plan Dividend Performers 6.81% Liguori Publications Inc 1 Liguori Drive Liguori, MO 63057 Gilbane Independence Balanced 16.09% Gilbane Profit Sharing Plan 7 Jackson Walkway Providence RI 02902-3623 Sterling Trust Company Independence Balanced 5.78% FBO ACP-ASIM A 1380 Lawrence Street Denver CO Dan River, Inc. Independence Balanced 7.54% Dan River, Inc.401(K) Plan 917 West Main Street Danville VA 24541 Sterling Trust Company Independence Balanced 8.57% FBO BAO Retirement & Savings Plan 1380 Lawrence Street Denver CO The Investment Incentive Plan Medium Capitalization Growth 32.49% 101 Huntington Avenue Boston MA 02199-7603 Sterling Trust Company Medium Capitalization Growth 11.97% FBO Southern Industrial 401(k) Plan 1380 Lawrence Street Denver CO 27 Percentage of Total Name and Address of Shareholder Fund Outstanding Shares - ------------------------------- ---- ------------------- Sterling Trust Company Medium Capitalization Growth 7.85% FBO Texon USA, Inc. Savings Plan for Employees of Texon USA Inc. 1380 Lawrence Street Denver CO Globe Manufacturing Co Medium Capitalization Growth 6.90% 401K Plan 456 Bedford Street Fall River MA 02720-4802 Sterling Trust Company Medium Capitalization Growth 7.72% FBO SIPEX Tax Deferred Savings Plan 1380 Lawrence Street Denver CO Sterling Trust Company Medium Capitalization Growth 6.21% FBO One Color Comm 401(k) Retirement Plan 1380 Lawrence Street Denver CO Gilbane Small Capitalization Value 55.89%% Gilbane Profit Sharing Plan 7 Jackson Walkway Providence RI 02902-3623 The Investment Incentive Plan Small Capitalization Value 19.45% 101 Huntington Avenue Boston MA 02199-7603 Sheldon & Co. Small Capitalization Value 5.37% c/o National City Bank P.O. Box 94984 Cleveland OH 44101 Fidelity Investment Institutional Small Capitalization Value 11.60% Operations Co. As Agent for certain employee Benefit plans 100 Magellan Way Covington KY 41015 The Investment Incentive Plan Focused Small Cap Growth Fund- 36.00% 101 Huntington Avenue Class I Boston MA 02199-7603 28 Percentage of Total Name and Address of Shareholder Fund Outstanding Shares - ------------------------------- ---- ------------------- Cape Ann Local Lodge #2654 Focused Small Cap Growth Fund 14.00% 401K Plan -Class I c/o Gloucester Engineering PO Box 900 Gloucester MA 01931-0900 Manistique Papers, Inc. Focused Small Cap Growth Fund 5.64% 453 S. Mackinac Avenue -Class I Manistique MI. 49854 CG Enterprises Inc Focused Small Cap Growth 5.91% 12001 Guilford Road Fund-Class I Annapolis Junction MD 20701 Sealol Inc. Retirement and 401(k) Focused Small Cap Growth 5.77% EG&G Sealol Inc Fund-Class I 15 Pioneer avenue Warwick, RI The Chase Manhattan Bank Focused Small Cap Growth 6.63% 450 West 33rd Street Fund-Class I New York NY 10001 Sterling Trust Company Focused Small Cap Growth 8.73% FBO ACP-ASIM A Fund-Class I 1380 Lawrence St Ste 1400 Denver CO 80204 Sterling Trust Company Focused Small Cap Growth 7.02% FBO ARA-Individual Retirement Fund-Class I 1380 Lawrence St Ste 1400 Denver CO 80204 Sterling Trust Company Focused Small Cap Growth 5.80% FBO ACP-ASIM B Fund-Class I 1380 Lawrence St Ste 1400 Denver CO 80204 Shareholders of a Fund having beneficial ownership of more than 25% of the shares of a Fund may be deemed for purposes of the Investment Company Act of 1940, as amended, to control that Fund. INVESTMENT ADVISORY AND OTHER SERVICES The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603, was organized in 1968 and has more than $30 billion in assets under management in its capacity as investment adviser to the Funds and the other funds and publicly traded investment companies in the John Hancock group of funds as well as retail and institutional privately managed accounts. The Adviser is an affiliate of the Life Company, one of the most recognized and respected financial institutions in the nation. With total assets under management of more 29 than $100 billion, the Life Company is one of the ten largest life insurance companies in the United States, and carries a high rating from Standard & Poor's and A.M. Best. Founded in 1862, the Life Company has been serving clients for over 130 years. The Small Capitalization Value Fund is managed by Timothy E. Quinlisk, CFA. Mr. Quinlisk is a Senior Vice President of the Adviser and has managed the Fund since 1998 except between January and March 2000. The Fund has entered into an investment management contract (the "Advisory Agreement") with the Adviser which was approved by the Funds' shareholders. Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously an investment program for the Fund and determine, subject to the overall supervision and review of the Trustees, which investments should be purchased, held, sold or exchanged, and (b) provide supervision over all aspects of the Fund's operations except those which are delegated to a custodian, transfer agent or other agent. The Fund bears all costs of its organization and operation, including but not limited to expenses of preparing, printing and mailing all shareholders' reports, notices, prospectuses, proxy statements and reports to regulatory agencies; expenses relating to the issuance, registration and qualification of shares; government fees; interest charges; expenses of furnishing to shareholders their account statements; taxes; expenses or redeeming shares; brokerage and other expenses connected with the execution of portfolio securities transactions; expenses pursuant to the Fund's plan of distribution; fees and expenses of custodians including those for keeping books and accounts, maintaining a committed line of credit and calculating the net asset value of shares; fees and expenses of transfer agents and dividend disbursing agents; legal, accounting, financial, management, tax and auditing fees and expenses of the Fund (including an allocable portion of the cost of the Adviser's employees rendering such services to the Fund); the compensation and expenses of Trustees who are not otherwise affiliated with the Trust, the Adviser or any of their affiliates; expenses of Trustees' and shareholders, meetings; trade association membership; insurance premiums; and any extraordinary expenses. As of December 14, 2000, with respect to International Equity Fund, the Adviser has entered into a sub-investment management contract (the "Sub-Advisory Agreement") with Nicholas-Applegate under which, subject to the review of the Trustees and the overall supervision of the Adviser, Nicholas-Applegate is responsible for providing the Fund with investment advice. Nicholas-Applegate will also provide the Fund on a continuous basis with economic, financial and political information, research and assistance concerning international markets. Nicholas-Applegate is a California limited partnership, with offices at 600 West Broadway, 30th Floor, San Diego, California 92101. Nicholas-Applegate was organized in August 1984 to manage discretionary accounts investing primarily in publicly traded equity securities and securities convertible into or exercisable for publicly traded equity securities, with the goal of capital appreciation. On January 31, 2001, Nicholas-Applegate was acquired by Allianz of America, Inc. ("AZOA"). Allianz AG, the parent of AZOA, is a German Aktiengesellschaft, a German publicly traded company, which, together with its subsidiaries, comprises the world's largest insurance group (the "Allianz Group"). Allianz Group currently has assets under management of approximately $690 billion, and in its last fiscal year wrote approximately $50 billion in gross insurance premiums. Allianz AG's address is: Koeniginstrasse 28, D-80802, Munich, Germany. Until December 14, 2000, the Sub-Adviser to the International Equity Fund was Indocam International Investment Services ("IIIS"). IIIS is organized under the laws of France and is a wholly owned subsidiary of Indocam, the asset management affiliate of Credit Agricole, a French banking group. Indocam is an indirect subsidiary of certain holding companies of Caisse Nationale de Credit Agricole ("CNCA"), 91-93 Boulevard Pasteur, Paris, France 75015, one of the largest financial and industrial groups in Europe. The Sub-Advisory Agreement with IIIS was terminated effective December 14, 2000. Until March 1, 2000, International Equity Fund had another Sub-Adviser, John Hancock Advisers International Limited ("JHAI"), located at 6th Floor, Duke's Court, 32-36 Duke Street, St. James's, London SWIY 6DF, England. JHAI is a wholly owned subsidiary of the Adviser formed in 1987 to provide investment research and advisory services to U.S. institutional clients. The Sub-Advisory Agreement with JHAI was terminated effective March 1, 2000. 30 With respect to each Independence Fund, the Adviser has entered into a Sub-Advisory Agreement with Independence Investment LLC. ("Independence") (formerly Independence Investment Associates, Inc. Independence, located at 53 State Street, Boston, Massachusetts 02109, and organized in 1982, is a wholly owned indirect subsidiary of John Hancock Subsidiaries, Inc. Under each respective Sub-Advisory Agreement, the corresponding Sub-Adviser, subject to the review of the Trustees and the over-all supervision of the Adviser, is responsible for managing the investment operations of the corresponding Fund and the composition of the Fund's portfolio and furnishing the Fund with advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. As compensation for its services under the Advisory Agreement, each Fund pays the Adviser monthly a fee based on a stated percentage of the average daily net assets of each Fund.
Funds Rate - ------ ---- Active Bond Fund .50% of average daily net assets up to $1.5 billion .45% of such assets in excess of $1.5 billion Small Capitalization Value Fund .70% of average daily net assets up to $500 million .65% of such assets in excess of $500 million Dividend Performers Fund .60% of average daily net assets up to $500 million .55% of such assets in excess of $500 million Medium Capitalization Growth Fund .80% of average daily net assets up to $500 million .75% of such assets in excess of $500 million Focused Small Cap Growth Fund .80% of average daily net assets International Equity Fund .90% of average daily net assets up to $500 million .65% of such assets in excess of $500 million Balanced Fund .70% of the average daily net assets up to $500 million .65% of such assets in excess of $500 million Diversified Core Equity Fund II .50% of the average daily net assets up to $1 billion .45% of such assets in excess of $1 billion Medium Capitalization Fund .80% of the average daily net assets up to $500 million .75% of such assets in excess of $500 million
The advisory fees paid by Focused Small Cap Growth Fund and International Equity Fund are greater than those paid by most funds. Due to the added complexity of managing funds with investment strategies similar to these Funds, advisory fees of similar funds tend to be higher than those paid by most funds. Also, the advisory fees paid by Medium Capitalization Fund are greater, but they are comparable to those paid by many investment companies with similar investment objectives and policies. Under each Sub-Advisory Agreement, the Adviser (not the Fund) pays a portion of its fee to the corresponding Sub-Adviser. Sub-Advisory fees are paid at the following rates: Diversified Core Equity Fund II, 80% of the advisory fee payable on the Fund's average daily net assets; Medium Capitalization Fund, 55% of the advisory fee payable on the Fund's average daily net assets and Balanced Fund, 60% of the advisory fee payable on the Fund's average daily net assets. With respect to International Equity Fund, the Adviser pays Nicholas-Applegate a 31 Sub-Advisory fee quarterly equal on an annual basis to (i) 0.90% of the first $500,000,000 of the average daily net asset value of the Fund; and (ii) 0.65% of the average daily net asset value of the Fund in excess of $500,000,000. From December 14, 2000 until May 11, 2001, the Adviser paid Nicholas-Applegate a Sub-Advisory fee equal to 55% of the gross management fee received by the Adviser with respect to the International Equity Fund's average daily net assets. Until December 14, 2000 with respect to International Equity Fund, the Adviser paid IIIS a Sub-Advisory fee equal to 55% of the gross management fee received by the Adviser with respect to the International Equity Fund's average daily net assets. The Sub-Advisory Agreement with IIIS was terminated effective December 14, 2000. For International Equity Fund, the Adviser also paid JHAI a Sub-Advisory fee equal to 70% of the advisory fee payable on the Fund's average daily net assets up to $500 million and 90% of the advisory fee payable on the Fund's assets exceeding $500 million. JHAI agreed to waive all but 0.05% of this fee beginning January 1, 2000. The Sub-Advisory Agreement with JHAI was terminated effective March 1, 2000. For the period ended February 28, 1999, the Adviser waived the entire investment management fee for all Funds except Small Capitalization Value Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified Core Equity Fund II and Medium Capitalization Fund. For the period ended February 28, 1999, the Adviser received $3,095, $69,056, $189,004, $511,989, $2,716,529 and $20,569 after expense limitation from Small Capitalization Value Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified Core Equity Fund II and Medium Capitalization Fund, respectively. For the period ended February 29, 2000, the Adviser waived the entire investment management fee for all Funds except Small Capitalization Value Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified Core Equity Fund II and Medium Capitalization Fund. For the period ended February 29, 2000, the Adviser received $2,775, $42,132, $89,049, $479,968, $2,710,449 and $31,290 after expense limitation from Small Capitalization Value Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified Core Equity Fund II and Medium Capitalization Fund, respectively. For the period ended February 28, 2001, the Adviser waived the entire investment management fee for all Funds except Small Capitalization Value Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified Core Equity Fund II and Medium Capitalization Fund. For the period ended February 28, 2001, the Adviser received $123,547, $29,197, $154,799, $352,005, $1,707,364 and $70,479 after expense limitation from Small Capitalization Value Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified Core Equity Fund II and Medium Capitalization Fund, respectively. From time to time, the Adviser may reduce its fee or make other arrangements to limit the Fund's expenses to a specified percentage of average daily net assets. The Adviser retains the right to reimpose a fee and recover any other payments to the extent that, at the end of any fiscal year, the Fund's annual expenses fall below this limit. The Adviser has agreed to limit the Funds' expenses as follows: Active Bond 0.60%; Dividend Performers 0.70%; Medium Capitalization Growth 0.90%; Small Capitalization Value 0.80%; Focused Small Cap Growth (excluding transfer agent expenses) 0.85%; International Equity 1.00%; Diversified Core Equity II 0.70%; Medium Capitalization 1.00% and Balanced Fund 0.90%. Securities held by the Funds may also be held by other funds or investment advisory clients for which the Adviser, the Sub-Advisers or their respective affiliates provide investment advice. Because of different investment objectives or other factors, a particular security may be bought for one or more funds or clients when one or more are selling the same security. If opportunities for purchase or sale of securities by the Adviser or Sub-Adviser for a Fund or for other funds or clients for which the Adviser or Sub-Advisers render investment advice arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds or clients in a manner deemed equitable to all of them. To the extent that transactions on behalf of more than one client of the Adviser, Sub-Advisers or their respective affiliates may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. 32 Pursuant to each Advisory Agreement, where applicable, Sub-Advisory Agreement, the Adviser and Sub-Adviser are not liable for any error of judgment or mistake of law or for any loss suffered by the Funds in connection with the matters to which their respective Agreements relate, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser or Sub-Adviser in the performance of their duties or from their reckless disregard of the obligations and duties under the applicable Agreement. Under each Advisory Agreement, each Fund may use the name "John Hancock" or any name derived from or similar to it only for as long as the Advisory Agreement or any extension, renewal or amendment thereof remains in effect. If a Fund's Advisory Agreement is no longer in effect, the Fund (to the extent that it lawfully can) will cease to use such name or any other name indicating that it is advised by or otherwise connected with the Adviser. In addition, the Adviser or the Life Company may grant the non-exclusive right to use the name "John Hancock" or any similar name to any other corporation or entity, including but not limited to any investment company of which the Life Company or any subsidiary or affiliate thereof or any successor to the business of any subsidiary or affiliate thereof shall be the investment adviser. Under the Sub-Advisory Agreement of each Independence Fund, each Independence Fund may use the name "Independence" or any name derived from or similar to it only for as long as the Sub-Advisory Agreement is effect. When the Sub-Advisory Agreement is no longer in effect, the Fund (to the extent that it lawfully can) will cease to use any name indicating that it is advised by or otherwise connected with Independence. In addition, Independence or the Life Company may grant the non-exclusive right to use the name "Independence" or any similar name to any other corporation or entity, including but not limited to any investment company of which Independence or any subsidiary or affiliate thereof or any successor to the business of any subsidiary or affiliate thereof shall be the investment adviser. The continuation of the Advisory Agreement, the Sub-Advisory Agreements and the Distribution Agreement was approved by all of the Trustees in June of 2001. With respect to International Equity Fund, on December 12, 2000, the Trustees approved the termination of IIIS as Sub-Adviser and appointed Nicholas-Applegate as Sub-Adviser effective December 14, 2000. This appointment was approved by International Equity Fund's shareholders on April 25, 2001. The Advisory Agreement, the Sub-Advisory Agreements and the Distribution Agreement will continue in effect from year to year, provided that its continuance is approved annually both (i) by the holders of a majority of the outstanding voting securities of the Trust or by the Trustees, and (ii) by a majority of the Trustees who are not parties to the Agreement or "interested persons" of any such parties. Each of these Agreements may be terminated on 60 days written notice by any party or by vote of a majority of the outstanding voting securities of the Fund and will terminate automatically if assigned. Accounting and Legal Services Agreement. The Trust, on behalf of the Funds, is a party to an Accounting and Legal Services Agreement with the Adviser. Pursuant to this Agreement, the Adviser provides the Fund with certain tax, accounting and legal services. For the fiscal years ended February 28, 1999, February 29, 2000 February 28, 2001, the Fund paid the Adviser the following for services under this Agreement: Balanced Fund $12,152, $13,666 and $10,633, Medium Capitalization Fund $1,587, $2,048 and $2,759, Diversified Core Equity Fund II $84,538, $98,578 and $64,547, Active Bond Fund $858, $902 and $1,045, Dividend Performers Fund $3,109, $3,096 and $2,436, Medium Capitalization Growth Fund $5,047, $3,853 and $5,315, Small Capitalization Value Fund $1,235, $2,289 and $5,168, Focused Small Cap Growth Fund $352, $752 and $1,491 and International Equity Fund $1,324, $1,587 and $1,913. Personnel of the Adviser and its affiliates may trade securities for their personal accounts. The Funds also may hold, or may be buying or selling, the same securities. To prevent the Fund from being disadvantaged, the adviser and its affiliates and the Fund have adopted a code of ethics which restricts the trading activity of those personnel. 33 DISTRIBUTION CONTRACT The Fund has a Distribution Agreement with John Hancock Funds. Under the Agreement, John Hancock Funds is obligated to use its best efforts to sell shares of each Fund. Shares of the Fund are also sold by selected broker-dealers (the "Selling Brokers") which have entered into selling agency agreements with John Hancock Funds. These Selling Brokers are authorized to designate other intermediaries to receive purchase and redemption orders on behalf of the Fund. John Hancock Funds accepts orders for the purchase of the shares of the Funds which are continually offered at net asset value next determined. SALES COMPENSATION As part of its business strategy, John Hancock Funds may pay compensation to financial services firms that sell the Fund's shares. These firms typically pass along a portion of this compensation to your financial representative. John Hancock Funds may make a one-time payment at the time of initial purchase out of its own resources to a Selling Broker who sells shares of the Fund. This payment may not exceed 0.15% of the amount invested. In addition, from time to time, John Hancock Funds, at its expense, may provide significant additional compensation to financial services firms in connection with the sale of shares of the Fund. Such compensation provided by John Hancock Funds may include, for example, financial assistance to financial services firms in connection with their marketing and sales development programs for their registered representatives and other employees, as well as payment for travel expenses, including lodging, incurred by registered representatives and other employees for such marketing and sales development programs, seminars for the public, advertising and sales campaigns regarding one or more Funds, and/or other financial services firms-sponsored events or activities. From time to time, John Hancock Funds may make expense reimbursements for special training of a financial services firm's registered representatives and other employees in group meetings. Other compensation, such as asset retention fees, finder's fees and reimbursement for wire transfer fees, may be offered to the extent not prohibited by law or any self-regulatory agency, such as the NASD. NET ASSET VALUE For purposes of calculating the net asset value ("NAV") of a Fund's shares, the following procedures are utilized wherever applicable. Debt investment securities are valued on the basis of valuations furnished by a principal market maker or a pricing service, both of which generally utilize electronic data processing techniques to determine valuations for normal institutional size trading units of debt securities without exclusive reliance upon quoted prices. Equity securities traded on a principal exchange or NASDAQ National Market Issues are generally valued at last sale price on the day of valuation. Securities in the aforementioned category for which no sales are reported and other securities traded over-the-counter are generally valued at the last available bid price. Short-term debt investments which have a remaining maturity of 60 days or less are generally valued at amortized cost which approximates market value. If market quotations are not readily available or if in the opinion of the Adviser any quotation or price is not representative of true market value, the fair value of the security may be determined in good faith in accordance with procedures approved by the Trustees. 34 Foreign securities are valued on the basis of quotations from the primary market in which they are traded. Any assets or liabilities expressed in terms of foreign currencies are translated into U.S. dollars by the custodian bank based on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on the date of any determination of the Fund's NAV. If quotations are not readily available, or the value has been materially affected by events occurring after the closing of a foreign market, assets are valued by a method that the Trustees believe accurately reflects fair value. The NAV for each Fund is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4 p.m. Eastern Time) by dividing the net assets by the number of its shares outstanding. On any day an international market is closed and the New York Stock Exchange is open, any foreign securities will be valued at the prior day's close with the current day's exchange rate. Trading of foreign securities may take place on Saturdays and U.S. business holidays on which the Fund's NAV is not calculated. Consequently, the Fund's portfolio securities may trade and the NAV of the Fund's redeemable securities may be significantly affected on days when a shareholder has no access to the Fund. ADDITIONAL SERVICES AND PROGRAMS Exchange Privilege. The Fund permits exchanges of shares of any class of a fund for shares of the same class in any other John Hancock fund offering that class. The Fund reserves the right to require that previously exchanged shares (and reinvested dividends) be in the Fund for 90 days before a shareholder is permitted a new exchange. The Fund may refuse any exchange order. The Fund may change or cancel its exchange policies at any time, upon 60 days' notice to its shareholders. An exchange of shares is treated as a redemption of shares of one fund and the purchase of shares of another for Federal Income Tax purposes. An exchange may result in a taxable gain or loss. See "TAX STATUS". PURCHASES AND REDEMPTIONS THROUGH THIRD PARTIES Shares of the Funds may be purchased or redeemed through certain broker-dealers or Service Agents ("Brokers"). Brokers may charge for their services or place limitations on the extent to which you may use the services of the Funds. A Fund will be deemed to have received a purchase or redemption order when an authorized broker, or if applicable, a broker's authorized designee, receives the order. If a broker is an agent or designee of the Fund, orders are processed at the NAV next calculated after the broker receives the order. The broker must segregate any orders it receives after the close of regular trading on the New York Stock Exchange and transmit those orders to the Fund for execution at NAV next determined. Some brokers that maintain nominee accounts with the Funds for their clients charge an annual fee on the average net assets held in such accounts for accounting, servicing and/or distribution services they provide with respect to the underlying Fund shares. John Hancock Funds, Inc. (the Fund's principal distributor), is responsible for paying these fees. SPECIAL REDEMPTIONS Although the Funds would not normally do so, each Fund has the right to pay the redemption price of shares of the Fund in whole or in part in portfolio securities as prescribed by the Trustees. When the shareholder sells portfolio securities received in this fashion, the shareholder will incur a brokerage charge. Any such securities would be valued for the purposes of making such payment at the same value as used in determining net asset value. Each Fund has, however, elected to be governed by Rule 18f-1 under the Investment Company Act. Under that rule, each Fund must redeem its shares for cash except to the extent that the redemption payments to any shareholder during any 90-day period would exceed the lesser of $250,000 or 1% of the Fund's net asset value at the beginning of that period. 35 DESCRIPTION OF THE FUNDS' SHARES The Trustees of the Trust are responsible for the management and supervision of the Funds. The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest of the Funds, without par value. Under the Declaration of Trust, the Trustees have the authority to create and classify shares of beneficial interest in separate series, without further action by shareholders. As of the date of this Statement of Additional Information, the Trustees have authorized shares of eleven series of which nine series are described herein. Additional series may be added in the future. The Declaration of Trust also authorizes the Trustees to classify and reclassify the shares of the Funds, or any other series of the Trust, into one or more classes. Effective October 1, 1999, the Trustees authorized the issuance Class P shares for Independence Diversified Core Equity Fund II. Existing shares of the Fund were designated "Class I" shares. Class P shares are discussed in a separate Statement of Additional Information. Effective November 15, 2000, the Trustees authorized the issuance of Class A, Class B, and Class C shares for Focused Small Cap Growth Fund. Existing shares of Focused Small Cap Growth Fund were designated "Class I" shares. Class A, Class B and Class C shares are discussed in a separate Statement of Additional Information. Each share of a Fund represents an equal proportionate interest in the assets belonging to that Fund. When issued, shares are fully paid and nonassessable. In the event of liquidation of a Fund, shareholders are entitled to share pro rata in the net assets of the Fund available for distribution to such shareholders. Shares of the Trust are freely transferable and have no preemptive, subscription or conversion rights. In accordance with the provisions of the Declaration of Trust, the Trustees have initially determined that shares entitle their holders to one vote per share on any matter on which such shares are entitled to vote. The Trustees may determine in the future, without the vote or consent of shareholders, that each dollar of net asset value (number of shares owned times net asset value per share) will be entitled to one vote on any matter on which such shares are entitled to vote. Unless otherwise required by the Investment Company Act or the Declaration of Trust, the Funds have no intention of holding annual meetings of shareholders. Each Fund's shareholders may remove a Trustee by the affirmative vote of at least two-thirds of the Trust's outstanding shares and the Trustees shall promptly call a meeting for such purpose when requested to do so in writing by the record holders of not less than 10% of the outstanding shares of the Trust. Shareholders may, under certain circumstances, communicate with other shareholders in connection with requesting a special meeting of shareholders. However, at any time that less than a majority of the Trustees holding office were elected by the shareholders, the Trustees will call a special meeting of shareholders for the purpose of electing Trustees. Under Massachusetts law, shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable for acts or obligations of the trust. However, the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for acts, obligations or affairs of the Trust. The Declaration of Trust also provides for indemnification out of the Trust's assets for all losses and expenses of any shareholder held personally liable by reason of being or having been a shareholder. The Declaration of Trust also provides that no series of the Trust shall be liable for the liabilities of any other series. Liability is therefore limited to circumstances in which a Fund itself would be unable to meet its obligations, and the possibility of this occurrence is remote. A Fund reserves the right to reject any application which conflicts with a Fund's internal policies or the policies of any regulatory authority. John Hancock Funds does not accept starter, credit card or third party checks. All checks returned by the post office as undeliverable will be reinvested in the fund or funds from which a redemption was made or dividend paid. Information 36 provided on the account application may be used by a Fund to verify the accuracy of the information or for background or financial history purposes. A joint account will be administered as a joint tenancy with right of survivorship, unless the joint owners notify Signature Services of a different intent. A shareholder's account is governed by the laws of The Commonwealth of Massachusetts. For telephone transactions, the transfer agent will take measures to verify the identity of the caller, such as asking for name, account number, Social Security or other taxpayer ID number and other relevant information. If appropriate measures are taken, the transfer agent is not responsible for any losses that may occur to any account due to an unauthorized telephone call. Also for your protection telephone transactions are not permitted on accounts whose names or addresses have changed within the past 30 days. Proceeds from telephone transactions can only be mailed to the address of record. Selling activities for the Fund may not take place outside the U.S. except with U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on Non-U.S. investors' accounts with foreign mailing addresses are required to certify that all sales activities have occurred, and in the future will occur, only in the U.S. A Foreign corporation may purchase shares of the Fund only if it has a U.S. mailing address. TAX STATUS Each Fund is treated as a separate entity for accounting and tax purposes, has qualified as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") and intends to continue to qualify for each taxable year. As such and by complying with the applicable provisions of the Code regarding the sources of its income, the timing of its distributions, and the diversification of its assets, a Fund will not be subject to Federal income tax on its taxable income (including net realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. Each Fund will be subject to a 4% nondeductible Federal excise tax on certain amounts not distributed (and not treated as having been distributed) on a timely basis in accordance with annual minimum distribution requirements. Each Fund intends, under normal circumstances, to seek to avoid or minimize liability for such tax by satisfying such distribution requirements. Distributions from each Fund's current or accumulated earnings and profits ("E&P") will be taxable under the Code for investors who are subject to tax. If these distributions are paid from a Fund's "investment company taxable income," they will be taxable as ordinary income; and if they are paid from the Fund's "net capital gain," they will be taxable as long-term capital gain. (Net capital gain is the excess (if any) of net long-term capital gain over net short-term capital loss, and investment company taxable income is all taxable income and capital gains, other than those gains and losses included in computing net capital gain, after reduction by deductible expenses.) Some distributions may be paid in January but may be taxable to shareholders as if they had been received on December 31 of the previous year. The tax treatment described above will apply without regard to whether distributions are received in cash or reinvested in additional shares of the Fund. Distributions, if any, in excess of E&P will constitute a return of capital under the Code, which will first reduce an investor's federal tax basis in Fund shares and then, to the extent such basis is exceeded, will generally give rise to capital gains. Shareholders who have chosen automatic reinvestment of their distributions will have a federal tax basis in each share received pursuant to such a reinvestment equal to the amount of cash they would have received had they elected to receive the distribution in cash, divided by the number of shares received in the reinvestment. Foreign exchange gains and losses realized by a Fund in connection with certain transactions involving foreign currency-denominated debt securities, certain foreign currency options and futures, foreign currency forward contracts, foreign currencies, or payables or receivables denominated in a foreign currency are subject to Section 988 of the Code, which generally causes such gains and 37 losses to be treated as ordinary income and losses and may affect the amount, timing and character of distributions to shareholders. Transactions in foreign currencies that are not directly related to a Fund's investment in stock or securities, including speculative currency positions, could under future Treasury regulations produce income not among the types of "qualifying income" from which the Fund must derive at least 90% of its annual gross income for each taxable year. If the net foreign exchange loss for a year treated as ordinary loss under Section 988 were to exceed a Fund's investment company taxable income computed without regard to such loss, the resulting overall ordinary loss for such year would not be deductible by a Fund or its shareholders in future years. If a Fund invests (either directly or through depository receipts such as ADRs, GDRs or EDRs) in stock (including an option to acquire stock such as is inherent in a convertible bond) of certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties, or capital gain) or hold at least 50% of their assets in investments producing such passive income ("passive foreign investment companies"), the Fund could be subject to Federal income tax and additional interest charges on "excess distributions" received from these passive foreign investment companies or gain from the sale of stock in such companies, even if all income or gain actually received by the Fund is timely distributed to its shareholders. The Funds would not be able to pass through to their respective shareholders any credit or deduction for such a tax. An election may be available to ameliorate these adverse tax consequences, but could require the Funds to recognize taxable income or gain without the concurrent receipt of cash. These investments could also result in the treatment of associated capital gains as ordinary income. Each Fund may limit and/or manage its investments in passive foreign investment companies to minimize its tax liability or maximize its return from these investments. The amount of a Fund's net realized capital gains, if any, in any given year will vary depending upon the current investment strategy of the Adviser and Subadvisers and whether the Adviser and the Subadvisers believes it to be in the best interest of the Funds to dispose of portfolio securities and/or engage in options, futures or forward transactions that will generate capital gains. At the time of an investor's purchase of Fund shares, a portion of the purchase price is often attributable to realized or unrealized appreciation in a Fund's portfolio or undistributed taxable income of a Fund. Consequently, subsequent distributions on those shares from such appreciation or income may be taxable to such investor even if the net asset value of the investor's shares is, as a result of the distributions, reduced below the investor's cost for such shares, and the distributions in reality represent a return of a portion of the purchase price. Upon a redemption or other disposition of shares of a Fund (including by exercise of the exchange privilege), in a transaction that is treated as a sale for tax purposes, a shareholder may realize a taxable gain or loss depending upon the amount of the proceeds and the investor's basis in his shares. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholder's hands. Any loss realized on a redemption or exchange may be disallowed to the extent the shares disposed of are replaced with other shares of the same Fund within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of, such as pursuant to the automatic dividend reinvestments. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Also, any loss realized upon the redemption of shares with a tax holding period of six months or less will be treated as a long-term capital loss to the extent of any amounts treated as distributions of long-term capital gain with respect to such shares. Shareholders should consult their own tax advisers regarding their particular circumstances to determine whether a disposition of Fund shares is properly treated as a sale for tax purposes, as is assumed in the foregoing discussion. The Funds reserve the right to retain and reinvest all or any portion of the excess, as computed for Federal income tax purposes, of net long-term capital gain over net short-term capital loss in any year. Although each Fund's present intention is to distribute all net capital gains, if any, the Fund will not in any event distribute net capital gains realized in any year to the extent that a capital loss is carried forward from prior years against such gain. To the extent such excess was retained and not exhausted by the carryforward of prior 38 years' capital losses, it would be subject to Federal income tax in the hands of the Fund. Upon proper designation of this amount by the Fund, each shareholder would be treated for Federal income tax purposes as if such Fund had distributed to him on the last day of its taxable year his pro rata share of such excess, and he had paid his pro rata share of the taxes paid by such Fund and reinvested the remainder in the Fund. Accordingly, each shareholder would (a) include his pro rata share of such excess as long-term capital gain in his return for his taxable year in which the last day of the Fund's taxable year falls, (b) be entitled either to a tax credit on his return for, or a refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his Fund shares by the difference between his pro rata share of such excess and his pro rata share of such taxes. For Federal income tax purposes, each Fund is permitted to carry forward a net realized capital loss in any year to offset net capital gains of that Fund, if any, during the eight years following the year of the loss. To the extent subsequent net capital gains are offset by such losses, they would not result in Federal income tax liability to a Fund and, as noted above, would not be distributed as such to shareholders. As of February 28, 2001, Active Bond Fund had a capital loss carryforwards of $49,819 and $79,391 which will expire in 2008 and 2009, respectively. Focused Small Cap Growth Fund had a capital loss carryforwards of $332,423 which will expire in 2009. International Fund had a capital loss carryforwards of $636,448 which will expire in 2009. The remaining Funds do not have any capital loss carryforwards. For purposes of dividends received deduction available to corporations, dividends received by a Fund, if any, from U.S. domestic corporations in respect of any share of stock held by the Fund, for U.S. Federal income tax purposes, for at least 46 days (91 days in the case of certain preferred stock) during a prescribed period extending before and after such dividend and distributed and properly designated by the Fund may be treated as qualifying dividends. Corporate shareholders must meet the holding period requirements stated above with respect to their shares of the applicable Fund for each dividend in order to qualify for the deduction and, if they have any debt that is deemed under the Code directly attributable to such shares, may be denied a portion of the dividends-received deduction. The entire qualifying dividend, including the otherwise deductible amount, will be included in determining alternative minimum tax liability, if any. Additionally, any corporate shareholder should consult its tax adviser regarding the possibility that its tax basis in its shares may be reduced, for Federal income tax purposes, by reason of "extraordinary dividends" received with respect to the shares and, to the extent such basis would be reduced below zero, that current recognition of income would be required. Each Fund that invests in securities of foreign issuers may be subject to withholding and other taxes imposed by foreign countries with respect to its investments in foreign securities. Some tax conventions between certain countries and the United States may reduce or eliminate such taxes. With respect to each Fund, other than International Equity Fund, because more than 50% of the Fund's total assets at the close of any taxable year will not consist of stock or securities of foreign corporations, the Funds will not be able to pass such taxes through to their shareholders, who in consequence will not include any portion of such taxes in their incomes and will not be entitled to tax credits or deductions with respect to such taxes. However, such Funds will be entitled to deduct such taxes in determining the amounts they must distribute in order to avoid Federal income tax. If more than 50% of the value of the total assets of International Equity Fund at the close of any taxable year consists of stock or securities of foreign corporations, the International Equity Fund may file an election with the Internal Revenue Service pursuant to which shareholders of the Fund will be required to (i) include in ordinary gross income (in addition to taxable dividends and distributions actually received) their pro rata shares of qualified foreign taxes paid by the Fund even though not actually received, and (ii) treat such respective pro rata portions as foreign taxes paid by them. 39 If the election is made, shareholders of the International Equity Fund may then deduct such pro rata portions of qualified foreign taxes in computing their taxable incomes, or, alternatively, use them as foreign tax credits, subject to holding period requirements and other limitations, against their U.S. federal income taxes. Shareholders who do not itemize deductions for Federal income tax purposes will not, however, be able to deduct their pro rata portion of qualified foreign taxes paid by International Equity Fund, although such shareholders will be required to include their shares of such taxes in gross income. Shareholders who claim a foreign tax credit for such foreign taxes may be required to treat a portion of dividends received from International Equity Fund as a separate category of income for purposes of computing the limitations on the foreign tax credit. Tax-exempt shareholders will ordinarily not benefit from this election. Each year (if any) that International Equity Fund files the election described above, its shareholders will be notified of the amount of (i) each shareholder's pro rata share of qualified foreign taxes paid by the Fund and (ii) the portion of Fund dividends which represents income from each foreign country. If the Fund cannot or does not make this election, the Fund will deduct the foreign taxes it pays in determining the amount it has available for distribution to shareholders, and shareholders will not include these foreign taxes in their income, nor will they be entitled to any tax deductions or credits with respect to such taxes. Each Fund that invests in zero coupon securities or certain PIK or increasing rate securities and any other securities with original issue discount (or with market discount if the Fund elects to include market discount in income currently) accrues income on such securities prior to the receipt of the corresponding cash payments. The mark to market or constructive sale rules applicable to certain options, futures, forwards, short sales or other transactions, may also require the Fund to recognize income or gain without a concurrent receipt of cash. Additionally, some countries restrict repatriation which may make it difficult or impossible for the Fund to obtain cash corresponding to its earnings or assets in those countries. Each Fund must distribute, at least annually, all or substantially all of its net income and net capital gains, including such accrued income or gain, to shareholders to qualify as a regulated investment company under the Code and avoid Federal income and excise taxes. Therefore, a Fund may have to dispose of its portfolio securities under disadvantageous circumstances to generate cash, or may have to borrow cash, to satisfy these distribution requirements. Active Bond Fund and Small Capitalization Value Fund may invest in debt obligations that are in the lower rating categories or are unrated, including debt obligations of issuers not currently paying interest as well as issuers who are in default. Investments in debt obligations that are at risk of or in default present special tax issues for the Funds. Tax rules are not entirely clear about issues such as when the Funds may cease to accrue interest, original issue discount, or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income, and whether exchanges of debt obligations in a workout context are taxable. These and other issues will be addressed by Active Bond Fund and Small Capitalization Value Fund in the event they invest in such securities, in order to seek to ensure that they distribute sufficient income to preserve their status as regulated investment companies and to avoid becoming subject to Federal income or excise tax. The Federal income tax rules applicable to certain structured or hybrid securities, currency swaps, interest rate swaps, caps, floors and collars, and possibly other investments or transactions are or may be unclear in certain respects, and each Fund will account for these investments or transactions in a manner intended to preserve its qualification as a regulated investment company and avoid material tax liability. Different tax treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement distributions, and certain prohibited transactions is accorded to accounts maintained as qualified retirement plans. Shareholders should consult their tax advisers for more information. 40 With respect to each Fund that may enter into foreign currency positions, forwards, futures and options transactions, limitations imposed by the Code on regulated investment companies may restrict the Funds' ability to enter into options, futures, foreign currency positions, and forward foreign currency contracts. Certain options, futures and forward foreign currency contracts undertaken by a Fund may cause the Fund to recognize gains or losses from marking to market even though its positions have not been sold or terminated and affect their character as long-term or short-term (or in the case of certain foreign currency contracts, as ordinary income or loss) and timing of some capital gains and losses realized by the Fund. Additionally, the Fund may be required to recognize gain, but not loss, if an option, futures contract, short sale or other transaction is treated as a constructive sale of an appreciated financial position in the Fund's portfolio. Also, certain of a Fund's losses on its transactions involving options, futures or forward contracts and/or offsetting or successor portfolio positions may be deferred rather than being taken into account currently in calculating the Fund's taxable income or gains. Certain of such transactions may also cause the Fund to dispose of investments sooner than would otherwise have occurred. These transactions may therefore affect the amount, timing and character of the Funds' distributions to shareholders. A Fund will also take into account the special tax rules (including consideration of available elections) applicable to options, futures and forward contracts in order to minimize any potential adverse tax consequence. A state income (and possibly local income and/or intangible property) tax exemption is generally available to the extent (if any) a Fund's distributions are derived from interest on (or, in the case of intangible property taxes, the value of its assets is attributable to) certain U.S. Government obligations, provided in some states that certain thresholds for holdings of such obligations and/or reporting requirements are satisfied. The Funds will not seek to satisfy any threshold or reporting requirements that may apply in particular taxing jurisdictions, although a Fund may in its sole discretion provide relevant information to shareholders. Each Fund will be required to report to the Internal Revenue Service (the "IRS") all distributions to shareholders, as well as gross proceeds from the redemption or exchange of Fund shares, except in the case of certain exempt recipients, i.e., corporations and certain other investors distributions to which are exempt from the information reporting provisions of the Code. Under the backup withholding provisions of Code Section 3406 and applicable Treasury regulations, all such reportable distributions and proceeds may be subject to backup withholding of federal income tax at the rate of 31% in the case of non-exempt shareholders who fail to furnish a Fund with their correct taxpayer identification number and certain certifications required by the IRS or if the IRS or a broker notifies the Fund that the number furnished by the shareholder is incorrect or that the shareholder is subject to backup withholding as a result of failure to report interest or dividend income. The Funds may refuse to accept an application that does not contain any required taxpayer identification number or certification that the number provided is correct. If the backup withholding provisions are applicable, any such distributions and proceeds, whether taken in cash or reinvested in shares, will be reduced by the amounts required to be withheld. Any amounts withheld may be credited against a shareholder's U.S. federal income tax liability. Investors should consult their tax advisers about the applicability of the backup withholding provisions. The foregoing discussion relates solely to U.S. Federal income tax law as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic corporations, partnerships, trusts or estates) subject to tax under such law. The discussion does not address special tax rules applicable to certain types of investors, such as tax-exempt entities, insurance companies, and financial institutions. Dividends, capital gain distributions, and ownership of or gains realized on the redemption (including an exchange) of Fund shares may also be subject to state and local taxes. Shareholders should consult their own tax advisers as to the Federal, state or local tax consequences of ownership of shares of, and receipt of distributions from, the Funds in their particular circumstances. 41 Non-U.S. investors not engaged in a U.S. trade or business with which their investment in the Funds is effectively connected will be subject to U.S. Federal income tax treatment that is different from that described above. These investors may be subject to a non-resident alien withholding tax at the rate of 30% (or a lower rate under an applicable tax treaty) on amounts treated as ordinary dividends from a Fund and unless an effective IRS Form W-8, Form W-8BEN, or other authorized withholding certificate on file, to 31% back up withholding on certain other payments from the Fund. Non U.S. investors should consult their tax advisers regarding such treatment and the application of foreign taxes to an investment in the Funds. The Funds are not subject to Massachusetts corporate excise or franchise taxes. The Funds anticipate that, provided that the Funds qualify as regulated investment companies under the Code, they will also not be required to pay any Massachusetts income tax. CALCULATION OF PERFORMANCE Yield - ----- For the 30-day period ended February 28, 2001, the yield of Active Bond Fund was 5.93%. A Fund's yield is computed by dividing its net investment income per share determined for a 30-day period by the maximum offering price per share on the last day of the period, according to the following standard formula: 6 Yield = 2 ( [ ( a - b ) + 1 ] - 1 ) ------- cd Where: a = dividends and interest earned during the period. b = net expenses accrued during the period. c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends. d = the maximum offering price per share on the last day of the period (NAV). Total Return - ------------ The average annual total return for the 1 year and life of that Fund for the period ended February 28, 2001 is as follows: One Year Ended Commencement of Operations February 28, 2001 to February 28, 2001 ----------------- -------------------------- Active Bond Fund 13.11% 7.83% (c) Small Capitalization Value Fund -10.14% 21.93% (d) Dividend Performers Fund 2.94% 15.42% (c) Medium Capitalization Growth Fund -38.23% 12.87% (e) Focused Small Cap Growth Fund -50.27% 11.63% (b) International Equity Fund -34.85% 2.01% (c) Balanced Fund 3.13% 10.93% (f) Diversified Core Equity Fund II -2.68% 16.76% (a) Medium Capitalization Fund 13.14% 16.67% (g) 42 (a) Commencement of operations, March 10, 1995. (b) From commencement of operations, May 2, 1996. (c) Commencement of operations, March 30, 1995. (d) Commencement of operations April 19, 1995. (e) Commencement of operations, April 11, 1995. (f) Commencement of operations, July 6, 1995. (g) From commencement of operations, October 2, 1995. A Fund's total return is computed by finding the average annual compounded rate of return over the indicated period that would equate the initial amount invested to the ending redeemable value according to the following formula: n _____ T = \ /ERV/P - 1 Where: P = a hypothetical initial investment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value of a hypothetical $1,000 investment made at the beginning of the one year and life of fund periods. This calculation assumes that all dividends and distributions are reinvested at net asset value on the reinvestment dates during the period. In addition to average annual total returns, the Funds may quote unaveraged or cumulative total returns reflecting the simple change in value of an investment over a stated period. Cumulative total returns may be quoted as a percentage or as a dollar amount, and may be calculated for a single investment, a series of investments, and/or a series of redemptions, over any time period. From time to time, in reports and promotional literature, a Fund's total return will be ranked or compared to indices of mutual funds and bank deposit vehicles. Such indices may include Lipper Analytical Services, Inc.'s "Lipper-Mutual Performance Analysis," a monthly publication which tracks net assets and total return on equity mutual funds in the United States, as well as those published by Frank Russell, Callan Associates, Wilshire Associates and SEI. Performance rankings and ratings reported periodically in, and excerpts from, national financial publications such as Money magazine, Forbes, Business Week, The Wall Street Journal, Micropal, Inc., Morningstar, Stanger's, and Barron's, Pensions & Investments and Institutional Investor may also be utilized. The Funds' promotional and sales literature may make reference to a Fund's "beta". Beta is a reflection of the market related risk of the Fund by showing how responsive the Fund is to the market. 43 The performance of the Funds is not fixed or guaranteed. Performance quotations should not be considered to be representations of performance of any Fund for any period in the future. The performance of a Fund is a function of many factors including its earnings, expenses and number of outstanding shares. Fluctuating market conditions; purchases, sales and maturities of portfolio securities; sales and redemptions of shares of beneficial interest; and changes in operating expenses are all examples of items that can increase or decrease a Fund's performance. BROKERAGE ALLOCATION Decisions concerning the purchase and sale of portfolio securities of the Funds are made by officers of the Adviser pursuant to recommendations made by an investment policy committee of the Adviser, which consists of officers and directors of the Adviser, corresponding Subadviser (if applicable), officers and Trustees who are interested persons of the Trust. Orders for purchases and sales of securities are placed in a manner, which, in the opinion of the officers of the Trust, will offer the best price and market for the execution of each such transaction. Purchases from underwriters of portfolio securities may include a commission or commissions paid by the issuer and transactions with dealers serving as market makers reflect a "spread." Debt securities are generally traded on a net basis through dealers acting for their own account as principals and not as brokers; no brokerage commissions are payable on such transactions. Each Fund's primary policy is to execute all purchases and sales of portfolio instruments at the most favorable prices consistent with best execution, considering all of the costs of the transaction including brokerage commissions. This policy governs the selection of brokers and dealers and the market in which a transaction is executed. Consistent with the foregoing primary policy, the Rules of Fair Practice of the National Association of Securities Dealers, Inc. and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Funds as a factor in the selection of broker-dealers to execute a Fund's portfolio transactions. To the extent consistent with the foregoing, each Fund will be governed in the selection of brokers and dealers, and the negotiation of brokerage commission rates and dealer spreads, by the reliability and quality of the services, including primarily the availability and value of research information and to a lesser extent statistical assistance furnished to the Adviser and corresponding Subadviser (if applicable) of the Funds. It is not possible to place a dollar value on information and services to be received from brokers and dealers, since it is only supplementary to the research efforts of the Adviser and corresponding Subadviser (if applicable). The receipt of research information is not expected to reduce significantly the expenses of the Adviser and Subadviser. The research information and statistical assistance furnished by brokers and dealers may benefit the Life Company or other advisory clients of the Adviser, and, conversely, brokerage commissions and spreads paid by other advisory clients of the Adviser may result in research information and statistical assistance beneficial to the Funds. Similarly, research information and assistance provided to a Subadviser by brokers and dealers may benefit other advisory clients or affiliates of such Subadviser. The Funds will not make any commitment to allocate portfolio transactions upon any prescribed basis. While the Adviser, in connection with the corresponding Subadviser (if applicable), will be primarily responsible for the allocation of the Funds' brokerage business, the policies and practices of the Adviser in this regard must be consistent with the foregoing and will, at all times, be subject to review by the Trustees. For the fiscal years ended on February 28, 1999, February 29, 2000 and February 28, 2001, the Funds paid negotiated brokerage commissions in the amount as follows: Independence Diversified Core Equity Fund II $559,111, $711,968 and $472,331, Independence Medium Capitalization Fund $8,985, $16,377 and $26,148, Independence Balanced Fund $49,743, $51,745 and $47,389, Dividend Performers Fund $32,953, $22,210 and $24,294, Medium Capitalization Growth Fund $96,224, $51,580 and $54,895, Small Capitalization Value Fund $39,784, $42,422 and $82,735, International Equity $38,053, $62,440 and $98,834, Focused Small Cap Growth Fund $5,313, $9,166 and $16,301. Active Bond Fund had no negotiated brokerage commissions. 44 As permitted by Section 28(e) of the Securities Exchange Act of 1934, each Fund may pay to a broker which provides brokerage and research services to the Fund an amount of disclosed commission in excess of the commission which another broker would have charged for effecting that transaction. This practice is subject to a good faith determination by the Trustees that such price is reasonable in light of the services provided and to such policies as the Trustees may adopt from time to time. During the fiscal year ended February 28, 2001, Dividend Performers Fund, Medium Capitalization Growth Fund, Small Capitalization Value Fund, Focused Small Cap Growth and Diversified Core Equity Fund II directed commissions in the amount of $750, $24,730, $20,734, $3,582 and $74,236, respectively to compensate brokers for research services such as industry, economics and company reviews and evaluations of securities. The Adviser's indirect parent, the Life Company, is the indirect sole shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999, John Hancock Distributors, Inc.) ("Signator" or "Affiliated Broker"). Credit Agricole, IIIS parent, has several affiliates engaged in the brokerage business in Europe and Asia: Credit Agricole Indosuez Cheuvreux; CPR Action (ex-Schelcher Prince Cheuvreux de Virieu International Ltd), London; Cheuvreux de Virieu, Nordic AB, Stockholm, Cheuvreux de Virieu, Espana, Madrid, Credit Agricole Indosuez Cheuvreux Deutschland GMBH, Frankfourt/ Main; Caboto Sim in Italy; Carr Securities; Carr Futures SNC. (Paris) and Carr Futures PTE, Singapore (all "Affiliated Brokers"). Pursuant to procedures determined by the Trustees and consistent with the above policy of obtaining best net results, the Fund may execute portfolio transactions with or through Affiliated Brokers. During the fiscal years ending February 28, 1999, February 29, 2000 and from the period from March 1, 2000 to December 12, 2000, the Fund did not execute any portfolio transactions with Affiliated Brokers. Signator may act as broker for the Funds on securities or commodities exchange transactions, subject, however, to the general policy of the Funds set forth above and the procedures adopted by the Trustees pursuant to the Investment Company Act. Commissions paid to an Affiliated Broker must be at least as favorable as those which the Trustees believe to be contemporaneously charged by other brokers in connection with comparable transactions involving similar securities being purchased or sold. A transaction would not be placed with an Affiliated Broker if a Fund would have to pay a commission rate less favorable than the Affiliated Broker's contemporaneous charges for comparable transactions for its other most favored, but unaffiliated, customers except for accounts for which the Affiliated Broker acts as clearing broker for another brokerage firm, and any customers of the Affiliated Broker not comparable to the Fund as determined by a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) of the Funds, the Adviser, the corresponding Subadviser (if applicable) or the Affiliated Broker. Because the Adviser, which is affiliated with the Affiliated Broker, and the corresponding Subadviser (if applicable), have, as investment advisers to the Funds, the obligation to provide investment management services, which includes elements of research and related investment skills, such research and related skills will not be used by the Affiliated Broker as a basis for negotiating commissions at a rate higher than that determined in accordance with the above criteria. Other investment advisory clients advised by the Adviser may also invest in the same securities as the Funds. When these clients buy or sell the same securities at substantially the same time, the Adviser may average the transactions as to price and allocate the amount of available investments in a manner which the Adviser believes to be equitable to each client, including the Funds. In some instances, this investment procedure may adversely affect the price paid or received by a Fund or the size of the position obtainable for it. On the other hand, to the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased for the Funds with those to be sold or purchased for other clients managed by it in order to obtain best execution. For purchases of equity securities, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. For high demand issues (for example, initial public offerings), shares will be allocated pro rata by account size as well as on the basis of account objective, account size ( a small account's allocation may be increased to provide it with a meaningful position), and the account's other holdings. In addition, an account's allocation may be increased if that account's portfolio 45 manager was responsible for generating the investment idea or the portfolio manager intends to buy more shares in the secondary market. For fixed income accounts, generally securities will be allocated when appropriate among accounts based on account size, except if the accounts have different objectives or if an account is too small to get a meaningful allocation. For new issues, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. However, if a partial allocation is too small to be meaningful, it may be reallocated based on such factors as account objectives, duration benchmarks and credit and sector exposure. For example, value funds will likely not participate in initial public offerings s frequently as growth funds. In some instances, this investment procedure may adversely affect the price paid or received by the Fund or the size of the position obtainable for it. On the other hand, to the extent permitted by law, the Adviser may aggregate securities to be sold or purchased for the Fund with those to be sold or purchased for other clients managed by it in order to obtain best execution. TRANSFER AGENT SERVICES John Hancock Signature Services, Inc., John Hancock Way, Suite 1001, Boston, MA 02217-1001, a wholly-owned indirect subsidiary of the Life Company is the transfer and dividend paying agent for each Fund. Each Fund pays Signature Services a fee of 0.05% of its average daily net assets plus certain out-of-pocket expenses. CUSTODY OF PORTFOLIO Portfolio securities of International Equity Fund are held pursuant to a Master Custodian Agreement, as amended, between the Adviser and State Street Bank and Trust Company, 200 Berkeley Street, Boston, Massachusetts 02116. Portfolio securities of the other Funds are held pursuant to a Master Custodian Agreement, as amended, between the Adviser and Investors Bank & Trust Company, 200 Clarendon Street, Boston, Massachusetts 02116. Under the Master Custodian Agreements, Investors Bank & Trust Company and State Street Bank and Trust Company perform custody, portfolio and fund accounting services for their respective Funds. INDEPENDENT AUDITORS The independent auditors of the Funds are Deloitte & Touche LLP, 200 Berkeley Street, Boston, Massachusetts 02116. Deloitte & Touche LLP audits and renders opinions on the Funds' annual financial statements and reviews the Funds' annual Federal income tax returns. 46 APPENDIX A Description of Securities Ratings1 Moody's Investors Service, Inc. Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuations of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa: Bonds which are rated Baa are considered as medium grade obligations i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during other good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. The ratings described here are believed to be the most recent ratings available at the date of this Statement of Additional Information for the securities listed. Ratings are generally given to securities at the time of issuance. While the rating agencies may from time to time revise these ratings, they undertake no obligation to do so, and the ratings indicated do not necessarily represent those which would be given to these securities on the date of a Fund's fiscal year-end. Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. - -------- 1 The ratings described here are believed to be the most recent ratings available at the date of this Statement of Additional Information for the securities listed. Ratings are generally given to securities at the time of issuance. While the rating agencies may from time to time revise these ratings, they undertake no obligation to do so, and the ratings indicated do not necessarily represent those which would be given to these securities on the date of a Fund's fiscal year-end. A-1 C: Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Absence of Rating: Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue. Should no rating be assigned, the reason may be one of the following: 1. An application for rating was not received or accepted. 2. The issue or issuer belongs to a group of securities or companies that are not rated as a matter of policy. 3. There is a lack of essential data pertaining to the issue or issuer. 4. The issue was privately placed, in which case the rating is not published in Moody's publications. Suspension or withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer available reasonable up-to-date data to permit a judgment to be formed; if a bond is called for redemption; or for other reasons. Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Commercial Paper Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Issuers rated Prime-1 or P-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-I or P-1 repayment ability will often be evidenced by the following characteristics: _ Leading market positions in well established industries. _ High rates of return on funds employed. _ Conservative capitalization structures with moderate reliance on debt and ample asset protection. _ Broad margins in earnings coverage of fixed financial charges and high internal cash generation. _ Well established access to a range of financial markets and assured sources of alternate liquidity. Prime-2 Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong ability for repayment of senior short-term obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. A-2 Prime-3 Issuers (or supporting institutions) rated Prime-3 (P-3) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Standard & Poor's Ratings Group Investment Grade AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA: Debt rated AA has a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in small degree. A: Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Speculative Grade Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB: Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. B: Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. CCC: Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. A-3 The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. CC: The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC debt rating. C: The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the addition of a plus of minus sign to show relative standing within the major rating categories. Provisional Ratings: The letter "P" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk. L: The letter "L" indicates that the rating pertains to the principal amount of those bonds to the extent that the underlying deposit collateral is insured by the Federal Saving & Loan Insurance Corp. or the Federal Deposit Insurance Corp. and interest is adequately collateralized. In the case of certificates of deposit the letter "L" indicates that the deposit, combined with other deposits, being held in the same right and capacity will be honored for principal and accrued pre-default interest up to the federal insurance limits within 30 days after closing of the insured institution or, in the event that the deposit is assumed by a successor insured institution, upon maturity. NR: NR indicates no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. Commercial Paper Standard & Poor's describes its three highest ratings for commercial paper as follows: A-1. This designation indicated that the degree of safety regarding timely payment is very strong. A-2. Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming as for issues designated A-1. A-3. Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. ******** Notes: Bonds which are unrated expose the investor to risks with respect to capacity to pay interest or repay principal which are similar to the risks of lower-rated speculative bonds. A Portfolio is dependent on the Investment Adviser's judgment, analysis and experience in the evaluation of such bonds. Investors should note that the assignment of a rating to a bond by a rating service may not reflect the effect of recent developments on the issuer's ability to make interest and principal payments. A-4 FINANCIAL STATEMENTS The financial statements listed below are included in the Fund's 2001 Annual Report to Shareholders for the year ended February 28, 2001; (filed electronically on April 30, 2001, accession number 0000928816-01-500082) and are included in and incorporated by reference into Part B of the Registration Statement for John Hancock Institutional Series Trust (file nos. 33-86102 and 811-8852). John Hancock Institutional Series Trust John Hancock Active Bond Fund John Hancock Dividend Performers Fund John Hancock Medium Capitalization Growth Fund John Hancock Small Capitalization Value Fund John Hancock Focused Small Cap Growth Fund John Hancock International Equity Fund John Hancock Independence Diversified Core Equity Fund II John Hancock Independence Medium Capitalization Fund John Hancock Independence Balanced Fund Statement of Assets and Liabilities as of February 28, 2001 (audited). Statement of Operations for the year ended February 28, 2001 (audited). Statement of Changes in Net Asset for each of the two years in the period ended February 28, 2001 (audited). Financial Highlights for each of the 5 years in the period ended February 28, 2001 (audited). Schedule of Investments as of February 28, 2001 (audited). Notes to Financial Statements. Report of Independent Auditors. F-1 The latest report from your Fund's management team ANNUAL REPORT Institutional Series Trust Active Bond Fund Dividend Performers Fund Medium Capitalization Growth Fund Small Capitalization Growth Fund Small Capitalization Value Fund International Equity Fund FEBRUARY 28, 2001 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS".] Table of Contents Page 1) CEO Corner 3 2) Portfolio Manager Commentary This commentary reflects the views of the portfolio managers or portfolio management teams through the end of each Fund's period discussed in this report. Of course, the managers' or teams' views are subject to change as market and other conditions warrant. John Hancock Active Bond Fund 4 John Hancock Dividend Performers Fund 7 John Hancock Medium Capitalization Growth Fund 10 John Hancock Small Capitalization Growth Fund 13 John Hancock Small Capitalization Value Fund 16 John Hancock International Equity Fund 19 3) Financial Statements 22 4) Notes to Financial Statements 60 TRUSTEES Stephen L. Brown James F. Carlin* William H. Cunningham Ronald R. Dion Maureen R. Ford Charles L. Ladner Steven R. Pruchansky* Lt. Gen. Norman H. Smith, USMC (Ret.) John P. Toolan* * Members of Audit Committee OFFICERS Stephen L. Brown Chairman Maureen R. Ford Vice Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary James J. Stokowski Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer CUSTODIANS International Equity Fund State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 Active Bond Fund Dividend Performers Fund Medium Capitalization Growth Fund Small Capitalization Growth Fund Small Capitalization Value Fund Investors Bank & Trust Company 200 Clarendon Street Boston, MA 02116 TRANSFER AGENT John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 INVESTMENT ADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, MA 02199-7603 SUB-INVESTMENT ADVISER International Equity Fund Nicholas-Applegate Capital Management 600 West Broadway San Diego, CA 92101 PRINCIPAL DISTRIBUTOR John Hancock Funds, Inc. 101 Huntington Avenue Boston, MA 02199-7603 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, MA 02109 INDEPENDENT AUDITORS Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116-5022 CEO CORNER [A 1" x 1" photo of Maureen R. Ford, Vice Chairman and Chief Executive Officer, flush right next to first paragraph.] DEAR FELLOW SHAREHOLDERS: The stock market brought investors back to earth in 2000 after a run of nine consecutive years of positive stock-market results. The first two months of 2001 have been equally sobering. Investors have grown increasingly worried about the slowing economy and declining corporate earnings. High-priced growth stocks have been the hardest hit. Technology stocks, which got pounded in 2000, went into another free fall in February, sending the NASDAQ Composite Index down 54% by the end of February from its near high a year ago. While the broad stock market has remained volatile, and in negative territory year-to-date, bonds have done well in response to falling interest rates. The year 2001 finds us with lingering uncertainties, a new U.S. president and new possibilities. Questions remain about how successful the Federal Reserve will be in preventing a recession. Even though the Fed remains a key force impacting financial markets, we are also watching Washington, D.C. as President George W. Bush attempts to enact tax cuts. This market environment serves to highlight the importance of having a diversified portfolio and maintaining a long-term perspective, particularly during tempestuous market times, to avoid making emotional, perhaps costly, investment decisions. Now could be a good time to connect with your investment professional for some insight and advice. In addition to reviewing your investments, this is also a good time to speak to your investment professional about tax-planning strategies. As you pay this year's taxes and look ahead, there are a variety of options to consider for minimizing and deferring tax payments -- in an effort to maximize results. These include focusing on tax-exempt funds, contributing the maximum to retirement plans, establishing or adding to IRAs and funding a variable annuity. Sincerely, /S/ MAUREEN R. FORD MAUREEN R. FORD, VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER BY JAMES K. HO, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND BENJAMIN A. MATTHEWS, PORTFOLIO MANAGER [A 3" x 2" photo at bottom middle of page of John Hancock Active Bond Fund. Caption below reads "Fund management team leader Jim Ho."] John Hancock Active Bond Fund Fund produces solid gains in an uneasy market For bond investors, this past year proved generally hospitable, though at times the market experienced extreme unease. The past 12 months were marked by price surges in the U.S. Treasury arena and bouts of extreme weakness in the corporate sector. Economic growth and inflation were primary concerns for all. In late summer, after dubious signs of slowing, the economy finally responded to the Fed's earlier campaign of interest-rate increases. This past January, fearing too much of a slowdown, the Fed changed tack and cut interest rates twice. "...this past year proved generally hospitable..." Strong performance John Hancock Active Bond Fund benefited from investment flexibility and intensive credit research. For the year ended February 28, 2001, the Fund produced a total return of 13.11% at net asset value. This compares with the 11.80% return of the average corporate debt A-rated fund, according to Lipper, Inc. The Fund's benchmark, the Lehman Brothers Government/Corporate Bond Index, posted a total return of 13.51% in the same period. Historical performance information can be found on page six. Defensive investments emphasized At the fiscal year's outset, it became increasingly clear the economy would heavily influence stock- and bond-market performance. The possibility of an economic slowdown or even a recession prompted investors to worry about corporations' missing their earnings targets and defaulting on debt. Any hint of financial woe or pullback in profit growth sent investors running for cover many times during the period, with the worst of the credit spread widening happening in October and November. Not surprisingly, many dot-com millionaires sought safer havens for the profits they had already made, turning to the relative safety of higher-quality fixed-income investments such as U.S. Treasury securities and mortgage-backed issues. After the plunge in stock and bond prices last March, we anticipated that volatility would continue. With this in mind, we focused our attention on higher-quality securities and on corporate industry sectors that tend to be relatively insulated from economic changes. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended February 28, 2001." The chart is scaled in increments of 7% with 0% at the bottom and 14% at the top. The first bar represents the 13.11% total return for John Hancock Active Bond Fund. The second bar represents the 11.80% total return for Average corporate debt A-rated fund. The third bar represents the 13.51% total return for Lehman Brothers Government/Corporate Bond Index. A note below the chart reads "The total return for John Hancock Active Bond Fund is at net asset value with all distributions reinvested. The average corporate debt A-rated fund is tracked by Lipper, Inc. See the following page for historical performance information."] We added to the Fund's position in U.S. Treasury securities, spreading our holdings across the maturity spectrum. We also boosted the Fund's stake in mortgage-backed and agency issues such as Ginnie Mae and Fannie Mae. We made no major bets on interest-rate movements, keeping the portfolio's duration, or interest-rate sensitivity, relatively neutral throughout much of the fiscal year. In the corporate sector, individual credit selection -- and avoidance -- became a key driver of Fund performance. Our practice of regularly monitoring credits enabled us to avoid some troubled securities altogether and move out of others before yields skyrocketed and prices plummeted. We avoided such issues as Xerox and Crown, Cork & Seal and sold FINOVA, Pacific Gas, Southern California Energy and Dillard's before the brunt of their downturns. We also trimmed our high-yield exposure, particularly telecommunications issues, and targeted somewhat recession- resistant industries such as defense, utilities, healthcare, media and energy. Noteworthy performers include Verizon, KeySpan, Tenet Healthcare, HCA -- The Healthcare Co. and Amerada Hess. "...stringent analysis and prudence will continue to dictate portfolio composition." Rate cuts point toward recovery The Fed's recent rate cuts -- and the possibility of more to come -- spurred a rebound in credit-sensitive securities. The yield curve has begun to steepen and credit spreads (the difference in yields between bonds of different quality) have narrowed. Believing that yields do not have much more room to fall, we recently began moving assets into shorter-term Treasury securities and shortened the portfolio's duration slightly. We have also selectively increased the Fund's high-yield weighting, purchasing such holdings as Crown Castle International and Nextel Communications (which we had sold in the fall.) We've initiated positions in cyclical issues, such as Stone Container, and bolstered the portfolio's stake in financial companies that stand to benefit from lower interest rates. These include Bank One Corp., CIT Group and Heller Financial. While it appears a recovery may be under way, experience tells us it could be long and drawn out and that caution is necessary. An economic slowdown means more financially weak companies and jittery markets. Therefore, stringent analysis and prudence will continue to dictate portfolio composition. A LOOK AT PERFORMANCE For the period ended February 28, 2001 SINCE ONE FIVE INCEPTION YEAR YEARS (3/30/95) ----- ----- --------- Cumulative Total Returns 13.11% 44.49% 56.18% Average Annual Total Returns(1) 13.11% 7.64% 7.83% YIELD As of February 28, 2001 SEC 30-DAY YIELD ---------- John Hancock Active Bond Fund 5.93% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance (1) The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $250,000 INVESTMENT... The chart below shows how much a $250,000 investment in John Hancock Active Bond Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $250,000 investment in the Lehman Brothers Government/ Corporate Bond Index -- an unmanaged index that measures the performance of U.S. government bonds, U.S. corporate bonds and Yankee bonds. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock Active Bond Fund, representing the growth of a hypothetical $250,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Lehman Brothers Government/Corporate Bond Index and is equal to $394,747 as of February 28, 2001. The second line represents the value of the hypothetical $250,000 investment made in the John Hancock Active Bond Fund on March 30, 1995 and is equal to $390,524 as of February 28, 2001.] BY JOHN F. SNYDER, III, PORTFOLIO MANAGEMENT TEAM LEADER AND PETER M. SCHOFIELD, CFA, PORTFOLIO MANAGER [A 3" x 2" photo at bottom middle of page of John Hancock Dividend Performers Fund. Caption below reads "Fund management team leader John Snyder."] John Hancock Dividend Performers Fund Tech stocks lead market down as economy slows As the Fund's year began last March, the stock market was about to undergo a major shift. Technology stocks, which led the market up in 1999, had risen to exorbitant valuation levels just as the economy began to soften after a series of interest-rate hikes. As a result, the tech-heavy NASDAQ Composite Index started a descent that lasted most of the year, ending down 54.18% by the end of February. New economy stocks gave way to the old, and value stocks finally overtook growth stocks, as investors ended their tech-at-any-price mania and returned to the kinds of companies that the Fund favors -- those with stable earnings growth and reasonable valuations. But the overall market remained choppy nonetheless, as many companies reported earnings disappointments and warned of slower revenue growth. The year ended in red ink for the broad market, with the Standard & Poor's 500 Index returning -8.20% for the 12 months ended February 28, 2001. Fund outperforms market With our main focus primarily on "dividend performer" companies that have a 10-year history of rising dividends, the Fund managed to outperform the market. For the year ended February 28, 2001, John Hancock Dividend Performers Fund posted a total return of 2.94% at net asset value. That was lower, however, than the 6.63% return of the average large-cap value fund, according to Lipper, Inc. Historical performance information can be found on page nine. Although we were underweighted in technology versus the S&P 500 Index, which served us well, our tech overweight versus our peer group held back our relative performance. Being underweighted in the solid-performing utilities sector also ate into relative performance. "As investors turned away from technol- ogy stocks, the more defensive, less expensive areas benefited." Defensive names help As investors turned away from technology stocks, the more defensive, less expensive areas benefited. These included health care, where our overweight helped performance with such holdings as Baxter International. Consumer staples also had a strong showing, with PepsiCo and Philip Morris among our top performers. Bestfoods and Nabisco were also boosted by takeovers. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended February 28, 2001." The chart is scaled in increments of 5% with -10% at the bottom and 10% at the top. The first bar represents the 2.94% total return for John Hancock Dividend Performers Fund. The second bar represents the 6.63% total return for Average large-cap value fund. The third bar represents the -8.20% total return for S&P 500 Index. A note below the chart reads "The total return for John Hancock Dividend Performers Fund is at net asset value with all distributions reinvested. The average large-cap value fund is tracked by Lipper, Inc. See the following page for historical performance information."] "...the market will undoubtedly remain under stress in the near term." Financial stocks were lifted by the growing prospect of lower interest rates, an environment that favors this rate-sensitive sector. Some of our larger holdings were among this group and they were main contributors to performance, including mortgage guarantors Fannie Mae and Freddie Mac, consumer finance company Household International and insurers Aflac and American International Group. With the Federal Reserve launching a campaign of lowering rates to prevent the economy from stalling, we added to our financial stake as the year progressed. Technology hurts As with the market in general, our technology stocks went from being our biggest contributor last year to our main detractor this year. Even quality names such as Nortel Networks, Cisco Systems, Sun Microsystems and Intel could not avoid the carnage, especially in the fall when tech stocks were hit particularly hard by earnings disappointments. In fact, after this latest downdraft, we selectively bought some high-quality technology names, since their long-range prospects remain good and their valuations had fallen to compelling levels. These included Texas Instruments and AOL Time Warner. A look ahead With the economy slowing and earnings warnings abounding, the market will undoubtedly remain under stress in the near term. We believe the market's focus will stay on companies with stable earnings growth that will outperform the market, and reasonable valuations -- exactly the kinds of stocks the Fund targets. In this environment, we will continue to maintain a mix of financial stocks, which should benefit from lower rates; defensive health-care and consumer staples names, and technology stocks that have the biggest rebound potential. A LOOK AT PERFORMANCE For the period ended February 28, 2001 SINCE ONE FIVE INCEPTION YEAR YEARS (3/30/95) ----- ------ -------- Cumulative Total Returns 2.94% 90.28% 133.64% Average Annual Total Returns(1) 2.94% 13.73% 15.42% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance (1) The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $250,000 INVESTMENT... The chart below shows how much a $250,000 investment in John Hancock Dividend Performers Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $250,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock Dividend Performers Fund, representing the growth of a hypothetical $250,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $684,041 as of February 28, 2001. The second line represents the value of the hypothetical $250,000 investment made in the John Hancock Dividend Performers Fund on March 30, 1995 and is equal to $584,117 as of February 28, 2001.] BY BARBARA FRIEDMAN, CFA, PORTFOLIO MANAGEMENT TEAM LEADER [A 2" x 3" photo at bottom middle of page of John Hancock Medium Capitalization Growth Fund. Caption below reads "Fund management team leader Barbara Friedman."] John Hancock Medium Capitalization Growth Fund Growth stocks sink as corporate and consumer spending slow The stock market reached new highs early last year, shortly before rising interest rates and the prospect of an economic slowdown sent leading technology stocks sliding. Value stocks moved into favor, benefiting sectors like utilities, financials, health care and energy. Although interest rates stabilized over the summer, concerns about the economy's rapid deceleration caused further deterioration in technology and telecommunications stock prices. During the fall and winter, the downturn spread. Mid-cap growth stocks, which had previously held up well because of their strong earnings and reasonable valuations, collapsed late in the year. The Russell Mid Cap Growth Index closed February 2001 with a disappointing 12-month return of -36.23%. "We also began focusing on companies that would be among the first to benefit from an economic rebound..." Performance review In this difficult environment, John Hancock Medium Capitalization Growth Fund maintained its disciplined focus on mid-size companies with strong earnings growth prospects. For the year ended February 28, 2001, the Fund returned -38.23% at net asset value. By comparison, the average mid-cap growth fund returned -35.25% over the same period, according to Lipper, Inc. Historical performance information can be found on page 12. Tech tumbles During the year, the Fund's largest stake remained in technology, where stock prices declined by 50% for the period. We reduced our technology investments to a market weight by last fall, but remained focused on the faster-growth areas of data storage and fiber optics -- names like Brocade Communications Systems and Aeroflex -- which got hit hard late in the year. In addition, companies like Lexmark International, a printer manufacturer (which we sold), and software companies like Parametric Technology also suffered as the economic outlook dimmed. An exception was E-Tek Dynamics, a leading producer of fiber-optic equipment that did well when it was bought out over the summer. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended February 28, 2001." The chart is scaled in increments of 10% with -40% at the bottom and 0% at the top. The first bar represents the -38.23% total return for John Hancock Medium Capitalization Growth Fund. The second bar represents the -35.25% total return for Average mid-cap growth fund. The third bar represents the -36.23% total return for Russell Midcap Growth Index. A note below the chart reads "The total return for John Hancock Medium Capitalization Growth Fund is at net asset value with all distributions reinvested. The average mid-cap growth fund is tracked by Lipper, Inc. See the following page for historical performance information."] Telecom and radio hurt The Fund also maintained a sizable stake in competitive local exchange carriers (CLECs) like Global Crossing, McLeodUSA, XO Communications (formerly NEXTLINK), and Allegiance Telecom. Funding concerns at selected CLECs devastated the entire sector last summer, unfairly squeezing companies like ours that remained fully funded with strong execution on their business plans. Dobson Communications, a rural direct television provider, and Scientific-Atlanta, a leading producer of digital set-top boxes for cable television, also suffered in this negative environment. Radio stocks declined significantly in anticipation of a huge slowdown in ad spending in 2001, causing us to sell all except market leader Clear Channel Communications. Energy cut; finance boosted In the fall, we reduced our energy stake, including top-performing oil service stocks like Baker-Hughes, Weatherford International and Transocean Sedco Forex (which acquired R&B Falcon). We also took profits in health care, eliminating strong performers like Stryker, which makes medical devices. We held on, however, to other top contributors like Waters, a company that makes analytical equipment for drug companies, as well as Allergan, a drug company that specializes in eye diseases. We also began focusing on companies that would be among the first to benefit from an economic rebound, including Ambac Financial Group, a municipal bond insurer; Mellon Financial, a bank with significant fee-based income; and USA Education, an education loan company that we recently sold. All benefited performance, as did transaction processors like Concord EFS, Fiserv and SunGard Data Systems. We also added to our retail stake, buying names like Bed Bath & Beyond, Talbots and TJX. "The Fund's assets span a wide array of sectors with a focus on the strongest mid caps in each industry..." Cautious outlook We expect the environment over the next six months to be one of uncertainty and continued volatility. The Federal Reserve began to cut interest rates this past January, but no one knows exactly how long it will take for these rate cuts to stimulate economic activity. Currently, earnings disappointments are on the rise and the outlook for earnings and revenue growth in the second half of the year remains murky. We believe that whenever a rebound comes, both mid-cap stocks and the Fund should benefit. The Fund's assets span a wide array of sectors with a focus on the strongest mid caps in each industry -- companies that should be among the first to snap back in an economic recovery. A LOOK AT PERFORMANCE For the period ended February 28, 2001 SINCE ONE FIVE INCEPTION YEAR YEARS (4/11/95) ----- ----- --------- Cumulative Total Returns (38.23%) 61.84% 103.88% Average Annual Total Returns(1) (38.23%) 10.11% 12.87% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance (1) The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $250,000 INVESTMENT... The chart below shows how much a $250,000 investment in John Hancock Medium Capitalization Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $250,000 investment in the Russell Midcap Growth Index -- an unmanaged index that contains those Russell Midcap securities with a greater-than-average growth orientation. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock Medium Capitalization Growth Fund, representing the growth of a hypothetical $250,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Russell Midcap Growth Index and is equal to $598,655 as of February 28, 2001. The second line represents the value of the hypothetical $250,000 investment made in the John Hancock Medium Capitalization Growth Fund on April 11, 1995 and is equal to $509,712 as of February 28, 2001.] BY BERNICE S. BEHAR, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND ANURAG PANDIT, CFA, PORTFOLIO MANAGER [A 2" x 2" photo at bottom middle of page of John Hancock Small Capitalization Growth Fund. Caption below reads "Fund management team leader Bernice Behar."] John Hancock Small Capitalization Growth Fund Growth stocks fall from favor as technology stocks plummet Small-cap growth stocks sank under the weight of falling technology and telecommunications stocks over the last 12 months. Growing earnings concerns in the face of a slowing economy caused investors to flee these high-priced stocks, sending the tech-heavy NASDAQ Composite Index down 54.18% for the year despite a summer rally. Investors became more focused on valuations and on more defensive segments of the market like health care, financial and energy stocks, and value replaced growth as the place to be. The result was a huge gap in performance between the two major indexes that track small-cap stocks. For the year ended February 28, 2001, the Russell 2000 Value Index gained 21.97%, while the Russell 2000 Growth Index lost 40.75%. Tech hurts performance For the year ended February 28, 2001, John Hancock Small Capitalization Growth Fund posted a total return of -50.27% at net asset value, compared with the -30.68% return of the average small-cap growth fund, according to Lipper, Inc. "In June, we began a restructur- ing of the Fund's portfolio..." While we were underweighted in technology versus our benchmark Russell 2000 Growth Index, we remained overweighted versus our peer group and that hurt relative performance, as a growing number of companies announced earnings disappointments and forecast slower growth. Tech and telecom companies suffered from growing inventories and slowing demand for all types of equipment and services just as the economy started to ebb. This group, including semiconductor, software and telecom-related companies, handed us some of our biggest disappointments, including M-Systems Flash Disk Pioneers, a wireless semiconductor company; WatchGuard, which provides Internet security solutions to small and mid-size companies; and PRI Automation, a supplier of advanced automation systems and software to the semiconductor industry. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended February 28, 2001." The chart is scaled in increments of 10% with -60% at the bottom and 0% at the top. The first bar represents the -50.27% total return for John Hancock Small Capitalization Growth Fund. The second bar represents the -30.68% total return for Average small-cap growth fund. The third bar represents the -40.75% total return for Russell 2000 Growth Index. A note below the chart reads "The total return for John Hancock Small Capitalization Growth Fund is at net asset value with all distributions reinvested. The average small-cap growth fund is tracked by Lipper, Inc. See the following page for historical performance information."] "...small-cap growth stock valuation levels have become more attractive..." Ad slowdown hits consumer cyclicals Our overweighting in consumer cyclical companies -- especially anything related to advertising -- also hurt our performance, as advertising by Internet companies dried up. The group includes broadcasters such as Radio One and media, advertising and even Internet analytical software companies like Accrue Software, which helps companies understand their Internet strategies. Fund restructuring In June, we began a restructuring of the Fund's portfolio to adopt a more concentrated approach. This provides us with the opportunity to act in a more aggressive manner on our convictions about both individual companies and sectors. We reduced the number of holdings from 180 to around 60, redeploying assets into high-quality companies that we believe have the best potential for success in the current environment. While this helped us in the summer rally, it hurt us on the downside later, which is typical of a more focused portfolio -- greater short-term swings on both the up and down sides. That was especially true for some of the telecom service providers that we added or held onto in January and February, such as WinStar Communications, AirGate PCS and SBA Communications. As part of the restructuring, we eliminated most of our positions in the lagging Internet software sector and increased our stake in health-care companies, which were 22% of net assets by the end of February. At first we focused on biotechnology companies and later took profits after these stocks rose significantly. We then moved into the more defensive area of health-care services. Our top holding by the end of the period was Rightchoice Managed Care, an HMO which stands to benefit from a more favorable environment for government expense reimbursements. A look ahead In the short term, we expect small-cap stocks to remain volatile while the economy slows and companies adjust their earnings downward. We're more optimistic further out, however, as small-cap growth stock valuation levels have become more attractive and companies will have a better chance of beating lowered expectations, especially in a falling interest-rate environment. Historically, small-cap stocks have been some of the first to recover from an economic slump, because they have the potential to provide the strongest earnings growth. - --------------------------------------------------------------------- See the prospectus for the the risks of investing in small-cap stocks. A LOOK AT PERFORMANCE For the period ended February 28, 2001 SINCE ONE INCEPTION YEAR (5/2/96) ---------- ---------- Cumulative Total Returns (50.27%) 70.09% Average Annual Total Returns(1) (50.27%) 11.63% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance (1) The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $250,000 INVESTMENT... The chart below shows how much a $250,000 investment in John Hancock Small Capitalization Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $250,000 investment in the Russell 2000 Index and the Russell 2000 Growth Index. The Russell 2000 Index is an unmanaged small-cap index comprised of 2,000 U.S. stocks. The Russell 2000 Growth Index is an unmanaged index containing Russell 2000 Index stocks with a greater-than-average growth orientation. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock Small Capitalization Growth Fund, representing the growth of a hypothetical $250,000 investment over the life of the fund. Within the chart are three lines. The first line represents the value of the hypothetical $250,000 investment made in the John Hancock Small Capitalization Growth Fund on May 2, 1996 and is equal to $425,236 as of February 28, 2001. The second line represents the Russell 2000 Index and is equal to $362,582 as of February 28, 2001. The third line represents the Russell 2000 Growth Index and is equal to $289,179 as of February 28, 2001.] BY TIMOTHY E. QUINLISK, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, R. SCOTT MAYO, CFA, AND JAMES S. YU, CFA, PORTFOLIO MANAGER [A 2" x 3" photo at bottom middle of page of John Hancock Small Capitalization Value Fund. Caption below reads "Fund management team leader Tim Quinlisk."] John Hancock Small Capitalization Value Fund Market volatility leads to renewed focus on valuation Rising interest rates pushed investors out of expensive technology names last spring and into more value-oriented sectors. Small-cap stocks, particularly financials, utilities and energy, benefited. During the summer and fall, telecommunications and technology stocks posted steep declines, as the slowing economy caused capital markets to tighten and demand to weaken. While growth sectors took hard hits, small-cap value stocks held up well. But in the fourth quarter, gross domestic product figures came in much lower than expected, causing a broad market downturn. In an effort to revive economic growth, the Federal Reserve cut interest rates early in the New Year. But continued economic uncertainty, along with a growing number of earnings disappointments, kept most market indexes in negative territory. "Among our strongest performers were less economi- cally sensitive names..." Performance review John Hancock Small Capitalization Value Fund posted a -10.14% total return at net asset value for the year ended February 28, 2001. This beat the -16.84% return posted by the Russell 2000 Index, but trailed the -6.96% return of the average small-cap core fund, according to Lipper, Inc. Historical performance information can be found on page 18. The Fund's strong stock selection and value orientation helped performance relative to the index. But above-average stakes in both technology and telecommunications caused the Fund to lag its peer group. Staying the course We found some of the greatest value opportunities this past year in the telecommunications sector, where investors indiscriminately punished strong and weak companies. Increased competition and difficulty funding the build-out of new high-speed networks chopped many telecom stock prices in half. We added to our stakes in companies like NTELOS (formerly CFW Communications) and CTC Communications Group -- newcomers that continue to execute on their plans for adding subscribers and building out access lines. We also held on to investments like ANTEC, which provides telephone services over cable, even as a pullback in capital spending dampened near-term prospects. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended February 28, 2001." The chart is scaled in increments of 6% with -18% at the bottom and 0% at the top. The first bar represents the -10.14% total return for John Hancock Small Capitalization Value Fund. The second bar represents the -6.96% total return for Average small-cap core fund. The third bar represents the -16.84% total return for Russell 2000 Index. A note below the chart reads "The total return for John Hancock Small Capitalization Value Fund is at net asset value with all distributions reinvested. The average small-cap core fund is tracked by Lipper, Inc. See the following page for historical performance information."] Riding with technology In the technology sector, we also maintained or added to investments on weakness, including Wind River Systems, the leading supplier of software for embedded microprocessor systems, and Electronics for Imaging, a company that supplies software used in office equipment. E-commerce consulting firms like Viant and Xpedior tumbled, but we held on, believing that huge pent-up demand will re-ignite the stocks. We also kept our investment in Bell & Howell, a company that develops software solutions to help clients like libraries access information more efficiently. The stock declined sharply, but should benefit as the company sells its non-core assets to focus on information services. In a related area, Pegasus Communications, a direct satellite television provider, tumbled when expected industry consolidation was postponed. Benefiting from defensive stocks Among our strongest performers were less economically sensitive names like Corinthian Colleges and Career Education, both of which own and operate for-profit colleges that benefited from growing enrollment trends. Other defensive names that did well included Valassis Communications, which does freestanding ad inserts for Sunday newspapers, and Heidrick & Struggles International, a leading executive search firm that we sold when it reached our price target. Covance, a contract research organization serving the pharmaceutical industry, benefited from restructuring and an improved health-care outlook. Some of our capital goods companies, including Amphenol, which makes connectors, also turned in strong results, thanks to solid demand. Finally, AC Nielsen, a market research company, was recently bought out at a premium. "The great value oppor- tunities, in our opinion, are now in beaten-down technology stocks." Looking ahead The future looks uncertain as earnings growth outlooks continue to erode in this slower economic environment. Our strategy is to position the Fund for the return of the economy's operating leverage. We feel that traditional value sectors -- like financials, utilities and energy -- have run their course. The great value opportunities, in our opinion, are now in beaten-down technology stocks. We're focusing there, as well as in stocks that should do well in a slower growth environment, such as NOVA, a large transaction processor that serves small to mid-size businesses. We'll continue to look for opportunities to buy good businesses like these whose stocks are selling at cheap prices. - --------------------------------------------------------------------- See the prospectus for a discussion of the risks of investing in small-cap stocks. A LOOK AT PERFORMANCE For the period ended February 28, 2001 SINCE ONE FIVE INCEPTION YEAR YEARS (4/19/95) ------ ------- --------- Cumulative Total Returns (10.14%) 194.46% 219.83% Average Annual Total Returns(1) (10.14%) 24.11% 21.93% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance (1) The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $250,000 INVESTMENT... The chart below shows how much a $250,000 investment in the John Hancock Small Capitalization Value Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $250,000 investment in the Russell 2000 Index -- an unmanaged, small-cap index comprised of 2,000 U.S stocks. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock Small Capitalization Value Fund, representing the growth of a hypothetical $250,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $250,000 investment made in the John Hancock Small Capitalization Value Fund on April 19, 1995 and is equal to $799,565 as of February 28, 2001. The second line represents the Russell 2000 Index and is equal to $492,921 as of February 28, 2001.] BY LORETTA MORRIS AND RANDY KAHN FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock International Equity Fund Volatility afflicts overseas markets On December 14, 2000, Nicholas-Applegate Capital Management assumed management responsibility for the Fund under a new subadvisory agreement that shareholders will be asked to formally approve in an upcoming proxy solicitation. Founded in 1984, Nicholas-Applegate is a recognized leader in U.S. equity, global and international equity management and currently manages more than $35 billion for institutional and individual investors. By nearly every measure, the 12-month period ended February 28, 2001 was a challenging one for international stock investors. An abnormally high level of volatility stemming from a slowdown in economic growth, a deceleration in corporate earnings and a rise in energy prices sent the global equity markets lower practically across the board. The contagion that began to spread early last year during the selloff of technology, media and telecommunications (TMT) stocks continued to linger in 2001. Contributing to the ongoing weakness was a tightening bias by central banks worldwide in 2000. All told, there were nearly 130 interest-rate hikes in 2000, and the cumulative effect of tighter monetary policy ultimately precipitated a sharp slowdown in global growth. Japan was especially hard hit by the investor rotation out of TMT stocks, since at its February 2000 peak this sector represented over 40% of Japanese stock-market capitalization. By February 2001, the country appeared to be sinking deeper into recession, and its chief index, the Nikkei, was on the verge of declining to a 15-year low. Meanwhile, tight monetary conditions in Europe served to dampen corporate spending, consumer credit growth, auto sales and the housing market. "On December 14, 2000, Nicholas- Applegate Capital Management assumed manage' ment..." Fund performance In this difficult environment, John Hancock International Equity Fund returned -34.85% at net asset value for the 12-month period ended February 28, 2001. That compares with a return of -21.16% for the average international fund, according to Lipper, Inc., and the -18.18% return of the MSCI All Country World Free ex-U.S. Index. See page 21 for historical performance information. The Fund's underperformance stemmed in large part from investments in the volatile TMT sectors. Although overweighted versus the MSCI index, the Fund had a lighter weighting than its peers when tech stocks skyrocketed early last year. After boosting the TMT stake, the Fund was hit by having an overweighted position as the stocks came back down to earth. The Fund was particularly hard-hit by significant declines in telecommunications companies in the U.K. and Mexico. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended February 28, 2001." The chart is scaled in increments of 10% with -40% at the bottom and 0% at the top. The first bar represents the -34.85% total return for John Hancock International Equity Fund. The second bar represents the - -21.16% total return for Average international fund. The third bar represents the -18.18% total return for MSCI All Country World Free Ex-U.S. Index. A note below the chart reads "The total return for John Hancock International Equity Fund is at net asset value with all distributions reinvested. The average international fund is tracked by Lipper, Inc. See the following page for historical performance information."] "...we will continue to focus on companies with out- standing fundamen- tals..." New management: Strategies and changes On December 14, 2000, Nicholas-Applegate Capital Management assumed management of the Fund. The cornerstone of our investment philosophy rests on identifying companies possessing three attributes: they are poised to benefit from positive change such as innovation or higher-than-expected earnings; they are positioned to sustain this positive change over time; and they are beginning to be recognized by the market through rising stock prices. In addition, we regularly assess political, economic, monetary and technology factors in each country and help to determine whether to overweight or underweight specific countries in the portfolio. Since assuming management of the Fund, we have gradually transitioned the portfolio to be consistent with our investment approach, paring the number of holdings to build larger positions in fewer companies. We also further reduced the Fund's exposure to the volatile technology sector and began cutting holdings in Japan, as the prospects for growth there remain dim. In its place, we have identified more attractive opportunities in the United Kingdom, where growth rates are projected to be solid in 2001. Looking ahead Many of the uncertainties that plagued the world's markets in 2000 may linger in 2001. Technology stocks could remain under pressure in the coming quarters, as valuations for many of this sector's leaders remain high. In addition, although global central banks have begun to reduce interest rates, the lagged effects of their tightenings should continue to slow world activity well into 2001, according to an analysis by International Strategy and Investment, an economic data and research firm. Going forward, we will continue to focus on companies with outstanding fundamentals, in the belief that their strengths will ultimately be recognized by the markets. - --------------------------------------------------------------------- International investing involves special risks such as political, economic and currency risks, and differences in accounting standards and financial reporting. A LOOK AT PERFORMANCE For the period ended February 28, 2001 SINCE ONE FIVE INCEPTION YEAR YEARS (3/30/95) ----- ----- ----- Cumulative Total Returns (34.85%) 2.43% 12.47% Average Annual Total Returns(1) (34.85%) 0.48% 2.01% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance (1) The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $250,000 INVESTMENT... The chart below shows how much a $250,000 investment in the John Hancock International Equity Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $250,000 investment in the Morgan Stanley Capital International (MSCI) All Country World Free Ex-U.S. Index -- an unmanaged index that measures the performance of both developed and emerging foreign stock markets. The index represents freely traded stocks. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock International Equity Fund, representing the growth of a hypothetical $250,000 investment over the life of the fund. Within the chart are two lines. The first line represents the MSCI All Country World Free Ex-U.S. Index and is equal to $355,151 as of February 28, 2001. The second line represents the value of the hypothetical $250,000 investment made in the John Hancock International Equity Fund on March 30, 1995 and is equal to $281,186 as of February 28, 2001.] FINANCIAL STATEMENTS John Hancock Funds -- Institutional Series Trust
Statements of Assets and Liabilities February 28, 2001 - ---------------------------------------------------------------------------------------------------------- ACTIVE DIVIDEND MEDIUM BOND PERFORMERS CAPITALIZATION FUND FUND GROWTH FUND ----------------- ----------------- ----------------- Assets: Investments at value -- Note C: Bonds (cost -- $6,219,298, none and none, respectively) $6,388,770 -- -- Common stocks (cost -- none, $5,098,709 and $11,013,857, respectively) -- $6,122,039 $11,270,366 Warrants (cost -- $103, none and none, respectively) 970 -- -- Short-term investments (cost -- $387,000, $109,000 and $428,000, respectively) 387,000 109,000 428,000 Corporate savings account 705 331 590 ----------------- ----------------- ----------------- 6,777,445 6,231,370 11,698,956 Receivable for investments sold 72,338 -- 300,244 Dividends and interest receivable 76,302 9,917 2,535 Other assets 512 1,735 3,680 ----------------- ----------------- ----------------- Total Assets 6,926,597 6,243,022 12,005,415 - ---------------------------------------------------------------------------------------------------------- Liabilities: Payable for investments purchased 69,504 -- 454,913 Payable for shares repurchased 9,975 -- 5,803 Dividends payable 3,358 -- -- Payable to John Hancock Advisers, Inc. and affiliates 2,132 9,712 6,109 Accounts payable and accrued expenses 36,415 31,003 39,737 ----------------- ----------------- ----------------- Total Liabilities 121,384 40,715 506,562 - ---------------------------------------------------------------------------------------------------------- Net Assets: Capital paid-in 6,803,914 4,107,506 10,644,410 Accumulated net realized gain (loss) on investments, financial futures contracts and foreign currency transactions (166,078) 1,060,523 599,986 Net unrealized appreciation of investments 170,339 1,023,330 256,509 Undistributed (distributions in excess of) net investment income (2,962) 10,948 (2,052) ----------------- ----------------- ----------------- Net Assets $6,805,213 $6,202,307 $11,498,853 ========================================================================================================== Net Asset Value Per Share: (Based on 790,144, 556,604 and 1,120,973 shares, respectively, of beneficial interest outstanding -- unlimited number of shares authorized with no par value) $8.61 $11.14 $10.26 ========================================================================================================== The Statement of Assets and Liabilities is each Fund's balance sheet and shows the value of what the Fund owns, is due and owes as of February 28, 2001. You'll also find the net asset value per share as of that date. See notes to financial statements.
Statement of Assets and Liabilities (continued) February 28, 2001 - ---------------------------------------------------------------------------------------------------------- SMALL SMALL INTERNATIONAL CAPITALIZATION CAPITALIZATION EQUITY GROWTH FUND VALUE FUND FUND ----------------- ----------------- ----------------- Assets: Investments at value -- Note C: Common stocks and warrants (cost -- $5,545,155, $32,424,457 and $5,222,120, respectively) $5,170,562 $30,703,773 $5,058,956 Preferred stocks (cost -- none, none and $70,749, respectively) -- -- 62,959 Short-term investments (cost -- $297,000, $26,000 and $1,516,471, respectively) 297,000 26,000 1,516,471 Corporate savings account 829 448 -- ----------------- ----------------- ----------------- 5,468,391 30,730,221 6,638,386 Cash -- -- 21,401 Foreign currency, at value (cost -- none, none and $67,454, respectively) -- -- 67,446 Receivable for forward foreign currency exchange contracts purchased -- -- 105 Receivable for investments sold 37,334 84,938 166,044 Dividends and interest receivable 46 3,650 14,446 Deferred organization expenses 714 -- -- Receivable from John Hancock Advisers, Inc. and affiliates 7,494 -- -- Other assets 479 1,113 1,156 ----------------- ----------------- ----------------- Total Assets 5,514,458 30,819,922 6,908,984 - ---------------------------------------------------------------------------------------------------------- Liabilities: Payable for open forward foreign currency exchange contracts sold -- -- 263 Payable for investments purchased 23,141 582,638 132,140 Payable for shares repurchased 411 2,533 1,544 Payable for securities on loan -- -- 844,471 Payable to John Hancock Advisers, Inc. and affiliates -- 12,064 7,397 Accounts payable and accrued expenses 32,500 39,265 63,777 ----------------- ----------------- ----------------- Total Liabilities 56,052 636,500 1,049,592 - ---------------------------------------------------------------------------------------------------------- Net Assets: Capital paid-in 7,097,867 31,030,185 7,286,654 Accumulated net realized gain (loss) on investments, financial futures contracts and foreign currency transactions (1,264,576) 874,987 (1,214,255) Net unrealized depreciation of investments and foreign currency transactions (374,593) (1,720,684) (171,606) Distributions in excess of net investment income (292) (1,066) (41,401) ----------------- ----------------- ----------------- Net Assets $5,458,406 $30,183,422 $5,859,392 ========================================================================================================== Net Asset Value Per Share: (Based on 520,388, 2,489,110 and 712,203 shares, respectively, of beneficial interest outstanding -- unlimited number of shares authorized with no par value) $10.49 $12.13 $8.23 ========================================================================================================== See notes to financial statements.
Statement of Operations Year ended February 28, 2001 - ---------------------------------------------------------------------------------------------------------- ACTIVE DIVIDEND MEDIUM BOND PERFORMERS CAPITALIZATION FUND FUND GROWTH FUND ----------------- ----------------- ----------------- Investment Income: Interest (including income from securities loaned of none, none and $13,642, respectively) $394,594 $45,185 $104,462 Dividends (net of foreign withholding tax of none, $593 and $301, respectively) 7,235 141,055 36,606 ----------------- ----------------- ----------------- 401,829 186,240 141,068 ----------------- ----------------- ----------------- Expenses: Investment management fee 27,380 77,983 224,846 Custodian fee 36,563 10,978 35,721 Registration and filing fees 17,723 12,590 12,093 Auditing fee 17,800 18,625 19,225 Printing 7,161 5,482 7,095 Transfer agent fee 2,738 6,498 14,052 Accounting and legal services fee 1,045 2,436 5,315 Miscellaneous 325 1,128 1,800 Organization expense 131 132 230 Trustees' fees 169 170 1,460 Legal fees 66 86 37 Interest expense -- 3,830 1,365 ----------------- ----------------- ----------------- Total Expenses 111,101 139,938 323,239 - ---------------------------------------------------------------------------------------------------------- Less Expense Reductions (78,188) (48,786) (70,047) - ---------------------------------------------------------------------------------------------------------- Net Expenses 32,913 91,152 253,192 - ---------------------------------------------------------------------------------------------------------- Net Investment Income (Loss) 368,916 95,088 (112,124) - ---------------------------------------------------------------------------------------------------------- Realized and Unrealized Gain (Loss) on Investments, Financial Futures Contracts and Foreign Currency Transactions: Net realized gain on investments sold 15,289 2,388,602 2,260,504 Net realized loss on financial futures contracts -- (7,744) -- Net realized gain on foreign currency transactions 3,483 -- -- Change in net unrealized appreciation (depreciation) of investments 305,118 (1,416,018) (12,919,604) Change in net unrealized appreciation (depreciation) of financial futures contracts -- 59,771 -- Change in net unrealized appreciation (depreciation) of foreign currency transactions (323) -- -- ----------------- ----------------- ----------------- Net Realized and Unrealized Gain (Loss) on Investments, Financial Futures Contracts and Foreign Currency Transactions 323,567 1,024,611 (10,659,100) - ---------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations $692,483 $1,119,699 ($10,771,224) ========================================================================================================== The Statement of Operations summarizes, for each of the Funds, the investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated. See notes to financial statements.
Statement of Operations (continued) Year ended February 28, 2001 - ---------------------------------------------------------------------------------------------------------- SMALL SMALL INTERNATIONAL CAPITALIZATION CAPITALIZATION EQUITY GROWTH FUND VALUE FUND FUND ----------------- ----------------- ----------------- Investment Income: Interest (including income from securities loaned of $9,214, $9,082 and $6,649, respectively) $25,333 $80,636 $34,453 Dividends (net of foreign withholding tax of none, none and $17,877, respectively) 1,570 67,132 110,146 ----------------- ----------------- ----------------- 26,903 147,768 144,599 ----------------- ----------------- ----------------- Expenses: Investment management fee 62,735 189,558 90,945 Custodian fee 39,371 24,015 206,240 Registration and filing fees 24,865 19,158 16,574 Auditing fee 15,550 18,025 18,431 Organization expense 4,079 219 130 Printing 5,604 5,487 6,435 Miscellaneous 789 1,399 773 Transfer agent fee 3,921 13,540 5,052 Accounting and legal services fee 1,491 5,168 1,913 Trustees' fees 265 1,186 412 Interest expense 1,355 4,798 2,992 Legal fees -- 251 -- ----------------- ----------------- ----------------- Total Expenses 160,025 282,804 349,897 - ---------------------------------------------------------------------------------------------------------- Less Expense Reductions (89,398) (66,011) (248,764) - ---------------------------------------------------------------------------------------------------------- Net Expenses 70,627 216,793 101,133 - ---------------------------------------------------------------------------------------------------------- Net Investment Income (Loss) (43,724) (69,025) 43,466 - ---------------------------------------------------------------------------------------------------------- Realized and Unrealized Gain (Loss) on Investments, Financial Futures Contracts and Foreign Currency Transactions: Net realized gain (loss) on investments sold (1,172,422) 6,208,030 (440,411) Net realized loss on financial futures contracts -- (132,737) -- Net realized gain (loss) on foreign currency transactions -- 3,027 (729,497) Change in net unrealized appreciation (depreciation) of investments (3,958,158) (8,772,416) (3,005,518) Change in net unrealized appreciation (depreciation) of foreign currency transactions -- -- 415 ----------------- ----------------- ----------------- Net Realized and Unrealized Loss on Investments, Financial Futures Contracts and Foreign Currency Transactions (5,130,580) (2,694,096) (4,175,011) - ---------------------------------------------------------------------------------------------------------- Net Decrease in Net Assets Resulting from Operations ($5,174,304) ($2,763,121) ($4,131,545) ========================================================================================================== See notes to financial statements.
Statement of Changes in Net Assets - --------------------------------------------------------------------------------------------------------------------------- ACTIVE BOND DIVIDEND PERFORMERS FUND FUND --------------------------------------- --------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 2001 FEBRUARY 29, 2000 FEBRUARY 28, 2001 ----------------- ----------------- ----------------- ----------------- Increase in Net Assets: From Operations: Net investment income $342,798 $368,916 $120,862 $95,088 Net realized gain (loss) on investments sold, financial futures contracts and foreign currency transactions (167,990) 18,772 1,960,778 2,380,858 Change in net unrealized appreciation (depreciation) of investments, financial futures contracts and foreign currency transactions (88,968) 304,795 (1,240,327) (1,356,247) ----------------- ----------------- ----------------- ----------------- Net Increase in Net Assets Resulting from Operations 85,840 692,483 841,313 1,119,699 ----------------- ----------------- ----------------- ----------------- Distributions to Shareholders: * Dividends from net investment income (342,798) (370,991) (125,515) (100,614) Distributions in excess of net investment income (47) -- -- -- Distributions from net realized gain on investments sold (11,387) -- (1,568,997) (2,068,903) ----------------- ----------------- ----------------- ----------------- Total Distributions to Shareholders (354,232) (370,991) (1,694,512) (2,169,517) ----------------- ----------------- ----------------- ----------------- From Portfolio Share Transactions: ** Shares sold 3,005,999 4,430,138 5,626,668 4,639,407 Shares issued to shareholders in reinvestment of distributions 351,436 366,504 1,694,964 2,169,758 ----------------- ----------------- ----------------- ----------------- 3,357,435 4,796,642 7,321,632 6,809,165 Less shares repurchased (4,552,479) (2,535,098) (9,348,646) (14,419,671) ----------------- ----------------- ----------------- ----------------- Net Increase (Decrease) (1,195,044) 2,261,544 (2,027,014) (7,610,506) ----------------- ----------------- ----------------- ----------------- Net Assets: Beginning of period 5,685,613 4,222,177 17,742,844 14,862,631 ----------------- ----------------- ----------------- ----------------- End of period (including undistributed (distribution in excess of) net investment income of ($1,213), ($2,963), $16,484 and $10,948 respectively) $4,222,177 $6,805,213 $14,862,631 $6,202,307 ================= ================= ================= ================= * Distributions to Shareholders: Per share dividends from net investment income $0.5791 $0.5579 $0.1106 $0.1073 ----------------- ----------------- ----------------- ----------------- Per share distributions in excess of net investment income $0.0001 -- -- -- ----------------- ----------------- ----------------- ----------------- Per share distributions from net realized gain on investments sold $0.0206 -- $1.5543 $2.8091 ----------------- ----------------- ----------------- ----------------- ** Analysis of Portfolio Share Transactions: Shares sold 358,987 535,238 375,404 320,516 Shares issued to shareholders in reinvestment of distributions 42,197 44,172 116,345 183,485 ----------------- ----------------- ----------------- ----------------- 401,184 579,410 491,749 504,001 Less shares repurchased (544,753) (307,954) (618,694) (1,047,503) ----------------- ----------------- ----------------- ----------------- Net Increase (Decrease) (143,569) 271,456 (126,945) (543,502) ================= ================= ================= ================= The Statement of Changes in Net Assets shows how the value of each Fund's net assets has changed since the previous period. The difference reflects net investment income, any investment and foreign currency gains and losses, distributions paid to shareholders and any increase or decrease in money shareholders invested in each Fund. The footnotes illustrate the number of Fund shares sold, reinvested and repurchased during the period, along with the per share amount of distributions made to shareholders of each Fund for the period indicated. See notes to financial statements.
Statement of Changes in Net Assets (continued) - --------------------------------------------------------------------------------------------------------------------------- MEDIUM CAPITALIZATION SMALL CAPITALIZATION GROWTH FUND GROWTH FUND --------------------------------------- --------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 2001 FEBRUARY 29, 2000 FEBRUARY 28, 2001 ----------------- ----------------- ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations: Net investment loss ($76,769) ($112,124) ($23,200) ($43,724) Net realized gain (loss) on investments sold 4,019,150 2,260,504 1,195,121 (1,172,422) Change in net unrealized appreciation (depreciation) of investments 12,122,951 (12,919,604) 3,128,562 (3,958,158) ----------------- ----------------- ----------------- ----------------- Net Increase (Decrease) in Net Assets Resulting from Operations 16,065,332 (10,771,224) 4,300,483 (5,174,304) ----------------- ----------------- ----------------- ----------------- Distributions to Shareholders: * Distributions from net realized gain on investments sold (808,355) (4,552,005) (579,250) (853,819) ----------------- ----------------- ----------------- ----------------- From Portfolio Share Transactions: ** Shares sold 13,799,897 23,310,057 9,505,733 8,114,648 Shares issued to shareholders in reinvestment of distributions 802,909 4,512,270 579,258 856,091 ----------------- ----------------- ----------------- ----------------- 14,602,806 27,822,327 10,084,991 8,970,739 Less shares repurchased (9,653,548) (37,893,065) (7,350,836) (6,392,389) ----------------- ----------------- ----------------- ----------------- Net Increase (Decrease) 4,949,258 (10,070,738) 2,734,155 2,578,350 ----------------- ----------------- ----------------- ----------------- Net Assets: Beginning of period 16,686,585 36,892,820 2,452,791 8,908,179 ----------------- ----------------- ----------------- ----------------- End of period (including distributions in excess of net investment income of $1,664, $2,052, $59 and $292, respectively) $36,892,820 $11,498,853 $8,908,179 $5,458,406 ================= ================= ================= ================= * Distributions to Shareholders: Per share distributions from net realized gain on investments sold $0.5502 $3.3259 $2.2594 $1.9194 ----------------- ----------------- ----------------- ----------------- ** Analysis of Portfolio Share Transactions: Shares sold 887,756 1,245,050 558,531 432,156 Shares issued to shareholders in reinvestment of distributions 46,642 366,810 32,488 70,365 ----------------- ----------------- ----------------- ----------------- 934,398 1,611,860 591,019 502,521 Less shares repurchased (703,733) (2,239,222) (436,856) (346,807) ----------------- ----------------- ----------------- ----------------- Net Increase (Decrease) 230,665 (627,362) 154,163 155,714 ================= ================= ================= ================= See notes to financial statements.
Statement of Changes in Net Assets (continued) - --------------------------------------------------------------------------------------------------------------------------- SMALL CAPITALIZATION INTERNATIONAL VALUE FUND EQUITY FUND --------------------------------------- --------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 2001 FEBRUARY 29, 2000 FEBRUARY 28, 2001 ----------------- ----------------- ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations: Net investment income (loss) $45,648 ($69,025) $50,863 $43,466 Net realized gain (loss) on investments sold, financial futures contracts and foreign currency transactions 3,502,891 6,078,320 855,747 (1,169,908) Change in net unrealized appreciation (depreciation) of investments and foreign currency transactions 6,887,323 (8,772,416) 2,049,079 (3,005,103) ----------------- ----------------- ----------------- ----------------- Net Increase (Decrease) in Net Assets Resulting from Operations 10,435,862 (2,763,121) 2,955,689 (4,131,545) ----------------- ----------------- ----------------- ----------------- Distributions to Shareholders: * Dividends from net investment income (52,590) (49,153) (50,863) (32,472) Distributions in excess of net investment income -- -- (28,356) -- Distributions from net realized gain on investments sold (1,849,452) (6,670,587) (475,044) (387,846) ----------------- ----------------- ----------------- ----------------- Total Distributions to Shareholders (1,902,042) (6,719,740) (554,263) (420,318) ----------------- ----------------- ----------------- ----------------- From Portfolio Share Transactions: ** Shares sold 12,736,754 17,123,240 5,684,244 5,627,681 Shares issued to shareholders in reinvestment of distributions 1,902,123 6,721,015 554,265 420,270 ----------------- ----------------- ----------------- ----------------- 14,638,877 23,844,255 6,238,509 6,047,951 Less shares repurchased (6,332,233) (8,436,558) (3,596,999) (8,484,719) ----------------- ----------------- ----------------- ----------------- Net Increase (Decrease) 8,306,644 15,407,697 2,641,510 (2,436,768) ----------------- ----------------- ----------------- ----------------- Net Assets: Beginning of period 7,418,122 24,258,586 7,805,087 12,848,023 ----------------- ----------------- ----------------- ----------------- End of period (including undistributed (distributions in excess of) net investment income of $48,651, ($1,066), ($78,887) and ($41,401) respectively) $24,258,586 $30,183,422 $12,848,023 $5,859,392 ================= ================= ================= ================= * Distributions to Shareholders: Per share dividends from net investment income $0.0575 $0.0273 $0.0688 $0.0391 ----------------- ----------------- ----------------- ----------------- Per share distributions in excess of net investment income -- -- $0.0383 -- ----------------- ----------------- ----------------- ----------------- Per share distributions from net realized gain on investments sold $2.0232 $3.7103 $0.6428 $0.4683 ----------------- ----------------- ----------------- ----------------- ** Analysis of Portfolio Share Transactions: Shares sold 857,366 1,077,952 464,681 469,845 Shares issued to shareholders in reinvestment of distributions 124,240 611,557 44,555 45,781 ----------------- ----------------- ----------------- ----------------- 981,606 1,689,509 509,236 515,626 Less shares repurchased (449,846) (541,612) (312,613) (766,906) ----------------- ----------------- ----------------- ----------------- Net Increase (Decrease) 531,760 1,147,897 196,623 (251,280) ================= ================= ================= ================= See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Active Bond Fund Financial Highlights Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED ------------------------------------------------- FEBRUARY 29, FEBRUARY 28, 1997 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $8.64 $8.54 $8.83 $8.59 $8.14 ------------- ------------- ------------- ------------- ------------- Net Investment Income (1) 0.60 0.59 0.56 0.58 0.56 Net Realized and Unrealized Gain (Loss) on Investments (0.09) 0.34 (0.02) (0.43) 0.47 ------------- ------------- ------------- ------------- ------------- Total from Investment Operations 0.51 0.93 0.54 0.15 1.03 ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.60) (0.59) (0.56) (0.58) (0.56) Distributions in Excess of Net Investment Income -- -- (2) -- (2) -- (2) -- Distributions from Net Realized Gain on Investments Sold (0.01) (0.05) (0.22) (0.02) -- ------------- ------------- ------------- ------------- ------------- Total Distributions (0.61) (0.64) (0.78) (0.60) (0.56) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $8.54 $8.83 $8.59 $8.14 $8.61 ============= ============= ============= ============= ============= Total Investment Return (3,4) 6.17% 11.25% 6.24% 1.83% 13.11% Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $2,191 $5,158 $5,686 $4,222 $6,805 Ratio of Expenses to Average Net Assets 0.60% 0.60% 0.60% 0.60% 0.60% Ratio of Adjusted Expenses to Average Net Assets (5,6) 4.05% 2.64% 2.33% 2.93% 2.03% Ratio of Net Investment Income to Average Net Assets 7.10% 6.78% 6.36% 6.88% 6.74% Portfolio Turnover Rate 136% 230% 356% 301% 327% (1) Based on the average of the shares outstanding at the end of each month. (2) Less than $0.01 per share. (3) Total investment return assumes dividend reinvestment. (4) Total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Does not take into consideration expense reductions during the periods shown. (6) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. The Financial Highlights summarizes the impact of the following factors on a single share for each period indi cated: net investment income, gains (losses), dividends and total investment return of the Fund. It shows how the Fund's net asset value for a share has changed since the end of the previous period. Additionally, important rela tionships between some items presented in the financial statements are expressed in ratio form. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Dividend Performers Fund Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED ------------------------------------------------- FEBRUARY 29, FEBRUARY 28, 1997 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.15 $11.91 $14.92 $14.46 $13.51 ------------- ------------- ------------- ------------- ------------- Net Investment Income (1) 0.21 0.18 0.15 0.11 0.10 Net Realized and Unrealized Gain on Investments 1.92 3.92 1.04 0.60 0.45 ------------- ------------- ------------- ------------- ------------- Total from Investment Operations 2.13 4.10 1.19 0.71 0.55 ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.18) (0.17) (0.15) (0.11) (0.11) Distributions from Net Realized Gain on Investments Sold (0.19) (0.92) (1.50) (1.55) (2.81) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.37) (1.09) (1.65) (1.66) (2.92) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $11.91 $14.92 $14.46 $13.51 $11.14 ============= ============= ============= ============= ============= Total Investment Return (2,3) 21.26% 35.55% 7.97% 4.17% 2.94% Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $8,668 $20,884 $17,743 $14,863 $6,202 Ratio of Expenses to Average Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% Ratio of Adjusted Expenses to Average Net Assets (4,5) 1.89% 1.02% 0.95% 1.05% 1.08% Ratio of Net Investment Income to Average Net Assets 1.94% 1.31% 0.95% 0.71% 0.73% Portfolio Turnover Rate 37% 77% 64% 46% 58% (1) Based on the average of the shares outstanding at the end of each month. (2) Total investment return assumes dividend reinvestment. (3) Total returns would have been lower had certain expenses not been reduced during the periods shown. (4) Does not take into consideration expense reductions during the periods shown. (5) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Medium Capitalization Growth Fund Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED ------------------------------------------------- FEBRUARY 29, FEBRUARY 28, 1997 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.69 $12.67 $13.51 $10.99 $21.10 ------------- ------------- ------------- ------------- ------------- Net Investment Income (Loss) (1) 0.01 -- (2) (0.02) (0.05) (0.07) Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions 2.02 2.06 (0.68) 10.71 (7.44) ------------- ------------- ------------- ------------- ------------- Total from Investment Operations 2.03 2.06 (0.70) 10.66 (7.51) ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income -- -- (2) -- -- -- Distributions from Net Realized Gain on Investments Sold (0.05) (1.22) (1.72) (0.55) (3.33) Distributions in Excess of Net Realized Gain on Investments Sold -- -- (0.10) -- -- ------------- ------------- ------------- ------------- ------------- Total Distributions (0.05) (1.22) (1.82) (0.55) (3.33) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $12.67 $13.51 $10.99 $21.10 $10.26 ============= ============= ============= ============= ============= Total Investment Return (3,4) 19.00% 17.39% (5.34%) 98.13% (38.23%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $29,085 $40,302 $16,687 $36,893 $11,499 Ratio of Expenses to Average Net Assets 0.90% 0.90% 0.90% 0.90%(7) 0.90% Ratio of Adjusted Expenses to Average Net Assets (5,6) 1.42% 1.10% 1.11% 1.28% 1.15% Ratio of Net Investment Income (Loss) to Average Net Assets 0.06% 0.03% (0.13%) (0.37%) (0.40%) Portfolio Turnover Rate 281% 341% 116% 153% 181% (1) Based on the average of the shares outstanding at the end of each month. (2) Less than $0.01 per share. (3) Total investment return assumes dividend reinvestment. (4) Total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Does not take into consideration expense reductions during the periods shown. (6) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. (7) Expense ratio does not include interest expense due to bank loans, which amounted to 0.01% for the year ended February 29, 2000. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Capitalization Growth Fund Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ------------------------------------------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED FEBRUARY 28, ------------------------------- FEBRUARY 29, FEBRUARY 28, 1997(1) 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $8.50 $9.24 $11.74 $11.65 $24.43 ------------- ------------- ------------- ------------- ------------- Net Investment Income (Loss) (2) 0.03 (0.03) (0.07) (0.09) (0.10) Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions 0.73 2.53 0.61 15.13 (11.92) ------------- ------------- ------------- ------------- ------------- Total from Investment Operations 0.76 2.50 0.54 15.04 (12.02) ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.02) -- (3) -- -- -- Distributions from Net Realized Gain on Investments Sold -- -- (0.63) (2.26) (1.92) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.02) -- (3) (0.63) (2.26) (1.92) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $9.24 $11.74 $11.65 $24.43 $10.49 ============= ============= ============= ============= ============= Total Investment Return (4,5) 8.89%(6) 27.07% 4.67% 136.18% (50.27%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $999 $3,102 $2,453 $8,908 $5,458 Ratio of Expenses to Average Net Assets 0.90%(7) 0.90% 0.90% 0.90% 0.90% Ratio of Adjusted Expenses to Average Net Assets (8,9) 16.24%(7) 4.05% 4.12% 3.19% 2.04% Ratio of Net Investment Income (Loss) to Average Net Assets 0.35%(7) (0.25%) (0.60%) (0.57%) (0.56%) Portfolio Turnover Rate 92% 117% 125% 238% 242% (1) The Fund commenced operations on May 2, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Total investment return assumes dividend reinvestment. (5) Total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Not annualized. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. (9) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Capitalization Value Fund Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED ------------------------------------------------- FEBRUARY 29, FEBRUARY 28, 1997 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $9.09 $9.38 $11.74 $9.16 $18.09 ------------- ------------- ------------- ------------- ------------- Net Investment Income (1) 0.14 0.07 0.05 0.05 (0.04) Net Realized and Unrealized Gain (Loss) on Investments 1.08 3.65 (1.23) 10.96 (2.18) ------------- ------------- ------------- ------------- ------------- Total from Investment Operations 1.22 3.72 (1.18) 11.01 (2.22) ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.12) (0.10) (0.04) (0.06) (0.03) Distributions from Net Realized Gain on Investments Sold (0.81) (1.26) (1.20) (2.02) (3.71) Distributions in Excess of Net Realized Gain on Investments Sold -- -- (0.16) -- -- ------------- ------------- ------------- ------------- ------------- Total Distributions (0.93) (1.36) (1.40) (2.08) (3.74) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $9.38 $11.74 $9.16 $18.09 $12.13 ============= ============= ============= ============= ============= Total Investment Return (2,3) 13.78% 41.81% (9.46%) 124.33% (10.14%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $6,011 $9,549 $7,418 $24,259 $30,183 Ratio of Expenses to Average Net Assets 0.80% 0.80% 0.80% 0.80% 0.80% Ratio of Adjusted Expenses to Average Net Assets (4,5) 1.83% 1.42% 1.46% 1.48% 1.04% Ratio of Net Investment Income to Average Net Assets 1.46% 0.62% 0.45% 0.37% (0.25%) Portfolio Turnover Rate 96% 216% 126% 104% 109% (1) Based on the average of the shares outstanding at the end of each month. (2) Total investment return assumes dividend reinvestment. (3) Total returns would have been lower had certain expenses not been reduced during the periods shown. (4) Does not take into consideration expense reductions during the periods shown. (5) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- International Equity Fund Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED ------------------------------------------------- FEBRUARY 29, FEBRUARY 28, 1997 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $9.24 $9.35 $9.63 $10.18 $13.33 ------------- ------------- ------------- ------------- ------------- Net Investment Income (1) 0.12 0.06 0.07 0.07 0.04 Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions 0.14 0.23 0.59 3.83 (4.63) ------------- ------------- ------------- ------------- ------------- Total from Investment Operations 0.26 0.29 0.66 3.90 (4.59) ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.10) (0.01) (0.07) (0.07) (0.04) Distributions in Excess of Net Investment Income -- -- (0.04) (0.04) -- Distributions from Net Realized Gain on Investments Sold (0.05) -- -- (0.64) (0.47) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.15) (0.01) (0.11) (0.75) (0.51) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $9.35 $9.63 $10.18 $13.33 $8.23 ============= ============= ============= ============= ============= Total Investment Return (2,3) 2.79% 3.07% 6.88% 38.84% (34.85%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $4,204 $7,983 $7,805 $12,848 $5,859 Ratio of Expenses to Average Net Assets 1.00% 1.00% 1.00% 1.00% 1.00% Ratio of Adjusted Expenses to Average Net Assets (4,5) 3.32% 2.02% 2.73% 2.86% 3.46% Ratio of Net Investment Income to Average Net Assets 1.26% 0.60% 0.69% 0.59% 0.43% Portfolio Turnover Rate 68% 125% 83% 139% 238% (1) Based on the average of the shares outstanding at the end of each month. (2) Total investment return assumes dividend reinvestment. (3) Total returns would have been lower had certain expenses not been reduced during the periods shown. (4) Does not take into consideration expense reductions during the periods shown. (5) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Active Bond Fund Schedule of Investments February 28, 2001 - ---------------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the Active Bond Fund on February 28, 2001. It's divided into three main categories: bonds, warrants and short-term investments. The bonds are further broken down by industry groups. Short-term investments, which represent the Fund's "cash" position, are listed last. PAR VALUE INTEREST CREDIT (000s ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- -------- ------ ------- ------------- BONDS Aerospace (0.69%) Northrop Grumman Corp., Deb 02-15-31 (R) 7.750% BBB- $20 $20,416 Raytheon Co., Note 03-01-03 7.900 BBB- 15 15,584 Note 03-01-10 8.300 BBB- 10 11,175 ------------- 47,175 ------------- Automobile/Trucks (2.32%) ERAC USA Finance Co., Note 02-15-05 (R) 6.625 BBB+ 6 5,889 Note 12-15-09 (R) 7.950 BBB+ 10 10,426 Ford Credit Auto Owner Trust, Pass Thru Ctf Ser 2000-F Class A-3 11-15-04 6.580 AAA 30 30,945 Ford Motor Co., Note 07-16-31 7.450 A 15 14,546 Honda Auto Receivables Owner Trust, Pass Thru Ctf Ser 2001-1 Class A-4 06-19-06 5.560 AAA 70 70,413 Toyota Auto Receivables Owner Trust, Asset Backed Note Ser 2000-B Class A-4 04-15-07 6.800 AAA 25 25,898 ------------- 158,117 ------------- Banks -- Foreign (1.21%) Abbey National First Capital, B.V., Sub Note (United Kingdom) 10-15-04 8.200 AA- 20 21,563 Royal Bank of Scotland Group Plc, Bond (United Kingdom) 03-31-49 8.817 A- 10 10,754 Scotland International Finance No. 2, B.V., Gtd Sub Note (United Kingdom) 11-01-06 (R) 8.850 A 35 38,961 UBS Preferred Funding Trust I, Perpetual Bond (8.622 to 10-01-10 then variable) 10-01-49 8.622 AA- 10 10,846 ------------- 82,124 ------------- Banks -- United States (2.61%) Bank of New York, Cap Security 12-01-26 (R) 7.780 A- 25 24,898 Bank One Corp., Sub Note 08-01-10 7.875 A- 15 16,198 Barclays North American Capital Corp., Gtd Cap Note 05-15-21 9.750 AA- 25 26,371 BNP Paribas Capital Trust, Perpetual Bond (9.003 to 10-27-10 then variable) 12-27-49 (R) 9.003 A 20 21,683 Capital One Bank, Sr Note 02-01-06 6.875 BBB- 15 14,946 National Westminster Bank Plc -- New York Branch, Sub Note 05-01-01 9.450 A+ 15 15,079 RBSG Capital Corp., Gtd Cap Note 03-01-04 10.125 A 30 33,410 Security Pacific Corp., Sub Note 03-01-01 11.000 A 25 25,000 ------------- 177,585 ------------- Beverages (0.22%) Canandaigua Brands, Inc., Sr Sub Note Ser C 12-15-03 8.750 B+ 15 15,038 ------------- Broker Services (0.15%) Goldman Sachs Group, Inc., Bond 01-15-11 6.875 A+ 10 10,199 ------------- Building (0.15%) Vulcan Materials Co., Note 02-01-06 6.400 A+ 10 10,075 ------------- Chemicals (0.22%) Akzo Nobel, Inc., Bond 11-15-03 (R) 6.000 A- 15 14,903 ------------- Containers (0.08%) Stone Container Corp., Sr Note 02-01-11 (R) 9.750 B 5 5,138 ------------- Energy (0.85%) CalEnergy Co., Inc., Sr Bond 09-15-28 8.480 BBB- 15 16,248 Enron Corp., Note 08-15-05 (R) 8.000 BBB+ 15 15,722 P&L Coal Holdings Corp., Sr Sub Note Ser B 05-15-08 9.625 B 15 15,750 Progress Energy, Inc., Sr Note 03-01-11 7.100 BBB 10 10,290 ------------- 58,010 ------------- Finance (5.24%) Boeing Capital Corp., Note 09-27-10 7.375 AA- 15 16,525 Bombardier Capital, Inc., Note 01-15-02 (R) 6.000 A- 20 20,072 CIT Group, Inc., Note 02-07-06 6.500 A+ 25 25,075 Citigroup, Inc., Note 01-18-11 6.500 AA- 10 10,010 Sub Note 10-01-10 7.250 A+ 10 10,522 Ford Capital B.V., Gtd Deb (Netherlands) 05-15-02 9.875 A 35 36,557 Ford Motor Credit Co., Bond 02-01-11 7.375 A 15 15,314 Note 04-28-03 6.125 A 20 20,050 General Electric Capital Corp., Global Medium Term Note Ser A 11-15-10 6.875 AAA 15 16,031 General Motors Acceptance Corp., Note 07-15-05 7.500 A 15 15,599 Heller Financial, Inc., Note 01-15-03 6.400 A- 15 14,970 Household Finance Corp., Note 11-01-02 5.875 A 25 25,067 Note 01-24-06 6.500 A 10 10,085 HSBC Capital Funding LP, Perpetual Note (9.547 to 06-30-10 then variable) (Channel Islands) 12-31-49 (R) 9.547 A- 15 17,169 ING Capital Funding Trust III, Perpetual Bond (8.439 to 12-31-10 then variable) 12-31-49 8.439 A 10 10,607 Marlin Water Trust/Marlin Water Capital Corp., Sr Sec Note 12-15-01 (R) 7.090 BBB 15 15,020 MBNA Master Credit Card Trust, Pass Thru Ctf Ser 1999-G Class A 12-15-06 6.350 AAA 30 30,919 MMCA Auto Owner Trust, Pass Thru Ctf Ser 2000-2 Class A-4 06-15-05 6.860 AAA 25 26,075 Qwest Capital Funding, Inc., Bond 02-15-31 (R) 7.750 BBB+ 20 20,518 ------------- 356,185 ------------- Food (0.23%) Earthgrains Co. (The), Note 08-01-03 8.375 BBB 15 15,389 ------------- Government -- Foreign (0.77%) Brazil, Federative Republic of, Bond (Brazil) 01-11-06 10.250 BB- 10 9,900 Nova Scotia, Province of, Deb (Canada) 11-15-19 8.250 A- 15 17,879 Quebec, Government of, Deb (Canada) 01-22-11 6.125 A+ 25 24,899 ------------- 52,678 ------------- Government -- U.S. (21.56%) United States Treasury, Bond 08-15-17 8.875 AAA 137 187,775 Bond 02-15-23 7.125 AAA 199 238,987 Bond 08-15-29 6.125 AAA 180 196,144 Note 08-15-03 5.750 AAA 342 351,405 Note 02-15-05 7.500 AAA 69 75,954 Note 07-15-06 7.000 AAA 174 191,917 Note 05-15-08 5.625 AAA 120 124,950 Note 08-15-10 5.750 AAA 95 100,121 ------------- 1,467,253 ------------- Government -- U.S. Agencies (21.01%) Federal National Mortgage Assn., 15 Yr Pass Thru Ctf 06-01-14 6.000 AAA 20 19,794 15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 140 137,820 15 Yr Pass Thru Ctf 07-01-15 7.000 AAA 19 19,347 30 Yr Pass Thru Ctf 06-01-29 6.000 AAA 19 18,209 Note 12-15-05 6.000 AAA 65 66,990 Note 09-15-09 6.625 AAA 270 287,466 Note 01-15-30 7.125 AAA 35 39,676 Sub Note 02-01-11 6.250 AA- 15 15,412 Government National Mortgage Assn., 30 Yr Pass Thru Ctf 04-15-28 to 06-15-29 6.500 AAA 506 507,154 30 Yr Pass Thru Ctf 04-15-29 to 01-15-31 7.000 AAA 272 275,530 30 Yr Pass Thru Ctf 11-15-24 to 07-15-30 8.000 AAA 41 42,412 ------------- 1,429,810 ------------- Insurance (1.57%) AXA SA, Sub Note (France) 12-15-30 8.600 A- 10 10,925 Equitable Life Assurance Society USA, Surplus Note 12-01-05 (R) 6.950 A+ 10 10,249 Hartford Life, Inc., Sr Note 03-01-31 7.375 A 15 15,270 Massachusetts Mutual Life Insurance Co., Surplus Note 11-15-23 (R) 7.625 AA 15 15,291 MONY Group, Inc. (The), Sr Note 12-15-05 7.450 A- 10 10,272 New York Life Insurance Co., Surplus Note 12-15-23 (R) 7.500 AA- 15 14,138 Sun Canada Financial Co., Sub Note 12-15-07 (R) 6.625 AA- 20 19,900 URC Holdings Corp., Sr Note 06-30-06 (R) 7.875 A- 10 10,800 ------------- 106,845 ------------- Leisure (0.59%) Harrah's Operating Co., Inc., Sr Sub Note 12-15-05 7.875 BB+ 10 9,950 HMH Properties, Inc., Sr Note Ser A 08-01-05 7.875 BB 10 9,900 MGM Mirage, Inc., Sr Note 09-15-10 8.500 BBB- 10 10,498 Station Casinos, Inc., Sr Note 02-15-08 (R) 8.375 BB- 5 5,025 Waterford Gaming LLC, Sr Note 03-15-10 (R) 9.500 B+ 5 4,950 ------------- 40,323 ------------- Media (3.52%) Adelphia Communications Corp., Sr Note Ser B 10-01-02 9.250 B+ 15 15,075 Sr Note Ser B 07-15-03 8.125 B+ 8 7,840 British Sky Broadcasting Group Plc, Sr Note (United Kingdom) 07-15-09 8.200 BB+ 10 10,103 Clear Channel Communications, Inc., Note 06-15-05 7.875 BBB- 10 10,581 Continental Cablevision, Inc., Sr Note 05-15-06 8.300 A 15 16,212 Cox Radio, Inc., Sr Note 02-15-06 6.625 BBB 10 10,020 CSC Holdings, Inc., Sr Note Ser B 07-15-09 8.125 BB+ 20 20,738 Sr Sub Deb 05-15-16 10.500 BB- 10 11,250 EchoStar DBS Corp., Sr Note 02-01-09 9.375 B+ 10 10,125 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 B+ 10 9,500 Jones Intercable, Inc., Sr Note 04-15-08 7.625 BBB 20 21,072 Lenfest Communications, Inc., Sr Note 11-01-05 8.375 BBB 10 10,898 Mediacom LLC/Mediacom Capital Corp., Sr Note Ser B 04-15-08 8.500 B+ 10 9,600 News America Holdings, Inc., Gtd Sr Deb 08-10-18 8.250 BBB- 15 15,126 TCI Communications, Inc., Sr Deb 02-15-26 7.875 A 10 9,964 Time Warner, Inc., Deb 01-15-13 9.125 BBB+ 21 25,153 Viacom, Inc., Deb 07-30-30 (R) 7.875 A- 15 16,254 Note 01-30-06 (R) 6.400 A- 10 10,136 ------------- 239,647 ------------- Medical (1.11%) Athena Neuro Finance LLC, Sr Note 02-21-08 7.250 BBB 15 15,190 Dynacare, Inc., Sr Note (Canada) 01-15-06 10.750 B+ 13 13,000 Fresenius Medical Care Capital Trust II, Gtd Trust Preferred Security 02-01-08 7.875 B+ 15 14,588 HCA -- The Healthcare Co., Note 09-01-10 8.750 BB+ 10 10,512 Healthsouth Corp., Note 02-01-08, (R) 8.500 BBB- 5 4,988 Quest Diagnostics, Inc., Sr Sub Note 12-15-06 10.750 B+ 11 12,155 Tenet Healthcare Corp., Sr Note 01-15-05 8.000 BB+ 5 5,100 ------------- 75,533 ------------- Metal (1.13%) Noranda, Inc., Note (Canada) 02-15-11 8.375 BBB 15 15,068 WMC Finance (USA) Ltd., Gtd Note (Australia) 11-15-03 6.500 A 55 55,804 Yanacocha Receivables Master Trust, Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 6 6,006 ------------- 76,878 ------------- Mortgage Banking (7.75%) Commercial Mortgage Acceptance Corp., Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-08 6.790 Aaa 27 27,966 EQCC Home Equity Loan Trust, Pass Thru Ctf Ser 1997-3 Class A-9 02-15-29 6.570 AAA 40 40,649 GMAC Commercial Mortgage Securities, Inc., Pass Thru Ctf Ser 1998-C1 Class A-1 11-15-07 6.411 Aaa 58 58,956 Pass Thru Ctf Ser 1997-C1 Class A-2 09-15-06 6.853 Aaa 20 20,638 Pass Thru Ctf Ser 1997-C2 Class A-3 11-15-07 6.566 Aaa 60 60,654 IMC Home Equity Loan Trust, Pass Thru Ctf Ser 1998-1 Class A-4 03-20-25 6.600 AAA 20 20,106 LB Commercial Mortgage Trust, Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-07 6.410 Aaa 14 14,261 Money Store Home Equity Trust (The), Pass Thru Ctf Ser 1997-D Class AF-7 12-15-38 6.485 AAA 24 23,714 Morgan Stanley Capital I, Inc., Pass Thru Ctf Ser 1997-WF1 Class A-1 10-15-06 (R) 6.830 AAA 109 112,212 Pass Thru Ctf Ser 1999-CAM1 Class A-3 11-15-08 6.920 AAA 50 51,779 Salomon Brothers Mortgage Securities VII, Inc., Pass Thru Ctf Ser 1997-HUD2 Class A-2 07-25-24 6.750 Aaa 11 11,085 Saxon Asset Securities Trust, Pass Thru Ctf Ser 2000-2 Class AF-2 06-25-15 7.965 AAA 30 30,745 UCFC Home Equity Loan Trust, Pass Thru Ctf Ser 1997-A1 Class A-8 06-15-28 7.220 AAA 26 26,811 Pass Thru Ctf Ser 1997-B Class A-6 10-15-28 6.900 AAA 27 27,730 ------------- 527,306 ------------- Oil & Gas (2.09%) Alberta Energy Co., Ltd., Note (Canada) 09-15-30 8.125 BBB+ 10 11,128 Amerada Hess Corp., Bond 10-01-29 7.875 BBB+ 20 21,681 Apache Finance Canada Corp., Note (Canada) 12-15-29 7.750 A- 20 21,902 El Paso Energy Corp., Medium Term Note 10-15-30 8.050 BBB 20 21,837 Louis Dreyfus Natural Gas Corp., Sr Note 12-01-07 6.875 BBB 10 10,075 Occidental Petroleum Corp., Sr Deb 09-15-09 10.125 BBB- 5 6,075 Ocean Energy, Inc., Sr Sub Note Ser B 07-15-07 8.875 BB+ 5 5,250 Petroleum Geo-Services ASA, Sr Note (Norway) 03-30-28 7.125 BBB- 15 11,313 Snyder Oil Corp., Sr Sub Note 06-15-07 8.750 BBB+ 10 10,561 Tosco Corp., Note 02-15-30 8.125 BBB 20 22,527 ------------- 142,349 ------------- Paper & Paper Products (0.23%) International Paper Co., Note 07-08-05 8.125 BBB+ 15 15,600 ------------- Real Estate Operations (0.07%) EOP Operating L.P., Note 02-15-05 6.625 BBB+ 5 5,041 ------------- Real Estate Investment Trust (1.11%) American Health Properties, Inc., Note 01-15-07 7.500 BBB- 10 9,750 Cabot Industrial Properties, L.P., Note 05-01-04 7.125 BBB- 15 15,125 Camden Property Trust, Note 04-15-04 7.000 BBB 10 10,105 Liberty Property L.P., Medium Term Note 06-05-02 6.600 BBB- 10 10,259 Mack-Cali Realty, L.P., Note 02-15-11 7.750 BBB 10 10,239 ProLogis Trust, Note 04-15-04 6.700 BBB+ 10 10,095 TriNet Corporate Realty Trust, Inc., Note 05-15-01 7.300 BB 10 9,915 ------------- 75,488 ------------- Retail (0.37%) Archer-Daniels-Midland Co., Deb 02-01-31 7.000 A+ 10 9,904 Sears Roebuck Acceptance Corp., Note 02-01-11 7.000 A- 15 15,045 ------------- 24,949 ------------- Telecommunications (4.27%) BellSouth Capital Funding Corp., Deb 02-15-30 7.875 AA- 20 21,645 Clearnet Communications, Inc., Sr Disc Note, Step Coupon (10.125 , 05-01-04) (Canada) 05-01-09, (A) Zero B3 10 8,400 Cox Communications, Inc., Note 11-01-10 7.750 BBB 10 10,630 Crown Castle International Corp., Sr Note 05-15-11 9.000 B 5 5,075 Deutsche Telekom International Finance B.V., Bond (Netherlands) 06-15-05 7.750 A- 25 25,800 Bond (Netherlands) 06-15-30 8.250 A- 15 15,167 Dominion Resources, Inc., Sr Note Ser A 06-15-10 8.125 BBB+ 15 16,350 Global Crossing Ltd., Sr Note (Bermuda) 11-15-09 9.500 BB 10 9,875 LCI International, Inc., Sr Note 06-15-07 7.250 BBB+ 15 15,163 Level 3 Communications, Inc., Sr Note 03-15-08 11.000 B 10 9,125 McLeodUSA, Inc., Sr Note 11-01-08 9.500 B+ 10 9,425 MetroNet Communications Corp., Sr Note (Canada) 08-15-07 12.000 BBB 10 11,100 Nextel Communications, Inc., Sr Note 11-15-09 9.375 B 10 9,350 Nortel Networks Ltd., Note (Canada) 02-15-06 6.125 A 15 14,477 NTL Communications Corp., Sr Note Ser B 10-01-08 11.500 B 10 9,700 TeleCorp PCS, Inc., Sr Sub Disc Note, Step Coupon (11.625 , 04-15-04) 04-15-09 (A) Zero B3 10 7,150 Telefonos de Mexico S.A. de C.V., Sr Note (Mexico) 01-26-06, (R) 8.250 BB+ 15 14,925 Tritel PCS, Inc., Sr Sub Note 01-15-11 (R) 10.375 B3 5 5,000 Triton PCS, Inc., Sr Sub Note 02-01-11 (R) 9.375 CCC+ 10 10,000 Verizon Global Funding Corp., Deb 12-01-30 (R) 7.750 A+ 25 26,971 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 B- 5 5,450 Sr Note 11-15-09 10.375 B- 5 5,600 WorldCom, Inc., Note 05-15-06 8.000 BBB+ 15 15,458 Note 08-15-28 6.950 BBB+ 10 8,655 ------------- 290,491 ------------- Transport (3.06%) America West Airlines, Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 A- 3 3,312 Burlington Northern Santa Fe Corp., Deb 08-15-30 7.950 BBB+ 20 21,290 Continental Airlines, Inc., Pass Thru Ctf Ser 1997-2C 06-30-04 7.206 BBB 19 19,127 Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA+ 19 18,713 Delta Air Lines, Inc., Pass Thru Ctf Ser 2000-1 Class A-2 11-18-10 7.570 AAA 10 10,708 Norfolk Southern Corp., Sr Note 02-15-31 7.250 BBB 15 15,152 Northwest Airlines 1996-1 Pass Through Trusts, Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BBB- 4 4,628 Northwest Airlines, Inc., Note 03-15-04 8.375 BB 10 9,907 NWA Trust, Sr Note Ser A 12-21-12 9.250 AA 32 35,681 U.S. Airways, Inc., Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 BB- 17 17,886 United Air Lines, Inc., Pass Thru Ctf Ser 2000-1 Class A-1 01-01-14 7.783 AAA 28 29,689 Pass Thru Ctf Ser 2000-2 Class A-1 10-01-10 7.032 AAA 15 15,122 Wisconsin Central Transportation Corp., Note 04-15-08 6.625 BBB- 7 6,755 ------------- 207,970 ------------- Utilities (9.63%) AES Corp., Sr Note 06-01-09 9.500 BB 10 10,550 Sr Note 09-15-10 9.375 BB 5 5,200 Sr Sub Note 07-15-06 10.250 B+ 12 12,420 AES Eastern Energy L.P., Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 15 15,694 Avon Energy Partners Holdings, Sr Note (United Kingdom) 12-11-02 (R) 6.730 BBB+ 10 10,032 Beaver Valley Funding Corp., Sec Lease Oblig Bond 06-01-17 9.000 BB- 9 9,765 BVPS II Funding Corp., Collateralized Lease Bond 06-01-17 8.890 BB- 7 7,709 Calpine Corp., Sr Note 08-15-05 8.250 BB+ 15 15,356 Sr Note 04-01-08 7.875 BB+ 5 4,875 Sr Note 02-15-11 8.250 BB+ 5 5,056 Cleveland Electric Illuminating Co., 1st Mtg Ser B 05-15-05 9.500 BB+ 35 36,444 Sec Note Ser D 11-01-17 7.880 BB+ 20 20,418 CMS Energy Corp., Sr Note 05-15-02 8.125 BB 15 15,163 Sr Note 10-15-07 9.875 BB 5 5,312 Sr Note Ser B 01-15-04 6.750 BB 15 14,400 Connecticut Light & Power Co., 1st Ref Mtg Ser C 06-01-02 7.750 BBB+ 15 15,314 East Coast Power LLC, Sec Note 03-31-12 7.066 BBB- 10 9,712 EIP Funding-PNM, Sec Fac Bond 10-01-12 10.250 BBB- 23 25,472 GG1B Funding Corp., Deb 01-15-11 7.430 BBB- 11 11,517 Hydro-Quebec, Gtd Bond (Canada) 02-01-21 9.400 A+ 15 19,418 Gtd Bond Ser HY (Canada) 01-15-22 8.400 A+ 10 11,932 Gtd Deb Ser IF (Canada) 02-01-03 7.375 A+ 25 26,013 Iberdrola International B.V., Note (Spain) 10-01-02 7.500 AA- 25 25,827 Note (Spain) 06-01-03 (R) 7.125 AA- 25 25,914 KeySpan Corp., Note 11-15-10 7.625 A 10 10,851 Long Island Lighting Co., Deb 03-15-23 8.200 A- 20 20,400 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 BB+ 35 40,425 Niagara Mohawk Power Corp., Sec Fac Bond 01-01-18 8.770 BBB 25 27,343 Nisource Finance Corp., Bond 11-15-10 (R) 7.875 BBB 15 16,149 North Atlantic Energy Corp., 1st Mtg Ser A 06-01-02 9.050 BB+ 6 6,105 Northeast Utilities, Note Ser A 12-01-06 8.580 BBB 3 3,235 PECO Energy Transition Trust, Pass Thru Ctf Ser 1999-A Class A-6 03-01-09 6.050 AAA 15 15,183 Pass Thru Ctf Ser 2000-A Class A-3 03-01-10 7.625 AAA 40 44,083 Pinnacle Partners, Sr Note 08-15-04 (R) 8.830 BBB- 10 10,332 PNPP II Funding Corp., Deb 05-30-16 9.120 BB- 15 16,308 PSEG Energy Holdings Inc., Sr Note 02-15-08 (R) 8.625 BBB- 15 14,978 Sierra Pacific Resources, Note 05-15-05 8.750 BBB 15 15,301 System Energy Resources, Inc., 1st Mtg 08-01-01 7.710 BBB- 5 4,963 TXU Electric Capital V., Capital Sec 01-30-37 8.175 BBB- 10 9,415 Waterford 3 Funding Corp., Sec Lease Obligation Bond 01-02-17 8.090 BBB- 25 25,850 Xcel Energy, Inc., Sr Note 12-01-10 7.000 BBB+ 15 15,201 ------------- 655,635 ------------- Waste Disposal Service & Equip. (0.07%) Waste Management, Inc., Sr Note 08-01-10 7.375 BBB 5 5,036 ------------- TOTAL BONDS (Cost $6,219,298) (93.88%) 6,388,770 -------- ------------- NUMBER OF WARRANTS -------- WARRANTS MetroNet Communications Corp. (Canada) (R)** 10 970 -------- ------------- TOTAL WARRANTS (Cost $103) (0.01%) 970 -------- ------------- INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (5.69%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 02-28-01, due 03-01-01 (Secured by U.S. Treasury Bonds 7.25% thru 13.25%, due 11-15-09 thru 02-15-19) -- Note A 5.380% $387 $387,000 ------------ Corporate Savings Account (0.01%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 4.20% 705 ------------ TOTAL SHORT-TERM INVESTMENTS (5.70%) 387,705 --------- ------------ TOTAL INVESTMENTS (99.59%) 6,777,445 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.41%) 27,768 --------- ------------ TOTAL NET ASSETS (100.00%) $6,805,213 ========= ============ * Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investor Services or John Hancock Advisers, Inc. where Standard & Poor's ratings are not available. ** Non-income producing security. (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $596,035 or 8.76% of net assets as of February 28, 2001. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Dividend Performers Fund Schedule of Investments February 28, 2001 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the Dividend Performers Fund on February 28, 2001. It's divided into two main categories: common stocks and short-term investments. The common stocks are further broken down by industry groups. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF ISSUER, DESCRIPTION SHARES VALUE - ------------------- ---------- ------------ COMMON STOCKS Advertising (2.61%) Interpublic Group of Cos., Inc. (The) 4,300 $161,680 ------------ Banks -- United States (3.87%) State Street Corp. 930 93,419 Wells Fargo & Co. 2,950 146,438 ------------ 239,857 ------------ Beverages (4.14%) Anheuser-Busch Cos., Inc. 2,720 118,864 PepsiCo, Inc. 3,000 138,240 ------------ 257,104 ------------ Broker Services (1.66%) Merrill Lynch & Co., Inc. 1,720 103,028 ------------ Building (1.58%) Black & Decker Corp. (The) 2,360 97,964 ------------ Computers (11.44%) Cisco Systems, Inc.* 2,580 61,114 Compaq Computer Corp. 5,740 115,948 EMC Corp.* 1,960 77,930 International Business Machines Corp. 1,040 103,896 KPMG Consulting, Inc.* 4,000 92,250 McDATA Corp. (Class A)* 72 1,287 Microsoft Corp.* 2,150 126,850 Oracle Corp.* 3,800 72,200 Sun Microsystems, Inc.* 2,925 58,134 ------------ 709,609 ------------ Containers (1.32%) Bemis Co., Inc. 2,400 81,648 ------------ Diversified Operations (2.74%) Minnesota Mining & Manufacturing Co. 600 67,650 Tyco International Ltd. 1,870 102,196 ------------ 169,846 ------------ Electronics (7.62%) Emerson Electric Co. 800 53,520 General Electric Co. 4,350 202,275 Intel Corp. 3,400 97,113 Motorola, Inc. 3,260 49,454 Texas Instruments, Inc. 2,380 70,329 ------------ 472,691 ------------ Finance (6.77%) Citigroup, Inc. 3,266 160,622 Household International, Inc. 1,900 110,048 J.P. Morgan Chase & Co. 2,000 93,320 Morgan Stanley Dean Witter & Co. 860 56,012 ------------ 420,002 ------------ Insurance (4.43%) AFLAC, Inc. 1,225 73,696 American General Corp. 1,540 117,410 American International Group, Inc. 1,020 83,436 ------------ 274,542 ------------ Media (2.82%) AOL Time Warner, Inc.* 2,100 92,463 McGraw-Hill Cos., Inc. (The) 1,400 82,544 ------------ 175,007 ------------ Medical (12.08%) Abbott Laboratories 1,500 73,485 American Home Products Corp. 2,240 138,365 Baxter International, Inc. 1,950 179,576 Johnson & Johnson 1,500 145,995 Merck & Co., Inc. 1,790 143,558 Schering-Plough Corp. 1,700 68,425 ------------ 749,404 ------------ Mortgage Banking (4.63%) Fannie Mae 1,700 135,490 Freddie Mac 2,300 151,455 ------------ 286,945 ------------ Office (1.07%) Avery Dennison Corp. 1,250 66,250 ------------ Oil & Gas (8.81%) Anadarko Petroleum Corp. 1,100 68,750 Chevron Corp. 1,140 97,652 Conoco Inc. (Class A) 3,440 97,180 Exxon Mobil Corp. 1,696 137,457 Halliburton Co. 1,900 75,658 Royal Dutch Petroleum Co., American Depositary Receipts (ADR) (Netherlands) 1,200 69,996 ------------ 546,693 ------------ Paper & Paper Products (2.43%) Kimberly-Clark Corp. 2,110 150,865 ------------ Retail (5.95%) CVS Corp. 1,900 115,900 Home Depot, Inc. (The) 2,150 91,375 Lowe's Cos., Inc. 2,900 162,052 ------------ 369,327 ------------ Telecommunications (4.12%) ADC Telecommunications, Inc.* 5,100 56,738 Nokia Corp., (ADR) (Finland) 2,360 51,920 Nortel Networks Corp. (Canada) 2,040 37,720 Verizon Communications 2,200 108,900 ------------ 255,278 ------------ Tobacco (2.80%) Philip Morris Cos., Inc. 3,600 173,448 ------------ Utilities (5.82%) ALLTEL Corp. 1,500 80,550 Duke Energy Corp. 3,800 154,850 SBC Communications, Inc. 2,630 125,451 ------------ 360,851 ------------ TOTAL COMMON STOCKS (Cost $5,098,709) (98.71%) 6,122,039 --------- ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (1.76%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 02-28-01, due 03-01-01 (Secured by U.S. Treasury Bonds, 7.25% thru 13.25% due 11-15-09 thru 02-15-19) -- Note A 5.38% $109 $109,000 ------------ Corporate Savings Account (0.00%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 4.20% 331 ------------ TOTAL SHORT-TERM INVESTMENTS (1.76%) 109,331 --------- ------------ TOTAL INVESTMENTS (100.47%) 6,231,370 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.47%) (29,063) --------- ------------ TOTAL NET ASSETS (100.00%) $6,202,307 ========= ============ * Non-income-producing security. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Medium Capitalization Growth Fund Schedule of Investments February 28, 2001 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the Medium Capitalization Growth Fund on February 28, 2001. It's divided into two main categories: common stocks and short-term investments. The common stocks are further broken down by industry groups. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF ISSUER, DESCRIPTION SHARES VALUE - ------------------- ---------- ------------ COMMON STOCKS Advertising (0.32%) TMP Worldwide, Inc.* 700 $36,619 ------------ Banks -- United States (3.04%) Mellon Financial Corp. 3,948 182,832 Northern Trust Corp. 2,350 167,144 ------------ 349,976 ------------ Beverages (0.99%) Pepsi Bottling Group, Inc. 2,833 114,312 ------------ Broker Services (1.52%) Bear Stearns Cos., Inc. 955 49,832 Lehman Brothers Holdings, Inc. 1,817 124,737 ------------ 174,569 ------------ Computers (15.63%) Brocade Communications Systems, Inc.* 3,035 117,796 DST Systems, Inc.* 830 50,630 EMC Corp.* 994 39,521 Emulex Corp.* 2,100 64,706 Exodus Communications, Inc.* 5,370 78,536 Fiserv, Inc.* 1,600 79,200 Handspring, Inc.* 2,600 65,163 i2 Technologies, Inc.* 3,050 81,969 Interwoven, Inc.* 3,200 53,000 Intuit, Inc.* 3,300 135,712 Manugistics Group, Inc.* 950 29,450 McDATA Corp. (Class A)* 36 644 McDATA Corp. (Class B)* 1,500 29,906 Mercury Interactive Corp.* 1,400 88,113 Micromuse, Inc.* 1,600 65,700 Palm, Inc.* 5,550 96,431 Parametric Technology Corp.* 16,600 220,988 Rational Software Corp.* 2,450 85,597 Research in Motion, Ltd.* (Canada) 1,200 46,425 SunGard Data Systems, Inc.* 3,407 189,770 TIBCO Software, Inc.* 2,700 36,450 VeriSign, Inc.* 2,950 141,508 ------------ 1,797,215 ------------ Electronics (12.89%) Aeroflex, Inc.* 10,574 141,427 Analog Devices, Inc.* 1,162 43,343 Applied Micro Circuits Corp.* 1,420 37,985 Atmel Corp.* 2,700 28,350 Flextronics International, Ltd.* (Singapore) 3,850 102,025 Jabil Circuit, Inc.* 4,874 109,568 KLA-Tencor Corp.* 2,650 94,737 Lam Research Corp.* 4,800 103,200 Molex, Inc. 1,410 51,201 Novellus Systems, Inc.* 2,600 100,425 PMC-Sierra, Inc.* (Canada) 1,050 35,175 QLogic Corp.* 1,650 61,669 Sanmina Corp.* 2,080 62,010 Tektronix, Inc.* 5,374 132,684 Vitesse Semiconductor Corp.* 2,300 90,706 Waters Corp.* 4,362 287,281 ------------ 1,481,786 ------------ Energy (2.32%) Calpine Corp.* 4,662 207,412 Dynegy, Inc. (Class A) 1,261 59,267 ------------ 266,679 ------------ Fiber Optics (0.71%) Sycamore Networks, Inc.* 4,500 81,562 ------------ Finance (5.71%) Affiliated Managers Group, Inc.* 2,103 108,304 Capital One Financial Corp. 1,120 61,880 Concord EFS, Inc.* 2,972 137,455 Golden West Financial Corp. 2,696 147,876 Providian Financial Corp. 4,014 200,740 ------------ 656,255 ------------ Instruments -- Scientific (1.68%) Applera Corp. -- Applied Biosystems Group 2,799 193,411 ------------ Insurance (6.30%) ACE, Ltd. (Bermuda) 3,360 122,976 AFLAC, Inc. 2,324 139,812 Ambac Financial Group, Inc. 4,139 233,440 American General Corp. 893 68,082 Everest Re Group, Ltd. (Bermuda) 2,535 160,339 ------------ 724,649 ------------ Media (2.62%) Charter Communications, Inc. (Class A)* 4,750 101,531 Clear Channel Communications, Inc.* 2,103 120,186 Reader's Digest Association, Inc. (Class A) 2,491 79,936 ------------ 301,653 ------------ Medical (12.31%) Alkermes, Inc.* 1,950 60,450 Allergan, Inc. 1,411 122,686 ALZA Corp.* 4,398 173,941 HEALTHSOUTH Corp.* 9,675 154,026 Human Genome Sciences, Inc.* 1,700 93,394 IDEC Pharmaceuticals Corp.* 1,780 100,347 Immunex Corp.* 4,400 143,275 Inhale Therapeutic Systems, Inc.* 2,250 62,719 MedImmune, Inc.* 2,300 100,481 Millennium Pharmaceuticals, Inc.* 4,100 138,375 Oxford Health Plans, Inc.* 3,700 122,331 Trigon Healthcare, Inc.* 967 58,204 Wellpoint Health Networks, Inc.* 868 85,802 ------------ 1,416,031 ------------ Oil & Gas (8.24%) Baker Hughes, Inc. 2,169 85,025 BJ Services Co.* 1,405 106,780 Cooper Cameron Corp.* 1,804 107,843 El Paso Corp. 2,414 169,704 Santa Fe International Corp. 3,903 146,167 Transocean Sedco Forex, Inc. 3,714 178,755 Weatherford International, Inc.* 2,938 152,864 ------------ 947,138 ------------ Pollution Control (1.56%) Waste Management, Inc. 7,095 180,000 ------------ Retail (7.03%) Abercrombie & Fitch Co. (Class A)* 4,082 115,766 Bed Bath & Beyond, Inc.* 6,000 147,750 BJ's Wholesale Club, Inc.* 2,723 123,924 Ethan Allen Interiors, Inc. 2,781 94,443 RadioShack Corp. 2,041 87,355 Talbots, Inc. 2,337 118,766 TJX Cos., Inc. 3,919 119,843 ------------ 807,847 ------------ Telecommunications (14.05%) Allegiance Telecom, Inc.* 6,650 134,662 American Tower Corp. (Class A)* 5,236 151,530 Comverse Technology, Inc.* 1,420 106,411 Crown Castle International Corp.* 4,850 121,856 Dobson Communications Corp. (Class A)* 13,050 242,241 Global Crossing, Ltd.* (Bermuda) 7,041 114,275 McLeodUSA, Inc. (Class A)* 16,615 218,072 Scientific-Atlanta, Inc. 4,645 217,850 Western Wireless Corp. (Class A)* 4,350 183,516 XO Communications, Inc. (Class A)* 8,400 124,950 ------------ 1,615,363 ------------ Textile (1.04%) Jones Apparel Group, Inc.* 3,119 119,770 ------------ Utilities (0.05%) NewPower Holdings, Inc.* 885 5,531 ------------ TOTAL COMMON STOCKS (Cost $11,013,857) (98.01%) 11,270,366 --------- ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (3.72%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 02-28-01, due 03-01-01 (Secured by U.S. Treasury Bonds, 7.25% thru 13.25% due 11-15-09 thru 02-15-19) -- Note A 5.38% $428 $428,000 ------------ Corporate Savings Account (0.01%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 4.20% 590 ------------ TOTAL SHORT-TERM INVESTMENTS (3.73%) 428,590 --------- ------------ TOTAL INVESTMENTS (101.74%) 11,698,956 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (1.74%) (200,103) --------- ------------ TOTAL NET ASSETS (100.00%) $11,498,853 ========= ============ * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
Portfolio Concentration (Unaudited) - ---------------------------------------------------------------------- The Medium Capitalization Growth Fund invests primarily in common stocks of U.S. and foreign issuers. The performance of the Fund is closely tied to the economic and financial conditions within the countries in which it invests. The concentration of investments by industry category for individual securities held by the Fund is shown in the schedule of investments. In addition, concentration of investments can be aggregated by various countries. The table below shows the percentages of the Fund's investments at February 28, 2001, assigned to country categories. VALUE AS A PERCENTAGE OF COUNTRY DIVERSIFICATION FUND'S NET ASSETS - ----------------------- ----------------- Bermuda 3.46% Canada 0.71 Singapore 0.89 United States 96.68 ------- TOTAL INVESTMENTS 101.74% ======= See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Capitalization Growth Fund Schedule of Investments February 28, 2001 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the Small Capitalization Growth Fund on February 28, 2001. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry groups. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF ISSUER, DESCRIPTION SHARES VALUE - ------------------- ---------- ------------ COMMON STOCKS Advertising (1.76%) Getty Images, Inc.* 3,820 $95,978 ------------ Banks -- United States (1.41%) Southwest Bancorp. of Texas, Inc.* 2,000 77,000 ------------ Business Services -- Misc (6.61%) Corporate Executive Board Co. (The)* 3,000 107,250 Forrester Research, Inc.* 1,550 60,547 Heidrick & Struggles International, Inc.* 2,500 82,656 Management Network Group, Inc. (The)* 7,350 83,606 Pivotal Corp.* (Canada) 2,000 26,625 ------------ 360,684 ------------ Computers (10.59%) Advent Software, Inc.* 2,990 115,115 Cerner Corp.* 3,400 174,037 Embarcadero Technologies, Inc.* 2,300 67,850 IDX Systems Corp.* 3,400 66,300 Manugistics Group, Inc.* 2,000 62,000 M-Systems Flash Disk Pioneers Ltd.* (Israel) 7,000 57,532 Novatel Wireless, Inc.* 7,050 35,250 ------------ 578,084 ------------ Electronics (8.37%) Aeroflex, Inc.* 5,000 66,875 Alpha Industries, Inc.* 2,100 33,862 DuPont Photomasks, Inc.* 1,050 69,234 Exar Corp.* 3,920 74,480 Micrel, Inc.* 2,740 77,063 PRI Automation, Inc.* 2,590 50,667 Semtech Corp.* 3,380 84,711 ------------ 456,892 ------------ Finance (5.19%) Actrade Financial Technologies, Ltd.* 2,428 60,396 Affiliated Managers Group, Inc.* 2,000 103,000 AmeriCredit Corp.* 3,500 119,630 ------------ 283,026 ------------ Insurance (3.25%) RenaissanceRe Holdings Ltd. (Bermuda) 1,200 89,220 Triad Hospitals, Inc.* 2,700 88,256 ------------ 177,476 ------------ Media (4.04%) Entercom Communications Corp.* 3,200 130,400 Radio One, Inc. (Class A)* 6,000 90,000 ------------ 220,400 ------------ Medical (22.08%) Accredo Health, Inc.* 4,500 130,781 Alkermes, Inc.* 750 23,250 AmeriSource Health Corp. (Class A)* 2,200 118,184 Cytyc Corp.* 1,500 94,313 DaVita, Inc.* 4,600 80,868 Lincare Holdings, Inc.* 2,650 156,184 NPS Pharmaceuticals, Inc.* 2,600 83,850 Pharmaceutical Product Development, Inc.* 1,900 105,806 Renal Care Group, Inc.* 4,850 128,222 Rightchoice Managed Care * 4,700 189,880 Wilson Greatbatch Technologies, Inc.* 3,960 94,050 ------------ 1,205,388 ------------ Oil & Gas (7.69%) Marine Drilling Cos., Inc.* 5,000 145,750 Newfield Exploration Co.* 3,050 106,811 Stone Energy Corp.* 1,800 97,200 Universal Compression Holdings, Inc.* 2,000 70,000 ------------ 419,761 ------------ Retail (3.98%) Columbia Sportswear Co.* 2,000 110,750 Krispy Kreme Doughnuts, Inc.* 400 28,725 Whole Foods Market, Inc.* 1,800 77,625 ------------ 217,100 ------------ Shoes & Related Apparel (1.40%) Wolverine World Wide, Inc. 5,200 76,492 ------------ Steel (2.16%) Lone Star Technologies, Inc.* 2,650 117,899 ------------ Telecommunications (14.31%) AirGate PCS, Inc.* 3,950 174,294 Alamosa Holdings, Inc.* 11,000 115,500 CTC Communications Group, Inc.* 10,950 90,337 Dobson Communications Corp. (Class A)* 5,600 103,950 SBA Communications Corp.* 4,930 162,690 Sierra Wireless, Inc.* (Canada) 1,500 39,563 WinStar Communications, Inc.* 7,500 94,688 ------------ 781,022 ------------ Textile (1.89%) Tommy Hilfiger Corp.* 6,800 103,360 ------------ TOTAL COMMON STOCKS (Cost $5,545,155) (94.73%) 5,170,562 --------- ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (5.44%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 02-28-01, due 03-01-01 (Secured by U.S. Treasury Bonds, 7.25% thru 13.25% due 11-15-09 thru 02-15-19) -- Note A 5.38% $297 $297,000 ------------ Corporate Savings Account (0.01%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 4.20% 829 ------------ TOTAL SHORT-TERM INVESTMENTS (5.45%) 297,829 --------- ------------ TOTAL INVESTMENTS (100.18%) 5,468,391 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.18%) (9,985) --------- ------------ TOTAL NET ASSETS (100.00%) $5,458,406 ========= ============ * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Capitalization Value Fund Schedule of Investments February 28, 2001 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the Small Capitalization Value Fund on February 28, 2001. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry groups. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF ISSUER, DESCRIPTION SHARES VALUE - ------------------- ---------- ------------ COMMON STOCK Advertising (1.95%) Penton Media, Inc. 16,000 $361,440 Ventiv Health, Inc.* 14,000 226,625 ------------ 588,065 ------------ Aerospace (0.77%) Innovative Solutions & Support, Inc.* 15,950 232,272 ------------ Broker Services (1.20%) Jefferies Group, Inc. 12,100 361,790 ------------ Business Services -- Misc (4.04%) Iron Mountain, Inc.* 16,600 647,566 Sensormatic Electronics Corp 25,550 559,545 Xpedior, Inc.* 17,750 12,203 ------------ 1,219,314 ------------ Computers (18.41%) Aspen Technology, Inc.* 29,000 755,812 Bell & Howell Co.* 45,000 1,032,750 Electronics for Imaging, Inc.* 56,250 1,374,609 Hyperion Solutions Corp.* 23,250 398,156 NetRatings, Inc.* 4,650 56,381 Parametric Technology Corp.* 23,200 308,850 Portal Software, Inc.* 30,850 220,772 Student Advantage, Inc.* 54,950 164,850 UNOVA, Inc. * 141,250 627,150 Viant Corp.* 124,900 382,506 Wind River Systems, Inc.* 10,000 235,000 ------------ 5,556,836 ------------ Containers (0.80%) Pactiv Corp.* 18,000 242,100 ------------ Diversified Operations (1.45%) ESCO Electronics Corp. 20,250 436,995 ------------ Electronics (8.71%) Alpha Industries, Inc.* 34,550 557,119 Axcelis Technologies, Inc.* 29,000 267,345 MKS Instruments, Inc.* 35,652 623,910 SBS Technologies, Inc.* 14,000 308,000 Vicor Corp.* 40,650 873,975 ------------ 2,630,349 ------------ Finance (5.10%) NOVA Corp. 50,500 960,005 Sovereign Bancorp, Inc. 65,000 578,910 ------------ 1,538,915 ------------ Food (5.89%) Galaxy Nutritional Foods, Inc.* 75,000 408,000 Hain Celestial Group, Inc.* 44,250 1,371,750 ------------ 1,779,750 ------------ Insurance (0.65%) StanCorp Financial Group, Inc.* 5,000 195,500 ------------ Leisure (2.44%) Six Flags, Inc.* 34,100 736,219 ------------ Machinery (0.77%) Zebra Technologies Corp. (Class A)* 5,150 232,072 ------------ Media (7.18%) Pegasus Communications Corp.* 57,000 1,592,438 Regent Communications, Inc.* 60,500 484,000 Sinclair Broadcast Group, Inc. (Class A)* 10,000 90,625 ------------ 2,167,063 ------------ Medical (10.01%) Alpharma, Inc. (Class A) 28,000 931,000 Covance, Inc.* 92,600 1,389,000 Cyberonics, Inc.* 25,000 514,687 DENTSPLY International, Inc. 5,000 188,125 ------------ 3,022,812 ------------ Oil & Gas (1.98%) Marine Drilling Cos., Inc.* 5,000 145,750 Petroleum Geo-Services ASA, American Depositary Receipts (ADR) (Norway)* 15,000 131,250 Precision Drilling Corp. (Canada)* 4,000 169,600 Seitel, Inc. 4,000 74,800 Veritas DGC, Inc.* 2,500 75,375 ------------ 596,775 ------------ Protection -- Safety Equip & Svc (4.17%) Pittston Brink's Group 63,400 1,258,490 ------------ Retail (3.38%) Pathmark Stores, Inc.* 53,000 901,000 Ruddick Corp. 9,100 119,210 ------------ 1,020,210 ------------ Schools/Education (2.40%) Career Education Corp.* 15,900 725,438 ------------ Telecommunications (18.44%) AirGate PCS, Inc.* 16,500 728,063 Alaska Communications Systems Holdings, Inc.* 41,700 284,081 ANTEC Corp.* 60,750 544,855 Commonwealth Telephone Enterprises, Inc.* 7,500 255,000 CT Communications, Inc. 17,000 267,750 CTC Communications Group, Inc.* 112,150 925,237 Intermedia Communications, Inc.* 11,850 187,378 Lightbridge, Inc.* 40,000 475,000 Motient Corp. 95,000 350,313 NTELOS, Inc. 60,000 963,750 TeleCorp PCS, Inc.* 12,000 256,500 XM Satellite Radio Holdings, Inc. (Class A)* 32,000 328,000 ------------ 5,565,927 ------------ Waste Disposal Service & Equip. (1.98%) Casella Waste Systems, Inc. (Class A)* 97,450 596,881 ------------ TOTAL COMMON STOCKS (Cost $32,424,457) (101.72%) 30,703,773 --------- ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (0.09%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 02-28-01, due 03-01-01 (Secured by U.S. Treasury Bonds, 7.25% thru 13.25% due 11-15-09 thru 02-15-19) -- Note A 5.38% $26 $26,000 ------------ Corporate Savings Account (0.00%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 4.20% 448 ------------ TOTAL SHORT-TERM INVESTMENTS (0.09%) 26,448 --------- ------------ TOTAL INVESTMENTS (101.81%) 30,730,221 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (1.81%) (546,799) --------- ------------ TOTAL NET ASSETS (100.00%) $30,183,422 ========= ============ * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- International Equity Fund Schedule of Investments February 28, 2001 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the International Equity Fund on February 28, 2001. It's divided into four main categories: common stocks, warrants, preferred stocks and short-term investments. Common stocks, warrants and preferred stocks are further broken down by country. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF ISSUER, DESCRIPTION SHARES VALUE - ------------------- ---------- ------------ COMMON STOCKS Brazil (0.99%) Embratel Participacoes SA, American Depositary Receipts (ADR) (Telecommunications) 1,200 $14,520 Tele Norte Leste Participacoes SA (ADR) (Telecommunications) 2,000 43,400 ------------ 57,920 ------------ Canada (7.82%) Alberta Energy Co. Ltd. (Oil & Gas) 1,900 84,960 Anderson Exploration Ltd.* (Oil & Gas) 3,100 65,970 Bombardier, Inc. (Diversified Operations) 4,100 58,721 Celestica, Inc.* (Electronics) 300 14,700 Manulife Financial Corp. (Insurance) 2,100 57,603 Precision Drilling Corp.* (Oil & Gas) 1,300 55,120 Research in Motion Ltd.* (Computers) 600 23,212 Sun Life Financial Services (Insurance) 3,000 67,074 Suncor Energy, Inc. (Oil & Gas) 1,200 30,879 ------------ 458,239 ------------ Denmark (2.01%) Novo Nordisk AS (Medical) 400 78,732 Vestas Wind Systems AS (Utilities) 800 39,193 ------------ 117,925 ------------ France (10.59%) Accor SA (Leisure) 700 27,506 Assurances Generales de France SA (Insurance) 1,100 68,597 Aventis SA (Medical) 1,000 80,816 Cap Gemini SA (Computers) 200 35,051 Lafarge SA (Building) 400 39,027 PSA Peugeot Citroen SA (Automobile/Trucks) 200 54,251 Schneider Electric SA (Machinery) 720 47,053 Suez Lyonnaise des Eaux SA (Diversified Operations) 300 49,704 Total Fina Elf SA (Oil & Gas) 889 125,606 Vivendi Environnement* (Utilities) 1,300 55,031 Vivendi Universal SA (Diversified Operations) 600 37,886 ------------ 620,528 ------------ Germany (5.79%) Bayerische Motoren Werke AG (Automobile/Trucks) 800 27,724 Deutsche Bank AG (Banks -- Foreign) 600 49,544 Dresdner Bank AG (Banks -- Foreign) 1,200 49,760 E.On AG (Utilities) 1,000 51,425 Ergo Versicherungs Gruppe AG (Insurance) 500 76,858 Muenchener Rueckversicherungs- Gesellschaft AG (Insurance) 258 83,722 ------------ 339,033 ------------ Hong Kong (2.96%) Cheung Kong Holdings Ltd. (Real Estate Operations) 5,000 60,578 Citic Pacific Ltd. (Diversified Operations) 10,000 35,641 Hutchison Whampoa Ltd. (Diversified Operations) 4,000 47,437 Johnson Electric Holdings Ltd. (Electronics) 18,000 30,116 ------------ 173,772 ------------ Ireland (1.86%) Allied Irish Banks Plc (Banks -- Foreign) 6,600 71,381 CRH Plc (Building) 2,000 37,646 ------------ 109,027 ------------ Israel (1.53%) Check Point Software Technologies Ltd.* (Computers) 500 32,062 Teva Pharmaceutical Industries Ltd. (ADR) (Medical) 900 57,375 ------------ 89,437 ------------ Italy (4.91%) Alleanza Assicurazioni SpA (Insurance) 4,600 69,100 Banca Nazionale del Lavoro SpA (Banks -- Foreign) 18,200 60,810 Edison SpA (Utilities) 6,200 58,209 Finmeccanica SpA* (Aerospace) 33,600 32,814 Riunione Adriatica di Sicurta SpA (Insurance) 4,916 66,924 ------------ 287,857 ------------ Japan (5.79%) Daikin Industries, Ltd. (Building) 2,000 37,084 Furukawa Electric Co., Ltd. (The) (Wire & Cable Products) 1,000 13,214 Itochu Techno-Science Corp. (Computers) 200 28,048 Japan Airlines Co., Ltd. (Transport) 7,000 29,957 Mitsui Fudosan Co., Ltd. (Real Estate Operations) 3,000 28,977 NEC Corp. (Electronics) 1,000 16,275 Nikon Corp. (Computers) 2,000 23,717 Nippon Steel Corp. (Steel) 25,000 45,610 Pioneer Corp. (Electronics) 1,000 25,916 Sony Corp. (Electronics) 600 43,222 Takeda Chemical Industries, Ltd. (Medical) 1,000 47,315 ------------ 339,335 ------------ Mexico (0.93%) Grupo Financiero BBVA Bancomer, SA de CV* (Finance) 4,000 2,683 Grupo Televisa SA* (ADR) (Media) 300 11,970 Telefonos de Mexico SA de CV (ADR) (Telecommunications) 1,230 39,680 ------------ 54,333 ------------ Netherlands (4.48%) Akzo Nobel NV (Chemicals) 1,280 62,090 ASM Lithography Holding NV* (Electronics) 2,200 46,612 ING Groep NV (Banks -- Foreign) 727 50,221 Koninklijke Ahold NV (Retail) 1,431 46,153 Qiagen NV* (Medical) 1,500 41,834 STMicroelectronics NV (Electronics) 500 15,690 ------------ 262,600 ------------ Norway (0.64%) Tomra Systems ASA (Pollution Control) 2,050 37,778 ------------ Portugal (1.89%) Electricidade de Portugal SA (Utilities) 16,100 47,866 Portugal Telecom SGPS SA (Telecommunications) 6,500 62,701 ------------ 110,567 ------------ Singapore (0.50%) Flextronics International Ltd.* (Electronics) 1,100 29,150 ------------ Spain (1.87%) Banco Bilbao Vizcaya Argentaria SA (Banks -- Foreign) 4,000 59,572 Corporacion Mapfre SA (Insurance) 1,200 27,613 Telefonica SA* (Telecommunications) 1,300 22,197 ------------ 109,382 ------------ Sweden (2.64%) Electrolux AB (Household) 2,400 39,572 Nordea AB (Bank-Foreign) 4,000 29,313 Svenska Handelsbanken AB (Banks -- Foreign) 5,100 85,649 ------------ 154,534 ------------ Switzerland (4.57%) ABB Ltd. (Engineering/R&D Services) 600 50,726 Nestle SA (Food) 20 43,795 Serona SA* (ADR) (Medical) 3,400 69,088 Syngenta AG* (Chemicals) 700 40,611 UBS AG (Banks -- Foreign) 400 63,572 ------------ 267,792 ------------ Taiwan (0.46%) United Microelectronics Corp.* (ADR) (Electronics) 2,800 26,908 ------------ United Kingdom (20.51%) Amdocs Ltd.* (Telecommunications) 800 52,008 Anglo American Plc (Metal) 900 58,602 AstraZeneca PLC (Medical) 1,400 63,649 Barclays Plc (Banks -- Foreign) 1,800 54,652 Billiton Plc (Metal) 14,000 64,377 BP Amoco Plc (Oil & Gas) 6,671 55,187 British Telecommunications Plc (Telecommunications) 7,700 63,366 Centrica Plc (Utilities) 24,410 82,819 CMG Plc (Computers) 4,600 50,075 COLT Telecom Group Plc* (Telecommunications) 1,900 34,097 Diageo Plc (Beverages) 3,600 36,512 Dixons Group Plc (Electronics) 14,600 54,488 Energis Plc* (Telecommunications) 8,050 52,823 GlaxoSmithKline Plc* (Medical) 1,500 41,255 National Grid Group Plc (Utilities) 9,700 82,066 Reckitt Benckiser Plc (Soap & Cleaning Preparations) 6,800 93,266 Royal Bank of Scotland Group Plc (Banks -- Foreign) 4,000 87,780 Shell Transport & Trading Co. Plc (Oil & Gas) 8,700 72,224 Vodafone Group Plc (Telecommunications) 37,840 102,571 ------------ 1,201,817 ------------ United States (3.60%) Santa Fe International Corp. (Oil & Gas) 2,000 74,900 Schlumberger Ltd. (Oil & Gas) 1,000 63,750 Transocean Sedco Forex, Inc. (Oil & Gas) 1,500 72,195 ------------ 210,845 ------------ TOTAL COMMON STOCKS (Cost $5,222,030) (86.34%) 5,058,779 --------- ------------ WARRANTS Germany (0.00%) Muenchener Rueckversicherungs- Gesellschaft AG* (Insurance) 2 177 ------------ TOTAL WARRANTS (Cost $90) (0.00%) 177 --------- ------------ TOTAL COMMON STOCKS AND WARRANTS (Cost $5,222,120) (86.34%) 5,058,956 --------- ------------ PREFERRED STOCKS Germany (1.07%) SAP AG (Computers) 400 62,959 ------------ TOTAL PREFERRED STOCKS (Cost $70,749) (1.07%) 62,959 --------- ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (11.47%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 02-28-01, due 03-01-01 (Secured by U.S. Treasury Bonds, 6.00% and 8.75% due 05-15-17 and 02-15-26) -- Note A 5.38% $672 $672,000 NUMBER OF SHARES ------ Cash Equivalents (14.41%) Navigator Securities Lending Prime Portfolio ** 844 844,471 ------------ TOTAL SHORT-TERM INVESTMENTS (25.88%) 1,516,471 --------- ------------ TOTAL INVESTMENTS (113.29%) 6,638,386 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (13.29%) (778,994) --------- ------------ TOTAL NET ASSETS (100.00%) $5,859,392 ========= ============ * Non-income producing security. ** Represents investment of security lending collateral -- Note A. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
Portfolio Concentration (Unaudited) - ---------------------------------------------------------------------- The Fund primarily invests in securities issued by companies of other countries. The performance of the Fund is closely tied to the economic conditions within the countries in which it invests. The concentration of investments by country for individual securities held by the Fund is shown in the schedule of investments. In addition, the concentration of investments can be aggregated by various industry groups. The table below shows the percentages of the Fund's investments at February 28, 2001, assigned to the various investment categories. VALUE OF SECURITIES INVESTMENT CATEGORIES AS A % OF NET ASSETS - --------------------- -------------------- Aerospace 0.56% Automobile/Trucks 1.40 Banks -- Foreign 11.30 Beverages 0.62 Building 1.94 Chemicals 1.75 Computers 4.35 Diversified Operations 3.91 Electronics 5.17 Engineering/R&D Services 0.87 Finance 0.05 Food 0.75 Household 0.68 Insurance 8.84 Leisure 0.47 Machinery 0.80 Media 0.20 Medical 8.19 Metal 2.10 Oil & Gas 11.96 Pollution Control 0.64 Real Estate Operations 1.53 Retail 0.79 Soap & Cleaning Preparations 1.59 Steel 0.78 Telecommunications 8.32 Transport 0.51 Utilities 7.11 Wire & Cable Products 0.23 Short-Term Investments 25.88 ------- TOTAL INVESTMENTS 113.29% ======= See notes to financial statements. John Hancock Funds -- Institutional Series Trust NOTES TO FINANCIAL STATEMENTS NOTE A -- ACCOUNTING POLICIES John Hancock Active Bond Fund ("Active Bond Fund"), John Hancock Dividend Performers Fund ("Dividend Performers Fund"), John Hancock Medium Capitalization Growth Fund ("Medium Capitalization Growth Fund"), John Hancock Small Capitalization Growth Fund ("Small Capitalization Growth Fund"), John Hancock Small Capitalization Value Fund ("Small Capitalization Value Fund") and John Hancock International Equity Fund ("International Equity Fund") (each, a "Fund," and collectively, the "Funds") are separate portfolios of John Hancock Institutional Series Trust (the "Trust") an open-end management investment company registered under the Investment Company Act of 1940, organized as a Massachusetts business trust in 1994. Each Fund's class of shares has equal rights as to voting, redemption, dividends and liquidation within their respective Fund. Effective November 15, 2000, the Board of Trustees designated the existing shares of Small Capitalization Growth Fund as Class I shares and authorized the issuance of Class A, Class B and Class C shares of the Fund, which will become available for sale to individual investors at a later time. The Trustees may authorize the creation of additional portfolios from time to time to satisfy various investment objectives. The investment objective of the Active Bond Fund is a high rate of total return, consistent with prudent investment risk. The investment objective of the Dividend Performers Fund is long-term growth of capital, with income as a secondary objective. The investment objective of the Medium Capitalization Growth Fund is long-term capital appreciation. The investment objective of the Small Capitalization Growth Fund is long-term growth of capital. The investment objective of the Small Capitalization Value Fund is capital appreciation. The investment objective of the International Equity Fund is long-term growth of capital. Significant accounting policies of the Funds are as follows: VALUATION OF INVESTMENTS Securities in the Funds' portfolios are valued on the basis of market quotations, valuations provided by independent pricing services or at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. All portfolio transactions initially expressed in terms of foreign currencies have been translated into U.S. dollars as described in "Foreign Currency Translation" below. JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Funds, along with other registered investment companies having a management contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, Inc., may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Funds' custodian bank receives delivery of the underlying securities for the joint account on the Funds' behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. FOREIGN CURRENCY TRANSLATION All assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars based on London currency exchange quotations as of 5:00 p.m., London time, on the date of any determination of the net asset value of the Funds. Transactions affecting statement of operations accounts and net realized gain (loss) on investments are translated at the rates prevailing at the dates of the transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gains or losses from investments. Reported net realized foreign exchange gains or losses arise from sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Funds' books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities, resulting from changes in the exchange rate. INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Capital gains realized on some foreign securities are subject to foreign taxes and are accrued, as applicable. DISCOUNT ON SECURITIES The Funds accrete discount from par value on securities from either the date of issue or the date of purchase over the life of the security. EXPENSES The majority of the expenses are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the Funds. ORGANIZATION EXPENSE Expenses incurred in connection with the organization of the Funds have been capitalized and are being charged to the Funds' operations ratably over a five-year year that began with the commencement of investment operations of the Funds. BANK BORROWINGS The Funds are permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Funds have entered into a syndicated line of credit agreement with various banks. This agreement enables the Funds to participate with other Funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each Fund, based on its borrowing. In addition, a commitment fee is charged to each Fund based on the average daily unused portion of the line of credit and is allocated among the participating Funds. The following funds had borrowings under the line of credit during the year ended February 28, 2001:
AVERAGE DAILY LOAN BALANCE INTEREST EXPENSE DURING THE PERIOD FOR WHICH WEIGHTED AVERAGE PAID UNDER THE FUND LOANS WERE OUTSTANDING INTEREST RATE LINE OF CREDIT - ---- --------------------------- ---------------- -------------- Dividend Performers Fund $2,764,125 6.33% $3,830 Medium Capitalization Growth Fund 7,011,000 7.125 1,365 International Equity Fund 1,256,429 6.05 1,457
The Funds had no outstanding borrowing under the line of credit at February 28, 2001. SECURITIES LENDING The Funds may lend their securities to certain qualified brokers who pay the Funds negotiated lender fees. These fees are included in interest income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Funds may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At February 28, 2001, Medium Capitalization Growth Fund loaned securities having a market value of $52,725 collateralized by securities in the amount of $53,780 and International Equity Fund loaned securities having a market value of $803,545 collateralized by cash in the amount of $844,471. The cash collateral was invested in a short-term instrument. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Funds (except for Dividend Performers Fund) may enter into forward foreign currency exchange contracts as a hedge against the effect of fluctuations in currency exchange rates. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date at a set price. The aggregate principal amounts of the contracts are marked to market daily at the applicable foreign currency exchange rates. Any resulting unrealized gains and losses are included in the determination of the Funds' daily net assets. The Funds record realized gains and losses at the time the forward foreign currency contracts are closed out or offset by matching contracts. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of the contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. These contracts involve market or credit risk in excess of the unrealized gain or loss reflected in the Funds' Statement of Assets and Liabilities. The Funds may also purchase and sell forward contracts to facilitate the settlement of foreign currency-denominated portfolio transactions, under which they intend to take delivery of the foreign currency. Such contracts normally involve no market risk if they are offset by the currency amounts of the underlying transactions. The Funds had the following open forward foreign currency exchange contracts at February 28, 2001: UNREALIZED PRINCIPAL AMOUNT EXPIRATION APPRECIATION CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION) - -------- ------------------- ---------- ------------ INTERNATIONAL EQUITY FUND Buys Canadian Dollar 5,006 March 01 ($2) Pound Sterling 41,357 March 01 107 ----------- $105 =========== Sells Euro 14,121 March 01 $6 Pound Sterling 103,240 March 01 (269) ----------- ($263) =========== FINANCIAL FUTURES CONTRACTS The Funds may buy and sell financial futures. Buying futures tends to increase the Funds' exposure to the underlying instrument. Selling futures tends to decrease the Funds' exposure to the underlying instrument or hedge other Fund instruments. At the time the Funds enter into a financial futures contract, they are required to deposit with their custodian a specified amount of cash or U.S. government securities, known as "initial margin," equal to a certain percentage of the value of the financial futures contract being traded. Each day, the futures contract is valued at the official settlement price of the board of trade or U.S. commodities exchange on which it trades. Subsequent payments to and from the broker, known as "variation margin," are made on a daily basis as the market price of the financial futures contract fluctuates. Daily variation margin adjustments, arising from this "mark to market," are recorded by the Funds as unrealized gains or losses. When the contracts are closed, the Funds recognize a gain or loss. Risks of entering into futures contracts include the possibility that there may be an illiquid market and/or that a change in the value of the contracts may not correlate with changes in the value of the underlying securities. In addition, the Funds could be prevented from opening or realizing the benefits of closing out futures positions because of position limits or limits on daily price fluctuation imposed by an exchange. For federal income tax purposes, the amount, character and timing of the Funds' gains and/or losses can be affected as a result of futures contracts. The Funds had no open financial futures contracts at February 28, 2001. FEDERAL INCOME TAXES The Funds' policy is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all of their taxable income, including net realized gain on investments, to their shareholders. Therefore, no federal income tax provisions are required. The following Funds had capital loss carryforwards available, to the extent provided by regulations, to offset future net realized gains. To the extent such carryforwards are used by each Fund, no capital gain distribution will be made. Additionally, net capital losses attributed to security transactions occurring after October 31, 2000 are treated as arising on the first day of the Funds' next taxable year (March 1, 2001).
POST- POST-OCTOBER CAPITAL LOSS CAPITAL LOSS OCTOBER 31, 2000 CURRENCY CARRYFORWARD CARRYFORWARD LOSS TREATED LOSS TREATED EXPIRING EXPIRING AS ARISING AS ARISING FUND 2/29/08 2/28/09 3/1/01 3/1/01 - ---- ------------ ------------ ---------------- ------------- Active Bond $49,819 $79,391 -- -- Small Capitalization Growth -- 332,423 $924,258 -- Small Capitalization Value -- -- 99,819 $303 International Equity -- 636,448 531,279 --
Expired capital loss carryforwards are reclassified to capital paid-in, in the year of expiration. Additionally, net capital losses attributable to security transactions occuring after October 31, 2000 are treated as arising on the first day of the Funds' next taxable year (March 1, 2001). DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Funds identify the dividend. Interest income on investment securities is recorded on the accrual basis. Foreign income may be subject to foreign withholding taxes, capital gains and repatriation taxes imposed by certain countries in which it invests, which are accrued as applicable. The Funds record all dividends and distributions to shareholders from net investment income and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from generally accepted accounting principles. USE OF ESTIMATES The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Funds. Actual results could differ from these estimates. NOTE B -- MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS The Funds have an investment management contract with the Adviser. Under the investment management contract, the Funds pay a monthly management fee to the Adviser equivalent, on an annual basis, as follows: FUND RATE - ---- ---- Active Bond Fund 0.50% of average daily net assets up to $1.5 billion 0.45% of such assets in excess of $1.5 billion Dividend Performers Fund 0.60% of average daily net assets up to $500 million 0.55% of such assets in excess of $500 million Medium Capitalization Growth Fund 0.80% of average daily net assets up to $500 million 0.75% of such assets in excess of $500 million Small Capitalization Growth Fund 0.80% of average daily net assets Small Capitalization Value Fund 0.70% of average daily net assets up to $500 million 0.65% of such assets in excess of $500 million International Equity Fund 0.90% of average daily net assets up to $500 million 0.65% of such assets in excess of $500 million International Equity Fund and the Adviser had a subadvisory contract with and Indocam International Investments Services ("IIIS"). The Adviser terminated the contract with IIIS on December 14, 2000. Effective December 14, 2000, the Fund and the Adviser entered into a subadvisory contract with Nicholas-Applegate Capital Management LP, who is the Funds' sole subadviser as of February 28, 2001. The Fund is not responsible for payment of these subadvisory fees. The Adviser has voluntarily agreed to limit each Funds' expenses to the following: 0.60% of Active Bond Fund's average daily net assets, 0.70% of Dividend Performers Fund's average daily net assets, 0.90% of Medium Capitalization Growth Fund's average daily net assets, 0.90% of Small Capitalization Growth Fund's average daily net assets, 0.80% of Small Capitalization Value Fund's average daily net assets and 1.00% of International Equity Fund's average daily net assets, at least until June 30, 2001. Accordingly, for the year ended February 28, 2001, the reduction in the Funds' expenses amounted to as follows: $78,188 for the Active Bond Fund, $48,786 for the Dividend Performers Fund, $70,047 for the Medium Capitalization Growth Fund, $89,398 for the Small Capitalization Growth Fund, $66,011 for the Small Capitalization Value Fund and $248,764 for the International Equity Fund. The Adviser reserves the right to terminate this limitation in the future. The Funds have a distribution agreement with John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the Adviser. For the year ended February 28, 2001, all sales of shares of beneficial interest were sold at net asset value. The Funds pay all expenses of printing prospectuses and other sales literature, all fees and expenses in connection with qualification as a dealer in various states, and all other expenses in connection with the sale and offering for sale of the shares of the Funds which have not been herein specifically allocated to the Trust. The Funds have a transfer agent agreement with John Hancock Signature Services, Inc., an indirect wholly owned subsidiary of John Hancock Life Insurance Company. Each Fund pays transfer agent fees at an annual fee accrued daily of 0.05% of its average daily net assets. The Funds have an agreement with the Adviser to perform necessary tax, accounting and legal services for the Funds. The compensation for the year was at an annual rate of less than 0.02% of the average net assets of each Fund. Mr. Stephen L. Brown and Ms. Maureen R. Ford are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Funds. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer, for tax purposes, their receipt of this compensation under the John Hancock Group of Fund Deferred Compensation Plan. The Funds make investments into other John Hancock funds, as applicable, to cover their liability for the deferred compensation. Investments to cover the Fund' deferred compensation liability are recorded on the Funds' books as an other assets. The deferred compensation liability and the related other assets are always equal and are marked to market on a quarterly basis to reflect any income earned by the investments as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Funds. NOTE C -- INVESTMENT TRANSACTIONS Purchases and proceeds from sales of securities for the Funds, other than short-term securities and obligations of the U.S. Government, during the year ended February 28, 2001, were as follows: FUND PURCHASES SALES - ---- ----------- ----------- Active Bond Fund $18,912,119 $16,825,288 Dividend Performers Fund 7,062,302 15,472,435 Medium Capitalization Growth Fund 46,891,025 56,434,459 Small Capitalization Growth Fund 20,136,084 18,467,653 Small Capitalization Value Fund 42,102,790 28,902,221 International Equity Fund 22,663,380 25,238,745 The cost of investments on February 28, 2001, and gross unrealized appreciation and depreciation in value of investments owned by the Funds, for federal income tax purposes, were as follows:
NET UNREALIZED GROSS UNREALIZED GROSS UNREALIZED APPRECIATION FUND COST APPRECIATION DEPRECIATION (DEPRECIATION) - ---- ---- ------------ ------------ ------------ Active Bond Fund $6,643,270 $189,638 $56,168 $133,470 Dividend Performers Fund 5,218,322 1,427,610 414,893 1,012,717 Medium Capitalization Growth Fund 11,642,925 2,127,107 2,071,666 55,441 Small Capitalization Growth Fund 5,850,051 532,878 915,367 (382,489) Small Capitalization Value Fund 32,450,457 4,452,002 6,172,686 (1,720,684) International Equity Fund 6,853,689 246,839 462,142 (215,303)
NOTE D -- RECLASSIFICATION OF ACCOUNTS During the year ended February 28, 2001, reclassifications have been made in each Fund's capital balances to report these balances on a tax basis, excluding certain temporary difference, as of February 28, 2001. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Funds, are primarily attributable to certain differences in the treatment of net operating losses, foreign currency gains and losses and return of capital under federal tax rules versus accounting principles generally accepted in the United States of America. The calculation of net investment income (loss) per share in the financial highlights excludes these adjustments. UNDISTRIBUTED ACCUMULATED CAPITAL NET INVESTMENT NET REALIZED FUND PAID-IN INCOME (LOSS) GAIN (LOSS) - ---- ------- ------------- ----------- Active Bond Fund ($51) $326 ($275) Dividend Performers Fund (155) (10) 165 Medium Capitalization Growth Fund (111,891) 111,736 155 Small Capitalization Growth Fund (43,524) 43,491 33 Small Capitalization Value Fund (713) 68,461 (67,748) International Equity Fund (6) 26,492 (26,486) NOTE E -- CHANGE IN ACCOUNTING PRINCIPLE The Funds have adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, effective for fiscal years beginning after December 15, 2000. As required, the Funds began amortizing premiums on debt securities effective March 1, 2001. Prior to this date, the Funds did not amortize premiums on debt securities. The cumulative effect of this accounting change will have no impact on the total net assets of the Funds. The impact of this accounting change has not been determined but will result in a reclassification between the cost of securities and a corresponding reclassification in net unrealized appreciation/depreciation, based on securities held as of February 28, 2001. INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Trustees of John Hancock Institutional Series Trust: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of John Hancock Institutional Series Trust (comprising, respectively, John Hancock Active Bond Fund, John Hancock Dividend Performers Fund, John Hancock Medium Capitalization Growth Fund, John Hancock Small Capitalization Growth Fund, John Hancock Small Capitalization Value Fund and John Hancock International Equity Fund (the "Funds")) as of February 28, 2001, the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of February 28, 2001 by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of each of the Funds constituting John Hancock Institutional Series Trust at February 28, 2001, the results of their operations, the changes in their net assets, and their financial highlights for the respective stated periods in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Boston, Massachusetts March 31, 2001 TAX INFORMATION (UNAUDITED) For federal income tax purposes, the following information is furnished with respect to the taxable distributions of the Funds for the fiscal year ended February 28, 2001. The Funds designated the following as long-term capital gain dividends during the fiscal year ended February 28, 2001. Additionally, the following dividend distributions qualify for the dividends received deduction available to corporations. LONG-TERM DIVIDENDS CAPITAL GAINS RECEIVED DESIGNATED DEDUCTION ---------------- ---------- Dividend Performers Fund $2,011,405 100% Medium Capitalization Growth Fund 1,987,361 -- Small Capitalization Growth Fund 240,520 -- Small Capitalization Value Fund 2,145,322 1.50 International Equity Fund 218,244 -- NOTES [This page intentionally left blank.] [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.] John Hancock Funds, Inc. MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 1-800-225-5291 1-800-554-6713 TDD 1-800-338-8080 EASI-Line www.jhfunds.com This report is for the information of shareholders of the John Hancock Institutional Series Trust. It is not authorized for distribution to prospective investors unless it is preceded or accompanied by the current prospectus, which details charges, investment objectives and operating policies. [A recycled logo in lower left hand corner with caption "Printed on Recycled Paper."] KB00A 2/01 4/01 The latest report from your Fund's management team SEMIANNUAL REPORT Institutional Series Trust Active Bond Fund Dividend Performers Fund Medium Capitalization Growth Fund Focused Small Cap Growth Fund (formerly Small Capitalization Growth Fund) Small Cap Equity Fund (formerly Small Capitalization Value Fund) International Equity Fund AUGUST 31, 2001 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS".] Table of Contents Page 1) CEO Corner 3 2) Portfolio Manager Commentary This commentary reflects the views of the portfolio management teams through the end of the Fund's period discussed in this report. Of course, the teams' views are subject to change as market and other conditions warrant. John Hancock Active Bond Fund 4 John Hancock Dividend Performers Fund 7 John Hancock Medium Capitalization Growth Fund 10 John Hancock Focused Small Cap Growth Fund 13 John Hancock Small Cap Equity Fund 16 John Hancock International Equity Fund 19 3) Financial Statements 22 4) Notes to Financial Statements 61 TRUSTEES James F. Carlin* William H. Cunningham John M. DeCiccio Ronald R. Dion Maureen R. Ford Charles L. Ladner Steven R. Pruchansky* Lt. Gen. Norman H. Smith, USMC (Ret.) John P. Toolan* * Members of Audit Committee OFFICERS Maureen R. Ford Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer TRANSFER AGENT John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 INVESTMENT ADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, MA 02199-7603 SUB-INVESTMENT ADVISER International Equity Fund Nicholas-Applegate Capital Management 600 West Broadway San Diego, CA 92101 PRINCIPAL DISTRIBUTOR John Hancock Funds, Inc. 101 Huntington Avenue Boston, MA 02199-7603 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, MA 02109 [A 1" x 1" photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush right next to second paragraph.] CEO CORNER DEAR FELLOW SHAREHOLDERS, The U.S. stock market has had a very difficult time so far in 2001, as the economy has slowed to a near standstill and the parade of corporate earnings disappointments has continued. The Federal Reserve aggressively began to attack the economic slowdown with interest-rate cuts totaling three percentage points between January and the end of August. The Standard & Poor's 500 Index, a leading benchmark of large-cap stocks, lost 13.40% year-to-date through August. Bonds have outperformed stocks overall, producing mostly positive results, as they were the beneficiaries of the rate cuts and investors' search for safety. As we entered September, the stock market remained in turmoil, as investors were trying to get a clearer sense of the timetable for economic and corporate recovery. Then on September 11, 2001, a terrorist attack of unspeakable horror was launched on the United States. We send our condolences to the victims' families and friends. Apart from the immediate impact of devastating human loss, the events have understandably raised concerns about the broader repercussions on our country's economy and financial markets. We have great confidence in the United States economy, its financial systems and, above all, its people. Throughout history, they have withstood a range of challenges -- from the Great Depression, to wars, natural disasters and global financial turmoil - -- and have emerged stronger thereafter. We encourage shareholders to keep this longer-term perspective, difficult as it may seem, when making investment decisions in the coming days. Today, we are seeing the full resources of industry and the U.S. government working to bolster and sustain our systems. Although we expect market volatility in the near term, what remains certain is that the U.S. economic and financial systems are working and resilient. "The American economy is open for business," said Deputy Treasury Secretary Ken Dam the day after the attack. We never had any doubts. Sincerely, /S/ MAUREEN R. FORD MAUREEN R. FORD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER BY JAMES K. HO, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND BENJAMIN A. MATTHEWS, PORTFOLIO MANAGER John Hancock Active Bond Fund Slowing economy was a positive influence on fixed-income market While stocks suffered from the lethargic economy and corporate earnings retrenchment during the past six months, the broad fixed-income market performed in historic fashion. The worse the economic news became and the more aggressive the Federal Reserve Board was in cutting short-term interest rates, the more yields fell and bond prices rose. All domestic fixed-income sectors posted gains, with investment-grade and high-yield corporate debt leading the pack. "All domestic fixed-income sectors posted gains ..." Corporate bonds enjoyed strong demand from domestic and foreign investors, as the difference in their yields relative to U.S. government securities with comparable maturities remained attractive. However, the generally hospitable environment thinly veiled the corporate sector's minefields. A number of issuers in the areas of telecommunications equipment and wireless services, such as competitive local exchange carriers, experienced quite a bit of distress. In-depth credit research and constant monitoring of holdings enabled us to move out of problem issuers early on or avoid them entirely. [A 2" x 2 1/2" photo at bottom middle of page of John Hancock Active Bond Fund. Caption below reads "Fund management team leader Jim Ho."] Performance review For the six months ended August 31, 2001, John Hancock Active Bond Fund produced a total return of 4.56%. This compares with the 4.20% return of the average corporate debt A-rated fund, according to Lipper, Inc. Historical performance information can be found on page six. Increased weighting in corporate bonds Since midyear, we continued our strategy of bolstering the Fund's stake in corporate bonds when prices dipped, as they did in early June. We focused primarily on investment-grade issues but also targeted high-yield bonds on a selective basis. This strategy proved beneficial to the Fund as investors began to take note of the corporate sector's attractive risk premium and the Fed's ongoing commitment to cut interest rates as much as is needed to stimulate economic growth. When risk premiums are attractive, it means that the higher relative yields and total return potential currently offered by a particular fixed-income sector tend to outweigh the possible risks. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended August 31, 2001." The chart is scaled in increments of 1% with 0% at the bottom and 5% at the top. The first bar represents the 4.56% total return for John Hancock Active Bond Fund. The second bar represents the 4.20% total return for Average corporate debt A-rated fund. The third bar represents the 4.60% total return for Lehman Brothers Government/Corporate Bond Index. A note below the chart reads "The total return for John Hancock Active Bond Fund is at net asset value with all distributions reinvested. The average corporate debt A-rated fund is tracked by Lipper, Inc. See the following page for historical performance information."] In both the investment-grade and high-yield areas, we chose holdings on a bond-by-bond basis, letting intensive research be our guide. Although a few high-profile telecommunications companies such as Lucent, Motorola, and Nortel Networks experienced financial deterioration (and whose bonds we moved out of earlier in the period), we were not deterred from investment-grade opportunities in the telecommunications sector. In fact, we owned a number of domestic and foreign telecom issues that performed well. These included Verizon, BellSouth, VoiceStream Wireless, Deutsche Telekom and France Telecom. We did, however, exit a number of high-yield telecom names that have since become problem credits, such as Nextel, Level 3, Global Crossing and NEXTLINK. We also avoided an esoteric fixed-income subsector called collateralized debt obligations, believing they exhibit much greater risk than their potential reward. These types of securities represent an underlying pool of debt from a variety of issuers with varying credit quality and offer high relative yields. Over the period, they proved quite volatile, and many investors suffered losses. "As the period progressed, we emphasized more cyclically oriented issuers..." Cyclically oriented issues gain exposure As the period progressed, we emphasized more cyclically oriented issuers or "old economy" names, particularly higher-yielding, lower-quality issues that stand to perform well once the economy gathers steam. We increased the Fund's exposure to automotive, retail, paper, defense and railroad holdings, purchasing or adding to such issues as Ford Motor, Delphi Automotive Systems, Sears Roebuck, Georgia-Pacific, Lockheed Martin and Burlington Northern. Outlook As we went to publication with this report, the tragic terrorist attacks on the World Trade Center and Pentagon had just rocked the nation. Please be assured that we will closely monitor the impact of these events on the financial markets and will act to adjust our investment posture where we see fit, continuing, of course, to focus on fundamentals and to apply in-depth analysis. We are also fully confident that despite any short-term impact, the resilience of the U.S. people and the economy will outlast the shock of these events. A LOOK AT PERFORMANCE For the period ended August 31, 2001 SINCE SIX ONE FIVE INCEPTION MONTHS YEAR YEARS (3/30/95) ------- ------- ------- ------- Cumulative Total Returns 4.56% 12.09% 50.49% 63.31% Average Annual Total Returns -- 12.09% 8.52% 7.94% YIELD As of August 31, 2001 SEC 30-DAY YIELD ------- John Hancock Active Bond Fund 5.33% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. The performance table above and the chart on the right do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $10,000 INVESTMENT... The chart below shows how much a $10,000 investment in John Hancock Active Bond Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers Government/Credit Bond Index -- an unmanaged index that measures the performance of U.S. government bonds, U.S. corporate bonds and Yankee bonds. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock Active Bond Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Lehman Brothers Government/Corporate Bond Index and is equal to $16,516 as of August 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Active Bond Fund on March 30, 1995 and is equal to $16,333 as of August 31, 2001.] BY JOHN F. SNYDER, III, PORTFOLIO MANAGEMENT TEAM LEADER, AND PETER M. SCHOFIELD, CFA, PORTFOLIO MANAGER John Hancock Dividend Performers Fund Slowing economy and corporate earnings disappointments send market down The stock market's malaise extended into 2001. Under the pressure of disappointing corporate earnings and gloomy economic news, stocks continued their treacherous decline. Several short-lived market rallies sparked investors' hopes that stock prices might have bottomed out. Those hopes, however, were repeatedly dashed as the dismal corporate results and a continued soft economy sent the market spiraling downward again after each rally. The period ended with doubt pervading the market and gun-shy investors taking a cautious wait-and-see attitude. The result was negative market returns, with the Standard & Poor's 500 Index returning -7.97% in the six months ended August 30, 2001. [A 2" x 2 1/2" photo at bottom middle of page of John Hancock Dividend Performers Fund. Caption below reads "Fund management team leader John Snyder."] Performance scorecard In the same period, John Hancock Dividend Performers Fund posted a total return of -6.65% at net asset value. By comparison, the average large-cap core fund returned -9.18% for the same period, according to Lipper Inc. Historical performance can be found on page nine. In this difficult environment, we were reminded of the importance of stock selectivity. For example, thanks to its strong product cycle and accelerating earnings, Baxter International turned in a strong performance, despite the declining health-care sector. In the communications sector, Verizon held up well, while long-distance carriers AT&T and MCI/WorldCom suffered from intense price competition. "In this difficult environment, we were reminded of the importance of stock selectivity." Not all of our investments performed so strongly. With technology stocks coming under pressure during the period, several of our tech holdings -- such as EMC and Compaq -- turned in disappointing returns. Drugstore chain CVS was also a disappointment, dropping on the news of weakening fundamentals. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended August 31, 2001." The chart is scaled in increments of 2% with -10% at the bottom and 0% at the top. The first bar represents the -6.65% total return for John Hancock Dividend Performers Fund. The second bar represents the -9.18% total return for Average large-cap value fund. The third bar represents the -7.97% total return for S&P 500 Index. A note below the chart reads "The total return for John Hancock Dividend Performers Fund is at net asset value with all distributions reinvested. The average large-cap value fund is tracked by Lipper, Inc. See the following page for historical performance information."] "...a change that incorporates a broader definition of 'dividend performers'..." Enhancing investment flexibility The Board of Trustees recently approved a change that we believe will enhance the Fund's investment flexibility. Prior to July 2, 2001, Dividend Performers Fund invested 65% of its stocks in "dividend performers," defined as companies that have increased their dividends for at least ten consecutive years. The Board has approved a change that incorporates a broader definition of "dividend performers" and increases the minimum percentage of the Fund's stock investments in such companies by 15%. As of July 2, 2001, the Fund will keep at least 80% of its common stock investments in "dividend performers" -- companies that have typically increased their dividend payments over time, or which the managers believe demonstrate the potential for above-average stability of earnings or dividends growth. The reason for the change is simple. Today, many companies are putting their cash flow back into their business rather than paying dividends. Fewer than 25% of companies in the S&P 500 Index meet the 10-year rising dividend test. This restriction has limited our flexibility to compete effectively. What's more, regulatory changes have increased the portion of the portfolio that has to meet the dividend performer test. Without a change in the definition of "dividend performer," this new mandate would have further limited the Fund's investment potential. New opportunities Our focus on stock selectivity has led us to make several additions to the portfolio. We've beefed up our position in basic materials stocks, such as Rohm & Haas and Dow Chemical, believing they will perform strongly when the economy recovers. We've also purchased cosmetic giant Avon. With a new CEO at the helm, Avon is expanding beyond its traditional catalogue business into new retail channels. A look ahead As we were going to publication with this report, the tragic terrorist attack on the World Trade Center and Pentagon had just rocked the nation. While it's too early to understand the true impact this event will have on the world financial markets, in the near term we are certain to see market volatility. We will keep a close eye on the situation and adjust our investment strategy accordingly. As always, we will maintain our steadfast focus on high-quality stocks with strong growth potential and reasonable valuations. A LOOK AT PERFORMANCE For the period ended August 31, 2001 SINCE SIX ONE FIVE INCEPTION MONTHS YEAR YEARS (3/30/95) ------- ------- ------- ------- Cumulative Total Returns (6.65%) (16.99%) 70.71% 118.11% Average Annual Total Returns -- (16.99%) 11.29% 12.91% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. The performance table above and the chart on the right do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $10,000 INVESTMENT... The chart below shows how much a $10,000 investment in John Hancock Dividend Performers Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock Dividend Performers Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $25,181 as of August 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Dividend Performers Fund on March 30, 1995 and is equal to $21,811 as of August 31, 2001.] BY PAUL J. BERLINGUET AND TIMOTHY N. MANNING FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock Medium Capitalization Growth Fund Mid-cap growth stocks tumble Recently, Paul Berlinguet assumed the role of portfolio management team leader for John Hancock Medium Capitalization Growth Fund. Prior to joining John Hancock Funds, Mr. Berlinguet spent more than 11 years as a senior vice president for Baring Asset Management. He has been in the investment business since 1986. "...the economy remained weak and many companies missed earnings..." The stock market continued to decline in 2001, despite a brief relief rally in the second quarter. Stock prices fell early in the year, led by technology and telecommunications names, which looked overly expensive relative to deteriorating business fundamentals. In April, the market recovered, but as the economy remained weak and many companies missed earnings, the market soon resumed its slide, with the Standard & Poor's 500 Index returning -7.97% for the six months ended August 31, 2001. Over the same period, the Russell Midcap Growth Index returned -13.89% due to its heavier concentrations in technology, telecom and biotechnology names. Disappointing performance John Hancock Medium Capitalization Growth Fund maintained its long-term focus on mid-cap companies with strong earnings growth prospects. The Fund had an average stake in technology -- about one-third of assets -- but was dogged by weak stock performance. Our higher-than-average investment in telecom also hurt, leaving the Fund with a -21.64% return at net asset value for the six months ended August 31, 2001. By comparison, the average multi-cap growth fund returned -16.91%, according to Lipper, Inc. Historical performance information can be found on page 12. [A 2" x 2 1/2" photo at bottom middle of page of John Hancock Medium Capitalization Growth Fund. Caption below reads "Fund management team leader Paul Berlinguet."] Declines in technology Among the biggest drags on performance were McLeodUSA and XO Communications, new telecom entrants that fell sharply as the sector moved out of favor with investors. Several biotech-related stocks also cost the Fund dearly, including Applera Corp.-Applied Biosystems Group, which supplies analytical equipment to biotech companies, and Immunex, a biopharmaceutical company that specializes in autoimmune disorders. In the technology area, Mercury Interactive, a software testing company, and Comverse Technology, a company that develops software for telecom companies, suffered as tech spending slowed. We cut our losses and sold all these names. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended August 31, 2001." The chart is scaled in increments of 5% with -25% at the bottom and 0% at the top. The first bar represents the -21.64% total return for John Hancock Medium Capitalization Growth Fund. The second bar represents the -16.91% total return for Average mid-cap growth fund. The third bar represents the -13.89% total return for Russell Midcap Growth Index. A note below the chart reads "The total return for John Hancock Medium Capitalization Growth Fund is at net asset value with all distributions reinvested. The average mid-cap growth fund is tracked by Lipper, Inc. See the following page for historical performance information."] Gains in finance and health care By contrast, finance investments such as USA Education, a student loan company; Concord EFS, a transaction processor; and Affiliated Managers, an asset management company, all posted strong returns thanks to their steady earnings growth. In the health-care area, Teva Pharmaceutical Industries, which has a strong product pipeline, and King Pharmaceuticals, which has a new cardiovascular drug, also did quite well. We took profits in the latter. Retailers like Abercrombie & Fitch and BJ's Wholesale Club (which we sold) also rallied nicely as consumer spending held steady. Focus on predictability In the spring, we stepped up the Fund's emphasis on companies that have predictable or visible earnings growth and currently enjoy favorable pricing trends. We reduced our total number of investments, selling more volatile names in the telecom, biotech and software areas. Our disciplined investment approach kept us focused on stocks like Dobson Communications, a wireless company with long-term contracts and little direct competition, as well as health-care companies like Wellpoint Health Networks, Universal Health Services and Express Scripts that have predictable earnings growth. "...we stepped up the Fund's emphasis on companies that have predictable or visible earnings growth..." Buying opportunities We added to our media investments, buying names like USA Networks that should benefit from having a highly diversified portfolio. We also increased our stake in semiconductor and semiconductor capital equipment names, anticipating that corporations will soon be in the midst of a personal computer upgrade cycle and chip makers will be upgrading to the newest manufacturing technology. A look ahead Near term, our main concern for the market is whether the terrorist acts that occurred shortly after the period ended could further delay a recovery by derailing consumer and business confidence. We believe, however, that the market outlook will improve over time, as the Federal Reserve's interest-rate cuts and additional government economic stimulus will lead eventually to economic recovery. A LOOK AT PERFORMANCE For the period ended August 31, 2001 SINCE SIX ONE FIVE INCEPTION MONTHS YEAR YEARS (4/11/95) ------- ------- ------- ------- Cumulative Total Returns (21.64%) (49.98%) 15.98% 59.77% Average Annual Total Returns -- (49.98%) 3.01% 7.61% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. The performance table above and the chart on the right do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $10,000 INVESTMENT... The chart below shows how much a $10,000 investment in John Hancock Medium Capitalization Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Russell Midcap Growth Index -- an unmanaged index that contains those Russell Midcap securities with a greater-than-average growth orientation. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock Medium Capitalization Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Russell Midcap Growth Index and is equal to $20,620 as of August 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Medium Capitalization Growth Fund on April 11, 1995 and is equal to $15,977 as of August 31, 2001.] BY BERNICE S. BEHAR, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND ANURAG PANDIT, CFA, PORTFOLIO MANAGER John Hancock Focused Small Cap Growth Fund Slowing economy and waning profits sink the stock market See the prospectus for the the risks of investing in small-cap stocks. On July 1, 2001, the John Hancock Small Capitalization Growth Fund was renamed John Hancock Focused Small Cap Growth Fund to more accurately reflect its concentrated management style. Over the last six months, the stock market was hit by a continuing stream of bad economic and corporate earnings news. With the exception of a rally in growth stocks in April on the hopes that seven interest-rate cuts by the Federal Reserve would reboot the economy by fall, stocks have mostly headed south. Investors became increasingly discouraged about the sharp drop in business spending -- particularly on technology -- as well as by signs that the world's major economies may be shrinking at once, and a growing number of layoffs that could eventually undermine consumer confidence. Less expensive value stocks continued to hold up better than growth stocks, and small stocks outperformed large. Overall, the major market indexes ended the period in negative territory, and investor sentiment remained decidedly wary. "The recent decline in commodities prices caused a sharp selloff in energy stocks..." [A 2" x 2 1/2" photo at bottom middle of page of John Hancock Focused Small Cap Growth Fund. Caption below reads "Fund management team leader Bernice Behar."] Fund performance For the six months ended August 31, 2001, John Hancock Focused Small Cap Growth Fund posted a total return of -11.73% at net asset value. That compared with the -5.10% return of the average small-cap growth fund, according to Lipper, Inc., and the -8.03% of the Fund's benchmark index, the Russell 2000 Growth Index. Historical performance information can be found on page 15. Energy, IT consultants, telecom hurt fund Our relative underperformance stemmed from our overweightings in energy and information technology (IT) consulting companies. The recent decline in commodities prices caused a sharp sell-off in energy stocks, as earnings estimates for next year got revised downward. As a result, we have pared our energy stake in this less favorable environment, although we continue to believe the longer-term outlook for the energy industry is good, given the tight supply picture. Our stake in IT companies hurt us as demand for IT services slowed dramatically, even for companies with strong franchises and niche markets like Forrester Research and Management Network Group. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended August 31, 2001." The chart is scaled in increments of 2% with -12% at the bottom and 0% at the top. The first bar represents the -11.73% total return for John Hancock Focused Small Cap Growth Fund. The second bar represents the -5.10% total return for Average small-cap growth fund. The third bar represents the -8.03% total return for Russell 2000 Growth Index. A note below the chart reads "The total return for John Hancock Focused Small Cap Growth Fund is at net asset value with all distributions reinvested. The average small-cap growth fund is tracked by Lipper, Inc. See the following page for historical performance information."] "More recently, we have begun to bring our tech weight back up to a market average..." Our telecommunications services companies also fell hard as the demand for all kinds of products and services ground to a halt. The telecom meltdown hurt Fund holdings SBA Communications, Winstar Communications, CTC Communications Group and Dobson Communications. We cut our losses and sold all but SBA, which provides communications towers to wireless providers. Defensive names help, tech boosted Our investments in more defensive companies with relative earnings stability served us well, although their gains were not enough to overcome other losses. In particular, health-care service companies were boosted by their perception as steady growers and by rising drug prices. Accredo Health, a specialty pharmaceutical distributor, was one of our better performers. We also did well with our defensive position in some consumer-oriented companies such as Whole Foods Market, which owns the chain of Bread & Circus gourmet stores. At the beginning of the period, we had scaled back our technology weighting to below the market average, given the lack of earnings visibility or growth prospects. More recently, we have begun to bring our tech weight back up to a market average, because we believe we need to be positioned to take advantage of a potential rebound in fundamentals next year. Outlook As we went to publication with this report, the tragic terrorist attacks on the World Trade Center and Pentagon had just rocked the nation. Please be assured that we will closely monitor the impact of these events on the financial markets and will act to adjust our investment posture where we see fit, continuing, of course, to focus on fundamentals and to apply in-depth security analysis. We are also fully confident that despite any short-term impact, the resilience of the U.S. people and the economy will outlast the shock of these events. See the prospectus for a discussion of the risks of investing in small-cap stocks. A LOOK AT PERFORMANCE For the period ended August 31, 2001 SINCE SIX ONE FIVE INCEPTION MONTHS YEAR YEARS (5/2/96) ------- ------- ------- ------- Cumulative Total Returns (11.73%) (50.87%) 36.65% 50.15% Average Annual Total Returns -- (50.87%) 6.44% 7.92% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. The performance table above and the chart on the right do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $10,000 INVESTMENT... The chart below shows how much a $10,000 investment in John Hancock Focused Small Cap Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Russell 2000 Index and the Russell 2000 Growth Index. The Russell 2000 Index is an unmanaged small-cap index composed of 2,000 U.S. stocks. The Russell 2000 Growth Index is an unmanaged index containing Russell 2000 Index stocks with a greater-than-average growth orientation. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock Focused Small Cap Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are three lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock Focused Small Cap Growth Fund on May 2, 1996 and is equal to $15,015 as of August 31, 2001. The second line represents the Russell 2000 Index and is equal to $14,430 as of August 31, 2001. The third line represents the Russell 2000 Growth Index and is equal to $10,639 as of August 31, 2001.] BY TIMOTHY E. QUINLISK, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND R. SCOTT MAYO, CFA, AND JAMES S. YU, CFA, PORTFOLIO MANAGERS John Hancock Small Cap Equity Fund Small-cap stocks shine in market decline On September 30, 2001, John Hancock Small Capitalization Value Fund was renamed John Hancock Small Cap Equity Fund to better reflect the Fund's investment strategy. Small-cap stocks held up well amid the stock market's continued volatility. The market rallied in the spring on the belief that both the Federal Reserve's numerous interest-rate cuts and strong consumer spending would help the economy stabilize and then turn around. But further signs of deterioration, followed by second-quarter earnings disappointments, soon triggered sell-offs in the market. Small-cap stocks, however, fared better than most other sectors, benefiting from access to cheaper capital and a lack of overseas exposure. The Russell 2000 Index returned -0.51% for the six months ended August 31, 2001, compared with the -7.87% return for the broader Standard & Poor's 500 Index. "We maintained above- average stakes in technology and telecom..." Performance review John Hancock Small Cap Equity Fund returned 2.31% at net asset value for the six months ended August 31, 2001. Our results were slightly behind the average small-cap core fund, which returned 3.71% over the same period, according to Lipper, Inc. The Fund benefited from its strategy of buying great businesses when their stocks are selling at cheap prices. Strong stock selection and an above-average stake in technology, solid gains in health care and a below-average investment in the weak energy sector also helped performance. The Fund lost some ground from its underweighting in the financial sector, as well as poor performance among selected media and food stocks. [A 2" x 2 1/2" photo at bottom middle of page of John Hancock Small Cap Equity Fund. Caption below reads "Fund management team leader Tim Quinlisk."] Strong stock selection Our technology related investments did quite well, especially Alpha Industries, a wireless semiconductor company; MKS Instruments, a semiconductor capital equipment company; and Three-Five Systems, a company that makes liquid crystal displays for wireless phones. All moved up in anticipation of improved business prospects related to the holiday selling season and economic recovery. Several other stocks posted strong gains from turnarounds, including Casella Waste Systems, a waste management company; Covance, a pharmaceutical contract research organization; ProQuest (formerly Bell & Howell), an information services firm; and Pathmark Stores, a supermarket chain emerging from bankruptcy. Other standouts included NOVA, a transactions processing company whose value was realized through an acquisition by U.S. Bancorp, and XM Satellite Radio Holdings, a satellite radio company that began rolling out its new service. [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended August 31, 2001." The chart is scaled in increments of 1% with -1% at the bottom and 4% at the top. The first bar represents the 2.31% total return for John Hancock Small Cap Equity Fund. The second bar represents the 3.71% total return for Average small-cap core fund. The third bar represents the -0.51% total return for Russell 2000 Index. A note below the chart reads "The total return for John Hancock Small Cap Equity Fund is at net asset value with all distributions reinvested. The average small-cap core fund is tracked by Lipper, Inc. See the following page for historical performance information."] Near-term weakness Unfortunately, some of our worst performers were also large investments. Pegasus Communications, a direct television company, suffered near term from changing its business model to focus on cash flow and profitability over subscriber growth. Hain Celestial Group struggled with integration issues surrounding its recent merger. Vicor, a power supply company, and Alpharma, a generic drug company, saw more modest stock price declines related to the difficult market environment. In the leisure area, disappointments included Six Flags, an amusement park chain hurt by rainy weather this past summer, and Penton Media, a trade publication company whose stock we sold. Selected software stocks like Aspen Technology and Parametric Technology also suffered sharp drops as technology spending slowed. Opportunities ahead We maintained above-average stakes in technology and telecom, which are not traditional value sectors, because that was where we found companies with great businesses whose stock prices were selling at a discount. We also boosted our media stake, adding stocks like Cumulus Media, a radio company that should benefit as the economy improves and companies increase their spending on advertising. We began rebuilding our investment in energy with companies like Chesapeake Energy whose stock price had fallen as commodity prices weakened. "Near term we expect further market volatility..." Looking forward Near term we expect further market volatility, as the terrorist acts that occurred shortly after the end of the period could slow consumer spending and delay a recovery. Further out, we expect small-cap stocks to benefit from lower interest rates, which should provide them with access to cheaper capital and eventually trigger an economic recovery. As always, we plan to stick with our disciplined strategy, taking advantage of market volatility to buy great companies at bargain prices. See the prospectus for a discussion of the risks of investing in small-cap stocks. A LOOK AT PERFORMANCE For the period ended August 31, 2001 SINCE SIX ONE FIVE INCEPTION MONTHS YEAR YEARS (4/19/95) ------- ------- ------- ------- Cumulative Total Returns 2.31% (11.49%) 189.87% 227.21% Average Annual Total Returns -- (11.49%) 23.72% 20.46% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. The performance table above and the chart on the right do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $10,000 INVESTMENT... The chart below shows how much a $10,000 investment in the John Hancock Small Cap Equity Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Russell 2000 Index -- an unmanaged, small-cap index composed of 2,000 U.S stocks. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock Small Cap Equity Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock Small Cap Equity Fund on April 19, 1995 and is equal to $32,721 as of August 31, 2001. The second line represents the Russell 2000 Index and is equal to $19,617 as of August 31, 2001.] BY LORETTA MORRIS AND RANDY KAHN FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock International Equity Fund International stocks decline amid slowing global growth During the six months ended August 31, 2001, international stock markets continued to reflect weakness in economies worldwide. Slowing growth in non-U.S. developed nations, coupled with the ongoing unwillingness of the European Central Bank (ECB) to reduce interest rates and ongoing uncertainty in Japan, sent international stocks lower. For the reporting period, non-U.S. stocks -- as represented by the MSCI All-Country World Free ex-U.S. Index -- shed 11.51% of their value. The central theme for most of 2001 has been the fall from grace of growth stocks, as cautious investors have instead turned to value-oriented stocks or alternative asset classes. Throughout most of the Eurozone nations, consumer spending declined, exports fell and confidence waned. Despite such a bleak outlook, the ECB remained focused on its mission to fight higher-than-mandated levels of inflation. While central bankers were aggressively cutting rates in other parts of the world -- including seven rate cuts totaling 3.0% in the U.S. -- the ECB held firm, lowering rates only twice during the period. Meanwhile, lingering structural problems with the Japanese economy weighed heavily on investor sentiment. Investors were initially optimistic following the election of popular Prime Minister Junichiro Koizumi. However, as the magnitude of Japan's problems -- growing unemployment, an aging populace that will require rising social spending, the overhang of bad debts and a weakening manufacturing sector -- became clear, its benchmark Nikkei 225 Index sank sharply in June, July and August to touch lows not seen since the early 1980s. Investors were further dismayed as Koizumi began to backpedal on some of his key campaign promises as the economic and political costs of their implementation began to emerge. "The central theme for most of 2001 has been the fall from grace of growth stocks..." Fund performance Amid such challenging market conditions, John Hancock International Equity Fund lost ground, returning -15.19% at net asset value. By comparison, the average international fund returned -12.69%, according to Lipper, Inc. See page 21 for historical performance information. The Fund's underperformance for the period stemmed in large part from poor stock selection in Japan and the United Kingdom. Despite a fundamentally sound economic picture and stimulus from the Bank of England's surprise rate cut in early August, U.K. stocks declined during the period. As for Japan, the Fund had significantly decreased its exposure to that country in light of its economic woes, but the Fund's holdings declined more than the stocks in the benchmark as the growth segment continued to come under tremendous pressure. During the reporting period, only holdings in Singapore, Ireland and South Africa registered positive gains. "...underperformance ...stemmed in large part from poor stock selection in Japan and the United Kingdom." [Bar chart at top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended August 31, 2001." The chart is scaled in increments of 5% with -20% at the bottom and 0% at the top. The first bar represents the -15.19% total return for John Hancock International Equity Fund. The second bar represents the -12.69% total return for Average international fund. The third bar represents the -11.51% total return for MSCI All Country World Free Ex-U.S. Index. A note below the chart reads "The total return for John Hancock International Equity Fund is at net asset value with all distributions reinvested. The average international fund is tracked by Lipper, Inc. See the following page for historical performance information."] From a sector standpoint, commercial/industrial services, energy and financial services stocks were especially hard hit. For the six months ended August 31, 2001, every sector in the benchmark save energy was down - -- in most cases by a significant margin. Holdings in the consumer durables group were the lone bright spot for the period, while stock selection in the health-care sector and an underweight position in the technology area helped limit the Fund's overall decline. Looking ahead Days after the period ended, the world was stunned by the devastating terrorist attack on the United States. Beyond any short-term volatility that may be understandably triggered by such a catastrophe, we believe that broader economic factors and events will influence stock markets worldwide over the long term. We remain confident that the actions of global central bankers will be positive for the financial markets. In these difficult times, as always, we at Nicholas-Applegate continue to adhere to our proven investment philosophy and process. We continue to seek out and invest in companies with solid fundamentals that we believe are poised to capitalize on positive, sustainable change in the short-to-intermediate term. We believe this approach will reward investors with significant capital appreciation over time. International investing involves special risks such as political, economic and currency risks, and differences in accounting standards and financial reporting. A LOOK AT PERFORMANCE For the period ended August 31, 2001 SINCE SIX ONE FIVE INCEPTION MONTHS YEAR YEARS (3/30/95) ------- ------- ------- ------- Cumulative Total Returns (15.19%) (35.50%) (12.37%) (4.61%) Average Annual Total Returns -- (35.50%) (2.61%) (0.73%) Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. All figures represent past performance and are no guarantee of future results. The performance table above and the chart on the right do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. WHAT HAPPENED TO A $10,000 INVESTMENT... The chart below shows how much a $10,000 investment in the John Hancock International Equity Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Morgan Stanley Capital International (MSCI) All Country World Free Ex-U.S. Index -- an unmanaged index that measures the performance of both developed and emerging foreign stock markets. The index represents freely traded stocks. It is not possible to invest in an index. Past performance is no guarantee of future results. [Line chart with the heading John Hancock International Equity Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the MSCI All Country World Free Ex-U.S. Index and is equal to $12,554 as of August 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock International Equity Fund on March 30, 1995 and is equal to $9,539 as of August 31, 2001.] FINANCIAL STATEMENTS John Hancock Funds -- Institutional Series Trust
Statement of Assets and Liabilities August 31, 2001 (Unaudited) - ---------------------------------------------------------------------------------------------------------- ACTIVE DIVIDEND MEDIUM BOND PERFORMERS CAPITALIZATION FUND FUND GROWTH FUND ----------------- ----------------- ----------------- Assets: Investments at value (cost - $8,479,023, $4,930,595 and $6,288,327, respectively) $8,712,699 $5,399,683 $6,245,007 Cash 578 332 -- Receivable for investments sold 66,782 -- 190,350 Dividends and interest receivable 106,548 7,856 1,179 Receivable from affiliates 3,074 2,538 4,054 Other assets 580 1,717 3,515 ----------- ----------- ----------- Total assets 8,890,261 5,412,126 6,444,105 - ---------------------------------------------------------------------------------------------------------- Liabilities: Due to custodian -- -- 380,717 Payable for investments purchased 143,519 -- 44,367 Accounts payable and accrued expenses 22,683 15,133 23,935 ----------- ----------- ----------- Total liabilities 166,202 15,133 449,019 - ---------------------------------------------------------------------------------------------------------- Net Assets: Capital paid-in 8,597,498 3,713,238 7,231,316 Accumulated net realized gain (loss) on investments and foreign currency transactions (82,771) 1,207,529 (1,163,835) Net unrealized appreciation (depreciation) of investments and translation of assets and liabilities in foreign currencies 233,507 469,088 (43,320) Undistributed net investment income (accumulated net investment loss) (24,175) 7,138 (29,075) ----------- ----------- ----------- Net assets $8,724,059 $5,396,993 $5,995,086 ========================================================================================================== Net Asset Value Per Share: (Based on 999,237, 521,466 and 745,937 shares, respectively, of beneficial interest outstanding - unlimited number of shares authorized with no par value) $8.73 $10.35 $8.04 ========================================================================================================== The Statement of Assets and Liabilities is each Fund's balance sheet and shows the value of what the Fund owns, is due and owes as of August 31, 2001. You'll also find the net asset value per share as of that date. See notes to financial statements.
Statement of Assets and Liabilities (continued) August 31, 2001 (Unaudited) - ---------------------------------------------------------------------------------------------------------- FOCUSED SMALL CAP INTERNATIONAL SMALL CAP EQUITY EQUITY GROWTH FUND FUND FUND ----------------- ----------------- ----------------- Assets: Investments at value (cost - $4,778,687, $35,596,383 and $5,116,029, respectively) $4,852,652 $32,491,151 $4,903,090 Cash 144 -- 492 Foreign currency, at value (cost - none, none and $73,505, respectively) -- -- 73,500 Receivable for investments sold -- 1,005,064 -- Receivable for shares sold -- 11,171 157,239 Dividends and interest receivable 129 3,071 11,806 Receivable from affiliates 2,395 -- 7,047 Other assets 550 1,618 1,187 ----------- ----------- ----------- Total assets 4,855,870 33,512,075 5,154,361 - ---------------------------------------------------------------------------------------------------------- Liabilities: Due to custodian -- 351,280 -- Payable for investments purchased 11,576 12,443 125,955 Payable for shares repurchased 2,750 16,880 -- Payable for securities on loan -- -- 585,960 Payable for forward foreign currency exchange contracts -- -- 9,418 Payable to affiliates -- 15,526 -- Accounts payable and accrued expenses 17,426 28,638 34,739 ----------- ----------- ----------- Total liabilities 31,752 424,767 756,072 - ---------------------------------------------------------------------------------------------------------- Net Assets: Capital paid-in 7,102,710 33,435,585 6,713,718 Accumulated net realized gain (loss) on investments and foreign currency transactions (2,338,368) 2,816,393 (2,085,800) Net unrealized appreciation (depreciation) of investments and translation of assets and liabilities in foreign currencies 73,965 (3,105,232) (222,801) Accumulated net investment loss, distributions in excess of net investment income (14,189) (59,438) (6,828) ----------- ----------- ----------- Net assets $4,824,118 $33,087,308 $4,398,289 ========================================================================================================== Net Asset Value Per Share: (Based on 520,896, 2,666,082 and 630,122 shares, respectively, of beneficial interest outstanding - unlimited number of shares authorized with no par value) $9.26 $12.41 $6.98 ========================================================================================================== See notes to financial statements.
Statement of Operations Six months ended August 31, 2001 (Unaudited) - ---------------------------------------------------------------------------------------------------------- ACTIVE DIVIDEND MEDIUM BOND PERFORMERS CAPITALIZATION FUND FUND GROWTH FUND ----------------- ----------------- ----------------- Investment Income: Dividends (net of foreign withholding tax of none, $113 and $45, respectively) -- $39,144 $7,000 Interest $263,115 4,535 5,874 Securities lending -- -- 1,531 ----------- ----------- ----------- Total investment income 263,115 43,679 14,405 - ---------------------------------------------------------------------------------------------------------- Expenses: Investment management fee 20,149 17,512 36,825 Custodian fee 19,925 4,615 13,042 Registration and filing fee 10,500 13,742 10,646 Auditing fee 9,187 7,814 8,280 Printing 3,323 2,814 3,185 Transfer agent fee 2,015 1,459 2,301 Accounting and legal services fee 811 586 921 Miscellaneous 336 601 463 Trustees' fee 166 55 576 Legal fee 47 57 62 ----------- ----------- ----------- Total expenses 66,459 49,255 76,301 Less expense reductions (42,280) (28,825) (34,873) - ---------------------------------------------------------------------------------------------------------- Net expenses 24,179 20,430 41,428 - ---------------------------------------------------------------------------------------------------------- Net investment income (loss) 238,936 23,249 (27,023) - ---------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investments 83,309 147,006 (1,763,818) Foreign currency transactions (2) -- (3) Change in net unrealized appreciation (depreciation) on: Investments 46,818 (554,242) (299,829) Translation of assets and liabilities in foreign currencies (169) -- -- ----------- ----------- ----------- Net realized and unrealized gain (loss) 129,956 (407,236) (2,063,650) - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $368,892 ($383,987) ($2,090,673) ========================================================================================================== The Statement of Operations summarizes, for each of the Funds, the investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated. See notes to financial statements.
Statement of Operations (continued) Six months ended August 31, 2001 (Unaudited) - ---------------------------------------------------------------------------------------------------------- FOCUSED SMALL CAP INTERNATIONAL SMALL CAP EQUITY EQUITY GROWTH FUND FUND FUND ----------------- ----------------- ----------------- Investment Income: Dividends (net of foreign withholding tax of none, none and $6,985, respectively) $626 $14,860 $48,480 Interest 2,851 3,618 8,748 Securities lending 5,853 54,089 5,444 ----------- ----------- ----------- Total investment income 9,330 72,567 62,672 - ---------------------------------------------------------------------------------------------------------- Expenses: Investment management fee 20,646 114,571 25,289 Registration and filing fee 13,443 12,615 10,565 Custodian fee 8,487 13,826 59,122 Auditing fee 7,574 8,835 9,036 Printing 3,322 4,140 5,653 Transfer agent fee 1,290 8,184 1,405 Organization expense 714 -- -- Accounting and legal services fee 519 3,300 564 Miscellaneous 243 398 463 Trustees' fee 209 725 158 Legal fee 36 203 255 Interest expense -- 3,162 -- ----------- ----------- ----------- Total expenses 56,483 169,959 112,510 Less expense reductions (33,256) (39,020) (84,411) - ---------------------------------------------------------------------------------------------------------- Net expenses 23,227 130,939 28,099 - ---------------------------------------------------------------------------------------------------------- Net investment income (loss) (13,897) (58,372) 34,573 - ---------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investments (1,073,792) 1,941,406 (719,804) Foreign currency transactions -- -- (151,741) Change in net unrealized appreciation (depreciation) on: Investments 448,558 (1,384,548) (41,985) Translation of assets and liabilities in foreign currencies -- -- (9,210) ----------- ----------- ----------- Net realized and unrealized gain (loss) (625,234) 556,858 (922,740) - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ($639,131) $498,486 ($888,167) ========================================================================================================== See notes to financial statements.
Statements of Changes in Net Assets - --------------------------------------------------------------------------------------------------------------------------- ACTIVE BOND DIVIDEND PERFORMERS FUND FUND --------------------------------------- --------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED AUGUST 31, 2001 YEAR ENDED AUGUST 31, 2001 FEBRUARY 28, 2001 (UNAUDITED) FEBRUARY 28, 2001 (UNAUDITED) ----------------- ----------------- ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations: Net investment income $368,916 $238,936 $95,088 $23,249 Net realized gain 18,772 83,307 2,380,858 147,006 Change in net unrealized appreciation (depreciation) 304,795 46,649 (1,356,247) (554,242) ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations 692,483 368,892 1,119,699 (383,987) ----------- ----------- ----------- ----------- Distributions to Shareholders: From net investment income (370,991) (243,630) (100,614) (27,059) From net realized gain -- -- (2,068,903) -- ----------- ----------- ----------- ----------- Total distributions to shareholders (370,991) (243,630) (2,169,517) (27,059) ----------- ----------- ----------- ----------- From Portfolio Share Transactions: * Shares sold 4,430,138 2,630,388 4,639,407 710,852 Shares issued to shareholders in reinvestment of distributions 366,504 226,404 2,169,758 27,227 Less shares repurchased (2,535,098) (1,063,208) (14,419,671) (1,132,347) ----------- ----------- ----------- ----------- Net increase (decrease) 2,261,544 1,793,584 (7,610,506) (394,268) ----------- ----------- ----------- ----------- Net Assets: Beginning of period 4,222,177 6,805,213 14,862,631 6,202,307 ----------- ----------- ----------- ----------- End of period (including undistributed (distributions in excess of) net investment income of ($2,962), ($24,175), $10,948 and $7,138, respectively) $6,805,213 $8,724,059 $6,202,307 $5,396,993 =========== =========== =========== =========== *Analysis of Portfolio Share Transactions: Shares sold 535,238 306,342 320,516 64,522 Shares issued to shareholders in reinvestment of distributions 44,172 26,376 183,485 2,521 Less shares repurchased (307,954) (123,625) (1,047,503) (102,181) ----------- ----------- ----------- ----------- Net increase (decrease) 271,456 209,093 (543,502) (35,138) =========== =========== =========== =========== The Statement of Changes in Net Assets shows how the value of each Fund's net assets has changed since the previous period. The difference reflects net investment income, any investment and foreign currency gains and losses, distributions paid to shareholders and any increase or decrease in money shareholders invested in each Fund. The footnotes illustrate the number of Fund shares sold, reinvested and repurchased during the period, along with the per share amount of distributions made to shareholders of each Fund for the period indicated. See notes to financial statements.
Statements of Changes in Net Assets (continued) - --------------------------------------------------------------------------------------------------------------------------- MEDIUM CAPITALIZATION FOCUSED SMALL CAP GROWTH FUND GROWTH FUND --------------------------------------- --------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED AUGUST 31, 2001 YEAR ENDED AUGUST 31, 2001 FEBRUARY 28, 2001 (UNAUDITED) FEBRUARY 28, 2001 (UNAUDITED) ----------------- ----------------- ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations: Net investment loss ($112,124) ($27,023) ($43,724) ($13,897) Net realized gain (loss) 2,260,504 (1,763,821) (1,172,422) (1,073,792) Change in net unrealized appreciation (depreciation) (12,919,604) (299,829) (3,958,158) 448,558 ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations (10,771,224) (2,090,673) (5,174,304) (639,131) ----------- ----------- ----------- ----------- Distributions to Shareholders: From net investment income -- -- -- -- From net realized gain (4,552,005) -- (853,819) -- ----------- ----------- ----------- ----------- Total distributions to shareholders (4,552,005) -- (853,819) -- ----------- ----------- ----------- ----------- From Portfolio Share Transactions: * Shares sold 23,310,057 1,791,537 8,114,648 1,049,251 Shares issued to shareholders in reinvestment of distributions 4,512,270 -- 856,091 -- Less shares repurchased (37,893,065) (5,204,631) (6,392,389) (1,044,408) ----------- ----------- ----------- ----------- Net Increase (Decrease) (10,070,738) (3,413,094) 2,578,350 4,843 ----------- ----------- ----------- ----------- Net Assets: Beginning of period 36,892,820 11,498,853 8,908,179 5,458,406 ----------- ----------- ----------- ----------- End of period (including accumulated net investment loss, distributions in excess of net investment income, of ($2,052), ($29,075), ($292) and ($14,189), respectively) $11,498,853 $5,995,086 $5,458,406 $4,824,118 =========== =========== =========== =========== *Analysis of Portfolio Share Transactions: Shares sold 1,245,050 189,860 432,156 104,854 Shares issued to shareholders in reinvestment of distributions 366,810 -- 70,365 -- Less shares repurchased (2,239,222) (564,896) (346,807) (104,346) ----------- ----------- ----------- ----------- Net increase (decrease) (627,362) (375,036) 155,714 508 =========== =========== =========== =========== See notes to financial statements.
Statements of Changes in Net Assets (continued) - --------------------------------------------------------------------------------------------------------------------------- SMALL CAP INTERNATIONAL EQUITY FUND EQUITY FUND --------------------------------------- --------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED AUGUST 31, 2001 YEAR ENDED AUGUST 31, 2001 FEBRUARY 28, 2001 (UNAUDITED) FEBRUARY 28, 2001 (UNAUDITED) ----------------- ----------------- ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations: Net investment income (loss) ($69,025) ($58,372) $43,466 $34,573 Net realized gain (loss) 6,078,320 1,941,406 (1,169,908) (871,545) Change in net unrealized appreciation (depreciation) (8,772,416) (1,384,548) (3,005,103) (51,195) ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations (2,763,121) 498,486 (4,131,545) (888,167) ----------- ----------- ----------- ----------- Distributions to Shareholders: From net investment income (49,153) -- (32,472) -- From net realized gain (6,670,587) -- (387,846) -- ----------- ----------- ----------- ----------- Total distributions to shareholders (6,719,740) -- (420,318) -- ----------- ----------- ----------- ----------- From Portfolio Share Transactions: * Shares sold 17,123,240 6,869,840 5,627,681 9,037,017 Shares issued to shareholders in reinvestment of distributions 6,721,015 -- 420,270 -- Less shares repurchased (8,436,558) (4,464,440) (8,484,719) (9,609,953) ----------- ----------- ----------- ----------- Net increase (decrease) 15,407,697 2,405,400 (2,436,768) (572,936) ----------- ----------- ----------- ----------- Net Assets: Beginning of period 24,258,586 30,183,422 12,848,023 5,859,392 ----------- ----------- ----------- ----------- End of period (including accumulated net investment loss, distributions in excess of net investment income, of ($1,066), ($59,438), ($41,401) and ($6,828), respectively) $30,183,422 $33,087,308 $5,859,392 $4,398,289 =========== =========== =========== =========== *Analysis of Portfolio Share Transactions: Shares sold 1,077,952 532,620 469,845 1,181,823 Shares issued to shareholders in reinvestment of distributions 611,557 -- 45,781 -- Less shares repurchased (541,612) (355,648) (766,906) (1,263,904) ----------- ----------- ----------- ----------- Net increase (decrease) 1,147,897 176,972 (251,280) (82,081) =========== =========== =========== =========== See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Active Bond Fund Financial Highlights Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED ---------------------------------------- FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001 1997 1998 1999 2000 2001 (UNAUDITED) -------- -------- -------- -------- -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $8.64 $8.54 $8.83 $8.59 $8.14 $8.61 -------- -------- -------- -------- -------- -------- Net Investment Income (1) 0.60 0.59 0.56 0.58 0.56 0.25 Net Realized and Unrealized Gain (Loss) on Investments (0.09) 0.34 (0.02) (0.43) 0.47 0.13 -------- -------- -------- -------- -------- -------- Total from Investment Operations 0.51 0.93 0.54 0.15 1.03 0.38 -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.60) (0.59) (0.56) (0.58) (0.56) (0.26) In Excess of Net Investment Income -- --(2) --(2) --(2) -- -- From Net Realized Gain (0.01) (0.05) (0.22) (0.02) -- -- -------- -------- -------- -------- -------- -------- Total Distributions (0.61) (0.64) (0.78) (0.60) (0.56) (0.26) -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $8.54 $8.83 $8.59 $8.14 $8.61 $8.73 ======== ======== ======== ======== ======== ======== Total Investment Return (3,4) 6.17% 11.25% 6.24% 1.83% 13.11% 4.56%(5) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $2,191 $5,158 $5,686 $4,222 $6,805 $8,724 Ratio of Expenses to Average Net Assets 0.60% 0.60% 0.60% 0.60% 0.60% 0.60%(6) Ratio of Adjusted Expenses to Average Net Assets (7,8) 4.05% 2.64% 2.33% 2.93% 2.03% 1.65%(6) Ratio of Net Investment Income to Average Net Assets 7.10% 6.78% 6.36% 6.88% 6.74% 5.93%(6,9) Portfolio Turnover Rate 136% 230% 356% 301% 327% 133% (1) Based on the average of the shares outstanding at the end of each month. (2) Less than $0.01 per share. (3) Total investment return assumes dividend reinvestment. (4) Total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. (9) Had the Fund not amortized premiums on debt securities, the annualized ratio of net investment income to average net assets would have been 6.13%. The Financial Highlights summarizes the impact of the following factors on a single share for each period indicated: net investment income, gains (losses), dividends and total investment return of the Fund. It shows how the Fund's net asset value for a share has changed since the end of the previous period. Additionally, important relationships between some items presented in the financial statements are expressed in ratio form. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Dividend Performers Fund Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED ---------------------------------------- FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001 1997 1998 1999 2000 2001 (UNAUDITED) -------- -------- -------- -------- -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.15 $11.91 $14.92 $14.46 $13.51 $11.14 -------- -------- -------- -------- -------- -------- Net Investment Income (1) 0.21 0.18 0.15 0.11 0.10 0.04 Net Realized and Unrealized Gain (Loss) on Investments 1.92 3.92 1.04 0.60 0.45 (0.78) -------- -------- -------- -------- -------- -------- Total from Investment Operations 2.13 4.10 1.19 0.71 0.55 (0.74) -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.18) (0.17) (0.15) (0.11) (0.11) (0.05) From Net Realized Gain (0.19) (0.92) (1.50) (1.55) (2.81) -- -------- -------- -------- -------- -------- -------- Total Distributions (0.37) (1.09) (1.65) (1.66) (2.92) (0.05) -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $11.91 $14.92 $14.46 $13.51 $11.14 $10.35 ======== ======== ======== ======== ======== ======== Total Investment Return (2,3) 21.26% 35.55% 7.97% 4.17% 2.94% (6.65%)(4) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $8,668 $20,884 $17,743 $14,863 $6,202 $5,397 Ratio of Expenses to Average Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%(5) Ratio of Adjusted Expenses to Average Net Assets (6,7) 1.89% 1.02% 0.95% 1.05% 1.08% 1.69%(5) Ratio of Net Investment Income to Average Net Assets 1.94% 1.31% 0.95% 0.71% 0.73% 0.80%(5) Portfolio Turnover Rate 37% 77% 64% 46% 58% 19% (1) Based on the average of the shares outstanding at the end of each month. (2) Total investment return assumes dividend reinvestment. (3) Total returns would have been lower had certain expenses not been reduced during the periods shown. (4) Not annualized. (5) Annualized. (6) Does not take into consideration expense reductions during the periods shown. (7) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Medium Capitalization Growth Fund Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED ---------------------------------------- FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001 1997 1998 1999 2000 2001 (UNAUDITED) -------- -------- -------- -------- -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.69 $12.67 $13.51 $10.99 $21.10 $10.26 -------- -------- -------- -------- -------- -------- Net Investment Income (Loss)(1) 0.01 --(2) (0.02) (0.05) (0.07) (0.03) Net Realized and Unrealized Gain (Loss) on Investments 2.02 2.06 (0.68) 10.71 (7.44) (2.19) -------- -------- -------- -------- -------- -------- Total from Investment Operations 2.03 2.06 (0.70) 10.66 (7.51) (2.22) -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income -- --(2) -- -- -- -- From Net Realized Gain (0.05) (1.22) (1.72) (0.55) (3.33) -- In Excess of Net Realized Gain -- -- (0.10) -- -- -- -------- -------- -------- -------- -------- -------- Total Distributions (0.05) (1.22) (1.82) (0.55) (3.33) -- -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $12.67 $13.51 $10.99 $21.10 $10.26 $8.04 ======== ======== ======== ======== ======== ======== Total Investment Return (3,4) 19.00% 17.39% (5.34%) 98.13% (38.23%) (21.64%)(5) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $29,085 $40,302 $16,687 $36,893 $11,499 $5,995 Ratio of Expenses to Average Net Assets 0.90% 0.90% 0.90% 0.90% 0.90% 0.90%(6) Ratio of Adjusted Expenses to Average Net Assets (7,8) 1.42% 1.10% 1.11% 1.28% 1.15% 1.66%(6) Ratio of Net Investment Income (Loss) to Average Net Assets 0.06% 0.03% (0.13%) (0.37%) (0.40%) (0.59%)(6) Portfolio Turnover Rate 281% 341% 116% 153% 181% 118% (1) Based on the average of the shares outstanding at the end of each month. (2) Less than $0.01 per share. (3) Total investment return assumes dividend reinvestment. (4) Total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Focused Small Cap Growth Fund Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ---------------------------------------------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED FEBRUARY 28, ------------------------ FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001 1997(1) 1998 1999 2000 2001 (UNAUDITED) -------- -------- -------- -------- -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $8.50 $9.24 $11.74 $11.65 $24.43 $10.49 -------- -------- -------- -------- -------- -------- Net Investment Income (Loss)(2) 0.03 (0.03) (0.07) (0.09) (0.10) (0.03) Net Realized and Unrealized Gain (Loss) on Investments 0.73 2.53 0.61 15.13 (11.92) (1.20) -------- -------- -------- -------- -------- -------- Total from Investment Operations 0.76 2.50 0.54 15.04 (12.02) (1.23) -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.02) --(3) -- -- -- -- From Net Realized Gain -- -- (0.63) (2.26) (1.92) -- -------- -------- -------- -------- -------- -------- Total Distributions (0.02) --(3) (0.63) (2.26) (1.92) -- -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $9.24 $11.74 $11.65 $24.43 $10.49 $9.26 ======== ======== ======== ======== ======== ======== Total Investment Return (4,5) 8.89%(6) 27.07% 4.67% 136.18% (50.27%) (11.73%)(6) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $999 $3,102 $2,453 $8,908 $5,458 $4,824 Ratio of Expenses to Average Net Assets 0.90%(7) 0.90% 0.90% 0.90% 0.90% 0.90%(7) Ratio of Adjusted Expenses to Average Net Assets (8,9) 16.24%(7) 4.05% 4.12% 3.19% 2.04% 2.19%(7) Ratio of Net Investment Income (Loss) to Average Net Assets 0.35%(7) (0.25%) (0.60%) (0.57%) (0.56%) (0.54%)(7) Portfolio Turnover Rate 92% 117% 125% 238% 242% 73% (1) The Fund commenced operations on May 2, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Total investment return assumes dividend reinvestment. (5) Total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Not annualized. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. (9) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Cap Equity Fund Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED ---------------------------------------- FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001 1997 1998 1999 2000 2001 (UNAUDITED) -------- -------- -------- -------- -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $9.09 $9.38 $11.74 $9.16 $18.09 $12.13 -------- -------- -------- -------- -------- -------- Net Investment Income (Loss)(1) 0.14 0.07 0.05 0.05 (0.04) (0.02) Net Realized and Unrealized Gain (Loss) on Investments 1.08 3.65 (1.23) 10.96 (2.18) 0.30 -------- -------- -------- -------- -------- -------- Total from Investment Operations 1.22 3.72 (1.18) 11.01 (2.22) 0.28 -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.12) (0.10) (0.04) (0.06) (0.03) -- From Net Realized Gain (0.81) (1.26) (1.20) (2.02) (3.71) -- In Excess of Net Realized Gain -- -- (0.16) -- -- -- -------- -------- -------- -------- -------- -------- Total Distributions (0.93) (1.36) (1.40) (2.08) (3.74) -- -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $9.38 $11.74 $9.16 $18.09 $12.13 $12.41 ======== ======== ======== ======== ======== ======== Total Investment Return (2,3) 13.78% 41.81% (9.46%) 124.33% (10.14%) 2.31%(4) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $6,011 $9,549 $7,418 $24,259 $30,183 $33,087 Ratio of Expenses to Average Net Assets 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%(5) Ratio of Adjusted Expenses to Average Net Assets (6,7) 1.83% 1.42% 1.46% 1.48% 1.04% 1.04%(5) Ratio of Net Investment Income (Loss) to Average Net Assets 1.46% 0.62% 0.45% 0.37% (0.25%) (0.36%)(5) Portfolio Turnover Rate 96% 216% 126% 104% 109% 34% (1) Based on the average of the shares outstanding at the end of each month. (2) Total investment return assumes dividend reinvestment. (3) Total returns would have been lower had certain expenses not been reduced during the periods shown. (4) Not annualized. (5) Annualized. (6) Does not take into consideration expense reductions during the periods shown. (7) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- International Equity Fund Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED ---------------------------------------- FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001 1997 1998 1999 2000 2001 (UNAUDITED) -------- -------- -------- -------- -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $9.24 $9.35 $9.63 $10.18 $13.33 $8.23 -------- -------- -------- -------- -------- -------- Net Investment Income (1) 0.12 0.06 0.07 0.07 0.04 0.05 Net Realized and Unrealized Gain (Loss) on Investments 0.14 0.23 0.59 3.83 (4.63) (1.30) -------- -------- -------- -------- -------- -------- Total from Investment Operations 0.26 0.29 0.66 3.90 (4.59) (1.25) -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.10) (0.01) (0.07) (0.07) (0.04) -- In Excess of Net Investment Income -- -- (0.04) (0.04) -- -- From Net Realized Gain (0.05) -- -- (0.64) (0.47) -- -------- -------- -------- -------- -------- -------- Total Distributions (0.15) (0.01) (0.11) (0.75) (0.51) -- -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $9.35 $9.63 $10.18 $13.33 $8.23 $6.98 ======== ======== ======== ======== ======== ======== Total Investment Return (2,3) 2.79% 3.07% 6.88% 38.84% (34.85%) (15.19%)(4) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $4,204 $7,983 $7,805 $12,848 $5,859 $4,398 Ratio of Expenses to Average Net Assets 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%(5) Ratio of Adjusted Expenses to Average Net Assets (6,7) 3.32% 2.02% 2.73% 2.86% 3.46% 4.00%(5) Ratio of Net Investment Income to Average Net Assets 1.26% 0.60% 0.69% 0.59% 0.43% 1.23%(5) Portfolio Turnover Rate 68% 125% 83% 139% 238% 96% (1) Based on the average of the shares outstanding at the end of each month. (2) Total investment return assumes dividend reinvestment. (3) Total returns would have been lower had certain expenses not been reduced during the periods shown. (4) Not annualized. (5) Annualized. (6) Does not take into consideration expense reductions during the periods shown. (7) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Active Bond Fund Schedule of Investments August 31, 2001 (Unaudited) - ---------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the Active Bond Fund on August 31, 2001. It's divided into three main categories: bonds, preferred stocks and warrants and short-term investments. The bonds are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. PAR VALUE INTEREST CREDIT (000s ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- -------- ------ ------- -------------- BONDS Aerospace (0.69%) Lockheed Martin Corp., Bond 12-01-29 8.500% BBB- $25 $29,219 Systems 2001 Asset Trust LLC, Pass Thru Ctf Ser 2001 Class B 12-15-11 (R) 7.156 A 30 31,318 -------------- 60,537 -------------- Agricultural Operations (0.41%) Cargill, Inc., Note 05-01-06 (R) 6.250 A+ 35 35,860 -------------- Automobile/Trucks (2.22%) DaimlerChrysler NA Holding Corp. Note 01-18-31 8.500 A- 20 22,282 Delphi Automotive Systems Corp., Note 06-15-06 6.550 BBB 70 71,463 ERAC USA Finance Co., Note 02-15-05 (R) 6.625 BBB+ 6 6,063 Note 06-15-08 (R) 7.350 BBB+ 35 36,050 Note 12-15-09 (R) 7.950 BBB+ 45 48,139 Ford Motor Co., Note 07-16-31 7.450 A 10 9,905 -------------- 193,902 -------------- Banks - Foreign (2.63%) Abbey National First Capital, B.V., Sub Note (United Kingdom) 10-15-04, (Y) 8.200 AA- 80 88,174 Barclays Bank Plc, Perpetual Bond (7.375% to 12-29-11 then variable) (United Kingdom) 06-29-49 (R), (Y) 7.375 A+ 20 20,800 Royal Bank of Scotland Group Plc, Bond (United Kingdom) 03-31-49, (Y) 8.817 A- 10 10,917 Bond (United Kingdom) 08-31-49, (Y) 7.648 A- 20 20,185 Scotland International Finance No. 2, B.V., Gtd Sub Note (United Kingdom) 11-01-06 (R), (Y) 8.850 A 35 39,798 Skandinaviska Enskilda Banken AB, Perpetual Bond (6.50% to 6-30-03 then variable) (Sweden) 12-29-49 (R), (Y) 6.500 BBB 20 20,298 UBS Preferred Funding Trust I, Perpetual Bond (8.622% to 10-01-10 then variable) 10-01-49 8.622 AA- 25 29,150 -------------- 229,322 -------------- Banks - United States (3.00%) Bank of New York, Cap Security 12-01-26 (R) 7.780 A- 25 26,319 Bank One Corp., Sub Note 08-01-10 7.875 A- 15 16,614 BNP Paribas Capital Trust, Perpetual Bond (9.003% to 10-27-10 then variable) 12-27-49 (R) 9.003 A 20 22,717 Capital One Bank, Sr Note 02-01-06 6.875 BBB- 15 15,083 Colonial Bank, Sub Note 06-01-11 9.375 BBB- 30 31,949 RBSG Capital Corp., Gtd Cap Note 03-01-04 10.125 A 50 56,248 Wells Fargo Bank NA, Sub Note 02-01-11 6.450 A+ 40 40,890 Zions Financial Corp., Note (6.95% to 5-15-06 then variable) 05-15-11 (R) 6.950 BBB- 50 51,562 -------------- 261,382 -------------- Beverages (0.17%) Canandaigua Brands, Inc., Sr Sub Note Ser C 12-15-03 8.750 B+ 15 15,112 -------------- Broker Services (1.53%) Citigroup, Inc., Note 01-18-11 6.500 AA- 35 36,161 Goldman Sachs Group, Inc., Bond 01-15-11 6.875 A+ 45 46,440 Morgan Stanley Dean Witter & Co., Bond 04-15-06 6.100 AA- 35 35,802 Salomon Smith Barney Holdings, Inc., Note 03-15-06 5.875 A 15 15,254 -------------- 133,657 -------------- Building (0.46%) Horton (D.R.), Inc., Sr Note 08-15-11 7.875 BB 10 9,700 Vulcan Materials Co., Note 02-01-06 6.400 A+ 30 30,863 -------------- 40,563 -------------- Business Services - Misc. (0.40%) Cendant Corp., Note 08-15-06 (R) 6.875 BBB 35 35,119 -------------- Chemicals (0.65%) Akzo Nobel, Inc., Bond 11-15-03 (R) 6.000 A- 15 15,422 Equistar Chemicals L.P./Equistar Funding Corp., Note 02-15-04 8.500 BBB- 15 14,578 Potash Corp. of Saskatchewan, Inc. Note (Canada) 05-31-11, (Y) 7.750 BBB+ 25 26,799 -------------- 56,799 -------------- Computers (0.30%) AOL Time Warner, Inc., Bond 04-15-31 7.625 BBB+ 25 26,174 -------------- Containers (0.18%) Stone Container Corp., Sr Note 02-01-11 9.750 B 15 15,675 -------------- Cosmetics & Personal Care (0.59%) International Flavors & Fragrances, Inc., Note 05-15-06 (R) 6.450 BBB+ 50 51,047 -------------- Energy (0.52%) CalEnergy Co., Inc., Sr Bond 09-15-28 8.480 BBB- 15 16,562 Enron Corp., Note 08-15-05 (R) 8.000 BBB+ 15 15,676 P&L Coal Holdings Corp., Sr Sub Note Ser B 05-15-08 9.625 B+ 12 12,780 -------------- 45,018 -------------- Finance (4.06%) Bombardier Capital, Inc., Note 01-15-02 (R) 6.000 A- 20 20,144 Ford Capital B.V., Gtd Deb (Netherlands) 05-15-02, (Y) 9.875 A 35 36,223 Ford Motor Credit Co., Note 01-15-03 7.250 A 25 25,926 Note 02-01-06 6.875 A 30 30,969 General Motors Acceptance Corp., Note 07-15-05 7.500 A 35 37,242 Note 03-02-11 7.250 A 25 26,129 Heller Financial, Inc., Note 03-15-06 6.375 A- 15 15,765 Household Finance Corp., Note 05-09-05 8.000 A 25 27,209 Note 07-15-10 8.000 A 15 16,815 HSBC Holding Plc, Sub Note (United Kingdom) 07-15-09, (Y) 7.500 A 15 16,247 ING Capital Funding Trust III, Perpetual Bond (8.439% to 12-31-10 then variable) 12-31-49 8.439 A 10 11,015 Standard Chartered Bank, Sub Note (United Kingdom) 05-30-31 (R), (Y) 8.000 A- 25 26,321 Standard Credit Card Master Trust, Ser 1995-1 Class A 01-07-07 8.250 AAA 40 43,950 U.S. Bank NA, Note 08-01-11 6.375 A 20 20,405 -------------- 354,360 -------------- Food (0.78%) Conagra, Inc., Sub Note 09-15-04 7.400 BBB 20 21,124 Earthgrains Co. (The), Note 08-01-03 8.375 A+ 45 46,971 -------------- 68,095 -------------- Government - Foreign (2.02%) Colombia, Republic of, Bond (Colombia) 04-09-11, (Y) 9.750 BBB 25 26,437 Nova Scotia, Province of, Deb (Canada) 11-15-19, (Y) 8.250 A- 25 29,856 Quebec, Government of, Deb (Canada) 01-22-11, (Y) 6.125 A+ 85 86,184 Quebec, Province of, Deb (Canada) 09-15-29, (Y) 7.500 A+ 30 33,598 -------------- 176,075 -------------- Government - U.S. (15.47%) United States Treasury, Bond 08-15-17 8.875 AAA 127 174,227 Bond 02-15-23 7.125 AAA 199 239,733 Bond 05-15-30 6.250 AAA 155 173,163 Inflation Indexed Note 01-15-07 3.375 AAA 107 108,059 Note 08-15-03 5.750 AAA 92 95,594 Note 02-15-05 7.500 AAA 164 181,399 Note 07-15-06 7.000 AAA 164 181,963 Note 05-15-08 5.625 AAA 30 31,542 Note 08-15-10 5.750 AAA 155 164,275 -------------- 1,349,955 -------------- Government - U.S. Agencies (15.12%) Federal National Mortgage Assn., 15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 130 129,075 15 Yr Pass Thru Ctf 07-01-15 7.000 AAA 16 16,986 15 Yr Pass Thru Ctf 02-01-16 7.000 AAA 23 23,816 15 Yr Pass Thru Ctf 05-01-16 6.000 AAA 20 19,733 15 Yr Pass Thru Ctf 06-01-16 6.000 AAA 167 167,845 30 Yr Pass Thru Ctf 06-01-30 7.500 AAA 213 219,821 30 Yr Pass Thru Ctf 12-01-30 7.000 AAA 19 19,905 30 Yr Pass Thru Ctf 02-01-31 7.500 AAA 51 52,602 Note 01-15-30 7.125 AAA 95 107,009 Government National Mortgage Assn., 30 Yr Pass Thru Ctf 04-15-28 to 05-15-29 6.500 AAA 109 110,780 30 Yr Pass Thru Ctf 04-15-29 to 12-25-31 7.000 AAA 405 415,314 30 Yr Pass Thru Ctf 11-15-24 to 07-15-30 8.000 AAA 35 36,317 -------------- 1,319,203 -------------- Insurance (1.83%) AXA SA, Sub Note (France) 12-15-30, (Y) 8.600 A- 20 23,312 Equitable Life Assurance Society USA, Surplus Note 12-01-05 (R) 6.950 A+ 25 26,227 Massachusetts Mutual Life Insurance Co., Surplus Note 11-15-23 (R) 7.625 AA 15 15,818 MONY Group, Inc. (The), Sr Note 12-15-05 7.450 A- 25 26,205 Sun Canada Financial Co., Sub Note 12-15-07 (R) 6.625 AA- 55 56,788 URC Holdings Corp., Sr Note 06-30-06 (R) 7.875 AA+ 10 11,046 -------------- 159,396 -------------- Leisure (0.94%) Harrah's Operating Co., Inc., Note 06-01-07 (R) 7.125 BBB- 25 25,344 Sr Sub Note 12-15-05 7.875 BB+ 10 10,288 HMH Properties, Inc., Sr Note Ser A 08-01-05 7.875 BB 10 10,000 MGM Mirage, Inc., Sr Note 09-15-10 8.500 BBB- 10 10,756 Sabre Holdings Corp., Note 08-01-11 7.350 BBB+ 15 15,220 Station Casinos, Inc., Sr Note 02-15-08 8.375 BB- 5 5,050 Waterford Gaming LLC,, Sr Note 03-15-10 (R) 9.500 B+ 5 5,012 -------------- 81,670 -------------- Media (5.29%) Adelphia Communications Corp., Sr Note 06-15-11 10.250 B+ 5 4,900 Sr Note Ser B 10-01-02 9.250 B+ 15 15,075 Sr Note Ser B 07-15-03 8.125 B+ 13 12,545 British Sky Broadcasting Group Plc, Sr Note (United Kingdom) 07-15-09, (Y) 8.200 BB+ 35 36,158 Century Communications Corp., Sr Note 03-01-05 9.500 B+ 10 9,938 Charter Communications Holdings, LLC/ Charter Communications Holdings Capital Corp., Sr Note 01-15-11 11.125 B+ 5 5,388 Sr Note 05-15-11 (R) 10.000 B+ 5 5,050 Clear Channel Communications, Inc., Note 06-15-05 7.875 BBB- 50 53,297 Comcast Cable Communications, Inc., Sr Note 01-30-11 6.750 BBB 15 15,052 Continental Cablevision, Inc., Sr Note 05-15-06 8.300 A 25 27,517 CSC Holdings, Inc., Sr Note 04-01-11 (R) 7.625 BB+ 45 44,981 Sr Sub Deb 05-15-16 10.500 BB- 10 11,125 EchoStar DBS Corp., Sr Note 02-01-09 9.375 B+ 10 10,300 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 B+ 10 9,400 Jones Intercable, Inc., Sr Note 04-15-08 7.625 BBB 20 21,018 Lenfest Communications, Inc., Sr Note 11-01-05 8.375 BBB 10 10,938 Mediacom LLC/Mediacom Capital Corp., Sr Note 01-15-13 (R) 9.500 B+ 5 5,025 Sr Note Ser B 04-15-08 8.500 B+ 10 9,750 News America, Inc., Gtd Sr Note 04-30-28 7.300 BBB- 15 14,005 News America Holdings, Inc., Gtd Sr Deb 08-10-18 8.250 BBB- 20 20,838 TCI Communications, Inc., Sr Deb 02-15-26 7.875 A 20 20,788 Time Warner, Inc., Deb 01-15-13 9.125 BBB+ 16 18,911 Univision Communications, Inc., Sr Note 07-15-11 (R) 7.850 BB+ 25 26,175 Viacom, Inc., Gtd Note 01-30-06 (R) 6.400 A- 15 15,562 Sr Note 01-30-06 6.400 A- 10 10,368 Sr Deb 07-30-30 7.875 A- 25 27,571 -------------- 461,675 -------------- Medical (1.34%) Dynacare, Inc., Sr Note (Canada) 01-15-06, (Y) 10.750 B+ 13 13,325 Fresenius Medical Care Capital Trust II, Gtd Trust Preferred Security 02-01-08 7.875 B+ 15 14,925 HCA - The Healthcare Co., Note 09-01-10 8.750 BB+ 25 27,375 Note 06-01-06 7.125 BB+ 20 20,340 HEALTHSOUTH Corp., Sr Note 02-01-08 8.500 BBB- 10 10,450 Quest Diagnostics, Inc., Sr Note 07-12-06 6.750 BBB- 15 15,322 Tenet Healthcare Corp., Sr Note 01-15-05 8.000 BB+ 5 5,350 Triad Hospitals, Inc., Note 05-01-09 (R) 8.750 B- 10 10,425 -------------- 117,512 -------------- Metal (1.07%) Newmont Mining Corp., Note 05-15-11 8.625 BBB 30 30,956 WMC Finance (USA) Ltd., Gtd Note (Australia) 11-15-03, (Y) 6.500 A 55 56,660 Yanacocha Receivables Master Trust, Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 6 5,566 -------------- 93,182 -------------- Mortgage Banking (6.39%) Asset Securitization Corp., Mtg Pass Thru Ctf Ser 1997-D4 Class A-1B 04-14-27 7.400 AAA 40 42,375 Commercial Mortgage Acceptance Corp., Pass Thru Ctf Ser 1999-C1 Class A-1 06-15-31 6.790 Aaa 26 27,216 Credit Suisse First Boston Mortgage Securities Corp., Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class A-1A 5-17-40 6.260 AAA 26 26,938 EQCC Home Equity Loan Trust, Pass Thru Ctf Ser 1997-3 Class A-9 02-15-29 6.570 AAA 40 41,300 GMAC Commercial Mortgage Securities, Inc., Pass Thru Ctf Ser 1997-C1 Class A-2 07-15-29 6.853 Aaa 20 20,963 Pass Thru Ctf Ser 1998-C1 Class A-1 05-15-30 6.411 Aaa 52 53,360 IMC Home Equity Loan Trust, Pass Thru Ctf Ser 1998-1 Class A-4 03-20-25 6.600 AAA 20 20,312 LB Commercial Mortgage Trust, Pass Thru Ctf Ser 1999-C1 Class A-1 06-15-31 6.410 Aaa 14 14,092 Money Store Home Equity Trust (The), Pass Thru Ctf Ser 1997-D Class AF-7 12-15-38 6.485 AAA 22 22,255 Morgan (J.P.) Commercial Mortgage Finance Corp., Pass Thru Ctf Ser 1997-C5 Class A2 09-15-29 7.069 AAA 35 36,794 Morgan Stanley Capital I, Inc., Pass Thru Ctf Ser 1997-WF1 Class A-1 07-15-29 (R) 6.830 AAA 101 104,996 Pass Thru Ctf Ser 1999-CAM1 Class A-3 03-15-32 6.920 AAA 50 52,578 Salomon Brothers Mortgage Securities VII, Inc., Mtg Pass Thru Ctf Ser 1997-HUD2 Class A-2 07-25-24 6.750 Aaa 10 10,265 Saxon Asset Securities Trust, Pass Thru Ctf Ser 2000-2 Class AF-2 06-25-15 7.965 AAA 30 30,309 UCFC Home Equity Loan Trust, Pass Thru Ctf Ser 1997-A1 Class A-8 06-15-28 7.220 AAA 24 25,043 Pass Thru Ctf Ser 1997-B Class A-6 10-15-28 6.900 AAA 28 28,741 -------------- 557,537 -------------- Oil & Gas (2.65%) Alberta Energy Co., Ltd., Note (Canada) 09-15-30, (Y) 8.125 BBB+ 10 11,055 Amerada Hess Corp., Note 08-15-31 7.300 BBB 25 25,335 Chesapeake Energy Corp., Sr Note 04-01-11 8.125 B+ 10 9,700 Forest Oil Corp., Sr Note 06-15-08 (R) 8.000 BB 10 9,950 Louis Dreyfus Natural Gas Corp., Sr Note 12-01-07 6.875 BBB 10 10,189 Nova Chemicals Corp., Note (Canada) 05-15-06, (Y) 7.000 BBB 15 14,981 Occidental Petroleum Corp., Sr Deb 09-15-09 10.125 BBB 5 6,127 Ocean Energy, Inc., Sr Sub Note Ser B 07-15-07 8.875 BB+ 5 5,285 Pemex Project Funding Master Trust, Note 10-13-10 (R) 9.125 BB+ 35 37,321 Petrobras International Finance Co., Sr Note (Cayman Islands) 07-06-11 (R), (Y) 9.750 Baa1 10 10,025 Petroleum Geo-Services ASA, Sr Note (Norway) 03-30-28, (Y) 7.125 BBB- 15 12,770 Snyder Oil Corp., Sr Sub Note 06-15-07 8.750 BBB+ 10 10,544 Tosco Corp., Note 02-15-30 8.125 BBB 15 16,947 Transocean Sedco Forex, Inc. Note 04-15-31 7.500 A- 20 20,335 Union Pacific Resources Group, Inc., Deb 05-15-28 7.150 BBB+ 20 20,038 Valero Energy Corp., Note 06-15-05 8.375 BBB- 10 10,847 -------------- 231,449 -------------- Paper & Paper Products (1.57%) International Paper Co., Note 07-08-05 8.125 BBB 45 48,375 Georgia-Pacific Corp., Note 05-15-06 7.500 BBB- 15 15,423 Note 05-15-31 8.875 BBB- 20 21,142 Stora Enso Oyj, Sr Note (Finland) 05-15-11, (Y) 7.375 BBB+ 25 26,563 Weyerhaeuser Co., Note 08-01-06 6.000 A- 25 25,155 -------------- 136,658 -------------- Real Estate Investment Trust (1.24%) American Health Properties, Inc., Note 01-15-07 7.500 BBB+ 10 10,309 Cabot Industrial Properties, L.P., Note 05-01-04 7.125 BBB 15 15,437 Camden Property Trust, Note 04-15-04 7.000 BBB 10 10,375 Healthcare Realty Trust Sr Note 05-01-11 8.125 BBB- 30 31,200 iStar Financial, Inc., Sr Note 08-15-08 8.750 BB+ 5 5,013 Liberty Property L.P., Medium Term Note 06-05-02 6.600 BBB 25 25,188 ProLogis Trust, Note 04-15-04 6.700 BBB+ 10 10,296 -------------- 107,818 -------------- Real Estate Operations (0.30%) EOP Operating L.P., Note 02-15-05 6.625 BBB+ 25 25,910 -------------- Retail (1.61%) Delhaize America, Inc., Note 04-15-11 (R) 8.125 BBB- 40 43,750 Kroger Co., Sr Note 04-01-11 6.800 BBB- 20 20,624 Sears Roebuck Acceptance Corp., Note 08-15-11 6.750 A- 35 34,822 Toys R Us, Inc., Note 08-01-11 (R) 7.625 BBB+ 40 40,924 -------------- 140,120 -------------- Telecommunications (5.09%) AT&T Wireless Group, Sr Note 03-01-31 (R) 8.750 BBB 25 27,775 BellSouth Capital Funding Corp., Deb 02-15-30 7.875 A+ 25 28,104 Citizens Communications Co., Note 05-15-06 8.500 BBB 35 37,367 Deutsche Telekom International Finance B.V., Bond (Coupon Rate Step-up/down on rating) (Netherlands) 06-15-05, (Y) 7.750 A- 55 58,588 Bond (Coupon Rate Step-up/down on rating) (Netherlands) 06-15-30, (Y) 8.250 A- 20 21,633 Dominion Resources, Inc., Sr Note Ser A 06-15-10 8.125 BBB+ 15 16,753 LCI International, Inc., Sr Note 06-15-07 7.250 BBB+ 15 15,445 MetroNet Communications Corp., Sr Discount Note, Step Coupon (10.75%, 11-01-02) (Canada) 11-01-07, (A), (Y) Zero BBB 15 12,603 Sr Note (Canada) 08-15-07, (Y) 12.000 BBB 10 10,900 Qwest Capital Funding, Inc., Bond 02-15-31 (R) 7.750 NR 30 29,997 Sprint Capital Corp., Note 01-30-06 7.125 BBB+ 15 15,645 Note 11-15-28 6.875 BBB+ 35 31,729 Telefonos de Mexico SA de C.V., Sr Note 01-26-06 (R) 8.250 BB+ 30 31,275 Telus Corp., Note (Canada) 06-01-11, (Y) 8.000 BBB+ 25 26,200 Triton PCS, Inc., Sr Sub Note 02-01-11 9.375 B- 5 5,025 Verizon Global Funding Corp., Deb 12-01-30 (R) 7.750 A+ 15 16,490 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 A- 5 5,750 WorldCom, Inc., Note 05-15-06 8.000 BBB+ 35 37,557 Note 05-15-31 8.250 BBB+ 15 15,266 -------------- 444,102 -------------- Transportation (2.85%) America West Airlines, Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 A- 3 3,296 Burlington Northern Santa Fe Corp., Deb 08-15-30 7.950 BBB+ 30 33,117 Continental Airlines, Inc., Pass Thru Ctf Ser 1997-2C 06-30-04 7.206 BBB 16 16,227 Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA+ 19 18,756 Delta Air Lines, Inc., Note 12-15-05 7.700 BBB- 15 15,128 Northrop Grumman Systems Corp., Note 02-15-11 7.125 BBB- 20 20,620 Northwest Airlines 1996-1 Pass Through Trusts, Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BBB- 4 4,710 Northwest Airlines, Inc., Note 03-15-04 8.375 BB 10 9,966 Sr Note 06-01-06 8.875 BB 10 9,900 NWA Trust, Sr Note Ser A 12-21-12 9.250 AA 31 34,854 U.S. Airways, Inc., Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 BB- 14 14,379 Union Pacific Corp., Deb 02-01-29 6.625 BBB- 25 23,964 United Air Lines, Inc., Pass Thru Ctf Ser 2000-1 Class A-1 01-01-14 7.783 AAA 28 29,276 Pass Thru Ctf Ser 2000-2 Class A-1 10-01-10 7.032 AAA 14 14,780 -------------- 248,973 -------------- Utilities (10.62%) AES Corp., Sr Note 06-01-09 9.500 BB 10 10,400 Sr Note 09-15-10 9.375 BB 5 5,050 Sr Sub Note 07-15-06 10.250 B+ 12 12,300 AES Eastern Energy L.P., Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 15 15,791 Beaver Valley Funding Corp., Sec Lease Oblig Bond 06-01-17 9.000 BB- 9 9,951 BVPS II Funding Corp., Collateralized Lease Bond 06-01-17 8.890 BB- 7 7,927 Calpine Canada Energy Finance ULC, Sr Note (Canada) 05-01-08 (Y) 8.500 BB+ 15 15,201 Calpine Corp., Sr Note 08-15-05 8.250 BB+ 15 15,415 Sr Note 04-01-08 7.875 BB+ 5 4,750 Sr Note 02-15-11 8.500 BB+ 35 35,564 Cleveland Electric Illuminating Co., 1st Mtg Ser B 05-15-05 9.500 BB+ 35 36,050 Sec Note Ser D 11-01-17 7.880 BB+ 20 21,146 CMS Energy Corp., Sr Note 05-15-02 8.125 BB 15 15,205 Sr Note 10-15-07 9.875 BB 5 5,350 Sr Note Ser B 01-15-04 6.750 BB 15 14,738 EIP Funding-PNM, Sec Fac Bond 10-01-12 10.250 BBB- 22 23,980 Exelon Generation Co LLC, Sr Note 06-15-11 (R) 6.950 A- 60 62,212 GG1B Funding Corp., Deb 01-15-11 7.430 BBB- 11 11,632 HQI Transelec Chile SA, Sr Note (Chile) 04-15-11 (R), (Y) 7.875 A- 55 56,610 Utilities (continued) Hydro-Quebec, Gtd Bond Ser HY (Canada) 01-15-22, (Y) 8.400 A+ 10 12,099 Gtd Deb Ser IF (Canada) 02-01-03, (Y) 7.375 A+ 25 26,179 Iberdrola International B.V., Note 10-01-02 7.500 AA- 25 25,885 Note (Spain) 06-01-03 (R), (Y) 7.125 AA- 25 26,110 KeySpan Corp., Note 11-15-10 7.625 A 25 27,390 Long Island Lighting Co., Deb 03-15-23 8.200 A- 20 20,600 Midland Funding Corp. II,, Deb Ser A 07-23-05 11.750 BB+ 50 55,500 Mirant Americas Generation, Inc., Sr Note 05-01-11 (R) 8.300 BBB- 35 37,169 Niagara Mohawk Power Corp., Sec Fac Bond 01-01-18 8.770 BBB 25 26,215 Northeast Utilities, Note Ser A 12-01-06 8.580 BBB 3 3,296 NRG Energy, Inc., Sr Note 04-01-11 7.750 BBB- 25 26,205 Pinnacle Partners, Sr Note 08-15-04 (R) 8.830 BBB- 20 20,260 Pinnacle West Capital Corp., Sr Note 04-01-06 6.400 BBB 20 20,293 PNPP II Funding Corp., Deb 05-30-16 9.120 BB- 15 16,830 PSEG Energy Holdings, Inc., Sr Note 02-15-08 (R) 8.625 BBB- 15 15,804 PSEG Power LLC, Sr Note 04-15-31 (R) 8.625 BBB 15 17,013 Sierra Pacific Power Co., 1st Mtg Note 06-01-08 (R) 8.000 BBB+ 45 46,451 Sierra Pacific Resources, Note 05-15-05 8.750 BBB- 10 10,402 Tiers Fixed Rate Certificates, Collateral Trust 06-15-04 (R) 7.200 BBB- 30 30,329 TXU Electric Capital V, Capital Sec 01-30-37 8.175 BBB- 10 10,205 Waterford 3 Funding Corp., Sec Lease Obligation Bond 01-02-17 8.090 BBB- 25 25,662 Xcel Energy, Inc., Sr Note 12-01-10 7.000 BBB+ 45 46,950 -------------- 926,119 -------------- Waste Disposal Service & Equip (0.35%) Republic Services, Inc., Sr Note 08-15-11 6.750 BBB 30 30,305 -------------- TOTAL BONDS (Cost $7,997,827) (94.34%) 8,230,281 -------------- -------------- NUMBER OF SHARES OR WARRANTS -------------- PREFERRED STOCKS AND WARRANTS CSC Holdings, Inc., 11.125%, Ser M, Preferred Stock 125 13,313 CSC Holdings, Inc., 11.750%, Ser H, Preferred Stock 140 15,155 MetroNet Communications Corp., Warrant (Canada) (R)** 10 950 -------------- 29,418 -------------- TOTAL PREFERRED STOCKS AND WARRANTS (Cost $28,196) (0.34%) 29,418 -------------- -------------- INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (5.19%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 08-31-01, due 09-04-01 (Secured by U.S. Treasury Bond, 8.75% due 05-15-20 and U.S. Treasury Note 4.75% due 11-15-08) 3.640% $453 $453,000 -------------- TOTAL SHORT-TERM INVESTMENTS (Cost $453,000) (5.19%) 453,000 -------------- -------------- TOTAL INVESTMENTS (99.87%) 8,712,699 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (0.13%) 11,360 -------------- -------------- TOTAL NET ASSETS (100.00%) $8,724,059 ============== ============== * Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investor Services or John Hancock Advisers, Inc. where Standard & Poor's ratings are not available. ** Non-income producing security. (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (R) These securities are exempt from registration under rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $1,421,083 or 16.29% of net assets as of August 31, 2001. (Y) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer, however, security is U.S. dollar denominated. + All or a portion of these securities, having an aggregate value of $87,179 or 1.00% of the Fund's net assets, have been purchased as forward commitments; that is, the Fund has agreed on trade date to take delivery of and make payment for such securities on a delayed basis subsequent to the date of this schedule. The purchase price and interest rate of such securities are fixed at trade date, although the Fund does not earn any interest on such securities until settlement date. The Fund has instructed its Custodian Bank to segregate assets with a current value at least equal to the amount of the forward commitments. Accordingly, the market values of $42,164 and $47,797 of United States Treasury Bond 7.125%, 02-15-23 and United States Treasury Note 5.75%, 08-15-03 has been segregated to cover the forward commitments. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
Schedule of Investments August 31, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- NUMBER OF ISSUER, DESCRIPTION SHARES VALUE - ------------------- ---------- -------------- COMMON STOCKS Banks - United States (4.04%) Bank of America Corp. 900 $55,350 PNC Financial Services Group 1,230 81,906 Wells Fargo & Co. 1,750 80,518 -------------- 217,774 -------------- Beverages (3.74%) Anheuser-Busch Cos., Inc. 1,420 61,117 PepsiCo, Inc. 3,000 141,000 -------------- 202,117 -------------- Chemicals (3.69%) Air Products & Chemicals, Inc. 1,600 67,840 Dow Chemical Co. (The) 1,700 59,602 Rohm & Haas Co. 2,000 71,820 -------------- 199,262 -------------- Computers (9.56%) AOL Time Warner, Inc.* 2,100 78,435 Cisco Systems, Inc.* 5,080 82,956 Compaq Computer Corp. 5,740 70,889 EMC Corp.* 1,960 30,302 International Business Machines Corp. 1,040 104,000 Microsoft Corp.* 1,850 105,543 Oracle Corp.* 3,600 43,956 -------------- 516,081 -------------- Cosmetics & Personal Care (1.28%) Avon Products, Inc. 1,500 69,195 -------------- Diversified Operations (3.18%) Honeywell International, Inc. 2,000 74,520 Tyco International Ltd. 1,870 97,147 -------------- 171,667 -------------- Electronics (9.05%) Analog Devices, Inc.* 1,400 66,892 Emerson Electric Co. 1,000 53,600 General Electric Co. 3,350 137,283 Intel Corp. 3,400 95,064 Motorola, Inc. 3,260 56,724 Texas Instruments, Inc. 2,380 78,778 -------------- 488,341 -------------- Energy (1.12%) Xcel Energy, Inc. 2,200 60,280 -------------- Finance (6.21%) Citigroup, Inc. 2,666 121,969 J.P. Morgan Chase & Co. 2,000 78,800 Merrill Lynch & Co., Inc. 1,720 88,752 Morgan Stanley Dean Witter & Co. 860 45,881 -------------- 335,402 -------------- Food (0.99%) Kraft Foods, Inc. (Class A) 1,655 53,374 -------------- Insurance (5.27%) ACE, Ltd. 1,800 59,706 AFLAC, Inc. 3,250 89,440 American International Group, Inc. 1,020 79,764 Marsh & McLennan Cos., Inc. 600 55,740 -------------- 284,650 -------------- Media (3.42%) McGraw-Hill Cos., Inc. (The) 1,900 112,575 Viacom, Inc. (Class B)* 1,700 72,080 -------------- 184,655 -------------- Medical (9.64%) American Home Products Corp. 2,240 125,440 Baxter International, Inc. 3,400 175,440 Johnson & Johnson 3,000 158,130 Pfizer, Inc. 1,600 61,296 -------------- 520,306 -------------- Mortgage Banking (5.08%) Fannie Mae 1,700 129,557 Freddie Mac 2,300 144,624 -------------- 274,181 -------------- Office (1.19%) Avery Dennison Corp. 1,250 64,262 -------------- Oil & Gas (8.37%) Anadarko Petroleum Corp. 1,100 56,925 Chevron Corp. 1,140 103,455 Conoco, Inc. (Class A) 3,440 101,996 Exxon Mobil Corp. 3,392 136,189 Halliburton Co. 1,900 52,934 -------------- 451,499 -------------- Paper & Paper Products (2.43%) Kimberly-Clark Corp. 2,110 130,925 -------------- Retail (6.11%) CVS Corp. 1,900 68,609 Home Depot, Inc. (The) 2,150 98,792 Lowe's Cos., Inc. 2,500 93,000 Target Corp. 2,000 69,300 -------------- 329,701 -------------- Telecommunications (3.56%) ADC Telecommunications, Inc.* 5,100 22,287 Tellabs, Inc.* 4,500 59,940 Verizon Communications, Inc. 2,200 110,000 -------------- 192,227 -------------- Tobacco (3.16%) Philip Morris Cos., Inc. 3,600 170,640 -------------- Utilities (3.52%) Duke Energy Corp. 2,100 82,551 SBC Communications, Inc. 2,630 107,593 -------------- 190,144 -------------- TOTAL COMMON STOCKS (Cost $4,637,595) (94.62%) 5,106,683 -------------- -------------- INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (5.43%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 08-31-01, due 09-04-01 (Secured by U.S. Treasury Bonds, 8.75% due 05-15-20 and U.S. Treasury Note, 4.75% due 11-15-08) 3.64% $293 $293,000 -------------- TOTAL SHORT-TERM INVESTMENTS (Cost $293,000) (5.43%) 293,000 -------------- -------------- TOTAL INVESTMENTS (100.05%) 5,399,683 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (0.05%) (2,690) -------------- -------------- TOTAL NET ASSETS (100.00%) $5,396,993 ============== ============== * Non-income producing security. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Medium Capitalization Growth Fund Schedule of Investments August 31, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the Medium Capitalization Growth Fund on August 31, 2001. Common stocks are further broken down by industry group. NUMBER OF ISSUER, DESCRIPTION SHARES VALUE - ------------------- ---------- -------------- COMMON STOCKS Advertising (2.22%) Lamar Advertising Co.* 1,850 $59,385 TMP Worldwide, Inc.* 1,650 74,003 -------------- 133,388 -------------- Banks - United States (1.80%) Commerce Bancorp, Inc. 495 33,437 Zions BanCorp. 1,300 74,438 -------------- 107,875 -------------- Broker Services (3.09%) Legg Mason, Inc. 3,388 151,477 Lehman Brothers Holdings, Inc. 510 33,481 -------------- 184,958 -------------- Business Services - Misc. (2.14%) Corporate Executive Board Co. (The)* 1,200 41,700 Robert Half International, Inc. 3,486 86,767 -------------- 128,467 -------------- Computers (5.97%) Brocade Communications Systems, Inc.* 2,485 59,764 Citrix Systems, Inc.* 2,400 79,080 DST Systems, Inc.* 1,722 82,398 EarthLink, Inc.* 650 8,782 Peregrine Systems, Inc. * 2,850 74,613 SunGard Data Systems, Inc.* 2,259 53,425 -------------- 358,062 -------------- Electronics (16.03%) Cree, Inc.* 3,450 72,346 Garmin Ltd.* 4,000 79,400 International Rectifier Corp.* 2,037 75,328 KLA-Tencor Corp.* 2,100 103,194 Lam Research Corp.* 3,300 93,423 Micrel, Inc.* 3,250 100,295 National Semiconductor Corp.* 4,587 151,600 Novellus Systems, Inc.* 2,500 110,775 Semtech Corp.* 2,550 95,192 TriQuint Semiconductor, Inc.* 3,750 79,500 -------------- 961,053 -------------- Energy (1.38%) Calpine Corp.* 2,500 82,550 -------------- Finance (7.61%) Affiliated Managers Group, Inc.* 1,443 102,309 Concord EFS, Inc.* 2,672 140,200 SEI Investments Co. 1,500 61,560 USA Education, Inc. 1,920 152,083 -------------- 456,152 -------------- Household (0.70%) Mohawk Industries, Inc.* 939 41,879 -------------- Instruments - Scientific (2.54%) Waters Corp.* 4,603 152,497 -------------- Insurance (6.66%) ACE, Ltd. (Bermuda) 3,225 106,973 Ambac Financial Group, Inc. 1,658 98,154 Everest Re Group, Ltd. (Bermuda) 1,505 97,675 MGIC Investment Corp. 1,383 96,672 -------------- 399,474 -------------- Manufacturing (2.83%) Danaher Corp. 3,052 169,600 -------------- Media (8.17%) Emmis Communications Corp. (Class A)* 3,250 77,935 McGraw-Hill Cos., Inc. (The) 1,860 110,205 Univision Communications, Inc. (Class A)* 2,190 65,328 USA Networks, Inc.* 5,000 115,800 Westwood One, Inc. 4,225 120,413 -------------- 489,681 -------------- Medical (23.98%) Allergan, Inc. 1,257 90,818 AmerisourceBergen Corp.* 1,915 123,403 Express Scripts, Inc.* 2,550 136,476 Genzyme Corp.* 1,600 90,624 ICOS Corp.* 1,200 69,960 IDEC Pharmaceuticals Corp.* 2,430 144,026 Laboratory Corp. of America Holdings* 1,157 90,130 MedImmune, Inc.* 2,650 106,398 Smith & Nephew Plc, (United Kingdom) 150 783 Tenet Healthcare Corp.* 1,283 71,104 Trigon Healthcare, Inc.* 871 56,397 Universal Health Services, Inc. (Class B) 2,815 133,150 Varian Medical Systems, Inc. 1,400 92,400 Wellpoint Health Networks, Inc.* 1,438 153,118 Zimmer Holdings, Inc.* 2,900 78,880 -------------- 1,437,667 -------------- Medical - Drugs (4.25%) Forest Laboratories, Inc.* 491 35,848 Shire Pharmaceuticals Group Plc,* American Depositry Receipt (ADR) (United Kingdom) 1,961 85,147 Teva Pharmaceutical Industries, Ltd., (ADR) (Israel) 1,879 133,597 -------------- 254,592 -------------- Oil & Gas (1.47%) Santa Fe International Corp. 1,878 47,513 Weatherford International, Inc.* 1,217 40,490 -------------- 88,003 -------------- Real Estate Operations (1.52%) Lennar Corp. 2,051 91,372 -------------- Retail (8.31%) Abercrombie & Fitch Co. (Class A)* 1,984 60,195 Darden Restaurants, Inc. 2,912 83,341 Family Dollar Stores, Inc. 2,711 81,330 Intimate Brands, Inc. 4,532 62,360 Talbots, Inc. 2,442 90,647 TJX Cos., Inc. 3,423 120,147 -------------- 498,020 -------------- Telecommunications (2.57%) Dobson Communications Corp. (Class A)* 10,450 154,137 -------------- Waste Disposal Service & Equip (0.93%) Republic Services, Inc.* 2,800 55,580 -------------- TOTAL COMMON STOCKS (Cost $6,288,327) (104.17%) 6,245,007 -------------- -------------- TOTAL INVESTMENTS (104.17%) 6,245,007 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (4.17%) (249,921) -------------- -------------- TOTAL NET ASSETS (100.00%) $5,995,086 -------------- -------------- * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
Portfolio Concentration (Unaudited) - ------------------------------------------------------------------------ The Medium Capitalization Growth Fund invests primarily in common stocks of U.S. and foreign issuers. The performance of the Fund is closely tied to the economic and financial conditions within the countries in which it invests. The concentration of investments by industry category for individual securities held by the Fund is shown in the schedule of investments. In addition, concentration of investments can be aggregated by various countries. The table below shows the percentages of the Fund's investments at August 31, 2001, assigned to country categories. VALUE AS A PERCENTAGE OF COUNTRY DIVERSIFICATION FUND'S NET ASSETS - ----------------------- ----------------- Bermuda 3.41% Israel 2.23 United Kingdom 1.43 United States 97.10 ----------------- TOTAL INVESTMENTS 104.17% ================= See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Focused Small Cap Growth Fund Schedule of Investments August 31, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the Focused Small Cap Growth Fund on August 31, 2001. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF ISSUER, DESCRIPTION SHARES VALUE - ------------------- ---------- -------------- COMMON STOCKS Advertising (0.67%) Getty Images, Inc.* 2,020 $32,360 -------------- Business Services - Misc. (2.88%) Corporate Executive Board Co. (The)* 4,000 139,000 -------------- Computers (9.03%) Advent Software, Inc.* 1,690 89,756 Cerner Corp.* 1,900 92,131 eFUNDS Corp.* 550 9,504 Macromedia, Inc.* 4,000 55,720 Manugistics Group, Inc.* 2,000 23,420 Netegrity, Inc.* 3,950 69,915 Numerical Technologies, Inc.* 1,500 42,675 Stellant, Inc. * 2,400 52,320 -------------- 435,441 -------------- Electronics (17.93%) Alpha Industries, Inc.* 3,100 98,456 Brooks Automation, Inc.* 1,800 78,030 Cree, Inc.* 3,300 69,201 DDi Corp.* 3,300 46,233 DuPont Photomasks, Inc.* 1,050 36,750 LTX Corp.* 3,650 65,372 Micrel, Inc.* 2,490 76,841 Microsemi Corp.* 3,000 85,500 Nanometrics, Inc.* 2,150 60,759 Powerwave Technologies, Inc.* 3,900 56,940 Rudolph Technologies, Inc.* 3,300 118,800 Semtech Corp.* 1,930 72,047 -------------- 864,929 -------------- Finance (4.01%) Affiliated Managers Group, Inc.* 1,750 124,075 AmeriCredit Corp.* 1,500 69,240 -------------- 193,315 -------------- Insurance (1.43%) StanCorp Financial Group, Inc. 1,500 69,000 -------------- Leisure (0.93%) Expedia, Inc. (Class A)* 1,200 44,832 -------------- Machinery (2.39%) Hydril Co.* 3,550 69,331 SureBeam Corp. (Class A)* 4,400 45,848 -------------- 115,179 -------------- Media (3.76%) Entercom Communications Corp.* 2,200 92,026 Insight Communications Co., Inc.* 1,900 43,301 Radio One, Inc. (Class A)* 3,000 45,990 -------------- 181,317 -------------- Medical (23.40%) Accredo Health, Inc.* 3,500 128,975 Alkermes, Inc.* 2,900 74,240 AmeriSourceBergen Corp. 1,150 74,106 Charles River Laboratories International, Inc.* 1,600 57,120 CV Therapeutics, Inc.* 1,100 54,747 Cytyc Corp.* 4,500 109,035 DaVita, Inc.* 3,700 76,405 Gene Logic, Inc.* 500 8,725 Lincare Holdings, Inc.* 4,000 113,640 Regeneron Pharmaceuticals, Inc.* 1,500 45,180 Renal Care Group, Inc.* 3,050 99,918 Rightchoice Managed Care, Inc. * 2,700 124,713 Wilson Greatbatch Technologies, Inc.* 6,260 162,134 -------------- 1,128,938 -------------- Medical - Drugs (8.03%) CIMA Labs, Inc.* 800 42,824 Inhale Therapeutic Systems, Inc.* 5,200 75,556 Noven Pharmaceuticals, Inc.* 2,100 46,557 NPS Pharmaceuticals, Inc.* 3,400 114,308 Pharmaceutical Product Development, Inc.* 2,300 69,368 Salix Pharmaceuticals, Ltd.* 2,600 38,480 -------------- 387,093 -------------- Oil & Gas (2.37%) Evergreen Resources, Inc.* 1,600 60,560 Universal Compression Holdings, Inc.* 2,000 53,600 -------------- 114,160 -------------- Retail (12.61%) Buca, Inc.* 2,450 37,461 Columbia Sportswear Co.* 2,400 78,384 Duane Reade, Inc.* 1,500 53,100 GoTo.com, Inc.* 4,150 81,962 Hot Topic, Inc.* 1,500 49,875 Krispy Kreme Doughnuts, Inc.* 1,600 49,360 O'Reilly Automotive, Inc.* 2,150 67,080 P.F. Chang's China Bistro, Inc.* 1,450 64,525 Whole Foods Market, Inc.* 3,600 126,684 -------------- 608,431 -------------- Schools / Education (2.61%) Strayer Education, Inc. 2,600 126,100 -------------- Shoes & Related Apparel (1.21%) Skechers U.S.A., Inc. (Class A)* 2,800 58,660 -------------- Telecommunications (4.20%) AirGate PCS, Inc.* 2,450 144,403 Metro One Telecommunications, Inc.* 725 22,990 SBA Communications Corp.* 2,630 35,032 -------------- 202,425 -------------- Waste Disposal Service & Equipment (1.60%) Waste Connections, Inc.* 2,400 77,472 -------------- TOTAL COMMON STOCKS (Cost $4,704,687) (99.06%) 4,778,652 ------------ -------------- INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (1.53%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 08-31-01, due 09-04-01 (Secured by U.S. Treasury Bond, 8.75% due 05-15-20 and U.S. Treasury Note, 4.75% due 11-15-08) 3.64% $74 $74,000 -------------- TOTAL SHORT-TERM INVESTMENTS (Cost $74,000) (1.53%) 74,000 ------------ -------------- TOTAL INVESTMENTS (100.59%) 4,852,652 ------------ -------------- OTHER ASSETS AND LIABILITIES, NET (0.59%) (28,534) ------------ -------------- TOTAL NET ASSETS (100.00%) $4,824,118 ============ ============== * Non-income producing security. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Cap Equity Fund Schedule of Investments August 31, 2001 (Unaudited) - --------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the Small Cap Equity Fund on August 31, 2001. Common stocks are further broken down by industry group. NUMBER OF ISSUER, DESCRIPTION SHARES VALUE - ------------------- ---------- -------------- COMMON STOCKS Advertising (0.23%) Penton Media, Inc. 6,000 $75,600 -------------- Broker Services (1.22%) Jefferies Group, Inc. 12,100 402,930 -------------- Computers (11.89%) Aspen Technology, Inc.* 46,000 757,620 Electronics for Imaging, Inc.* 18,000 368,280 Hyperion Solutions Corp.* 23,250 361,538 Parametric Technology Corp.* 23,200 169,128 ProQuest Co.* 10,450 368,885 Student Advantage, Inc.* 54,950 106,054 UNOVA, Inc. * 141,250 889,875 Wind River Systems, Inc.* 60,000 912,000 -------------- 3,933,380 -------------- Electronics (13.34%) Alpha Industries, Inc.* 32,050 1,017,908 Axcelis Technologies, Inc.* 29,000 404,550 MKS Instruments, Inc.* 35,652 796,822 Three-Five Systems, Inc. * 53,730 1,020,870 Vicor Corp.* 57,650 1,173,754 -------------- 4,413,904 -------------- Finance (2.18%) Sovereign Bancorp., Inc. 65,000 720,200 -------------- Food (6.38%) Galaxy Nutritional Foods, Inc.* 75,000 506,250 Hain Celestial Group, Inc.* 71,500 1,605,890 -------------- 2,112,140 -------------- Insurance (0.63%) StanCorp Financial Group, Inc.* 4,500 207,000 -------------- Leisure (1.71%) Six Flags, Inc.* 34,100 567,083 -------------- Media (11.48%) Cumulus Media, Inc. (Class A)* 91,300 1,154,945 Pegasus Communications Corp.* 141,700 1,629,550 Radio One, Inc. (Class D)* 35,300 540,443 Regent Communications, Inc.* 60,500 474,925 -------------- 3,799,863 -------------- Medical (10.83%) Alpharma, Inc. (Class A) 47,500 1,491,500 Covance, Inc.* 55,000 1,057,100 Cyberonics, Inc.* 25,000 437,500 I-STAT Corp.* 85,300 597,100 -------------- 3,583,200 -------------- Oil & Gas (3.68%) Chesapeake Energy Corp.* 40,000 238,400 Marine Drilling Cos., Inc.* 22,500 290,250 Petroleum Geo-Services ASA, American Depositary Receipts. (ADR) (Norway)* 15,000 149,400 Precision Drilling Corp. (Canada)* 22,000 539,000 -------------- 1,217,050 -------------- Protection - Safety Equip & Svc. (2.56%) Pittston Brink's Group 38,400 847,104 -------------- Real Estate Investment Trust (0.23%) Pinnacle Holdings, Inc.* 114,000 75,240 -------------- Retail (6.58%) Pathmark Stores, Inc.* 53,000 1,285,250 Rite Aid Corp. * 45,000 357,300 Wild Oats Markets, Inc.* 60,000 535,200 -------------- 2,177,750 -------------- Telecommunications (18.17%) AirGate PCS, Inc.* 5,000 294,700 Alaska Communications Systems Holdings, Inc.* 41,700 353,616 Arris Group, Inc.* 60,750 439,830 Aware, Inc. 38,000 209,380 CT Communications, Inc. 17,000 296,820 CTC Communications Group, Inc.* 112,150 790,658 Lightbridge, Inc.* 47,000 549,900 LCC International, Inc. (Class A)* 40,000 206,400 Motient Corp. 95,000 32,281 NTELOS, Inc.* 61,000 1,013,820 SBA Communications Corp.* 27,400 364,966 XM Satellite Radio Holdings, Inc. (Class A)* 145,350 1,460,768 -------------- 6,013,139 -------------- Transportation (3.66%) RailAmerica, Inc.* 95,000 1,211,250 -------------- Waste Disposal Service & Equip (3.43%) Casella Waste Systems, Inc. (Class A)* 97,450 1,134,318 -------------- -------------- TOTAL COMMON STOCKS (Cost $35,596,383) (98.20%) 32,491,151 -------------- -------------- TOTAL INVESTMENTS (98.20%) 32,491,151 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (1.80%) 596,157 -------------- -------------- TOTAL NET ASSETS (100.00%) $33,087,308 ============== ============== * Non-income producing security. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- International Equity Fund Schedule of Investments August 31, 2001 (Unaudited) - --------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the International Equity Fund on August 31, 2001. It's divided into three main categories: common stocks, warrants and short-term investments. Common stocks and warrants are further broken down by country. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF ISSUER, DESCRIPTION SHARES VALUE - ------------------- ---------- -------------- COMMON STOCKS Australia (0.27%) Woolworths Ltd. (Retail) 2,100 $11,877 -------------- Belgium (0.29%) UCB SA (Medical) 300 12,736 -------------- Bermuda (1.13%) XL Capital Ltd. (Class A) (Insurance) 600 49,800 -------------- Canada (6.96%) Anderson Exploration Ltd.* (Oil & Gas) 2,500 42,638 Biovail Corp.* (Medical) 500 23,050 Loblaw Cos. Ltd. (Retail) 800 27,082 Magna International, Inc. (Class A) (Automobile/Trucks) 603 37,028 Manulife Financial Corp. (Insurance) 1,900 55,765 Precision Drilling Corp.* (Oil & Gas) 1,500 36,750 Suncor Energy, Inc. (Oil & Gas) 1,500 41,582 Talisman Energy, Inc. (Oil & Gas) 1,100 42,163 -------------- 306,058 -------------- Denmark (1.59%) Novo Nordisk AS (Medical) 1,100 45,928 Vestas Wind Systems AS (Utilities) 800 24,124 -------------- 70,052 -------------- Finland (0.61%) Stora Enso Oyj (Paper & Paper Products) 2,300 26,868 -------------- France (13.05%) Alstom SA (Machinery) 1,600 43,550 Assurances Generales de France SA (Insurance) 700 38,119 Aventis SA (Medical) 600 43,910 BNP Paribas SA (Banks - Foreign) 400 36,728 Castorama Dubois Investissement SA (Retail) 600 33,546 Lafarge SA (Building) 300 27,232 PSA Peugeot Citroen SA (Automobile/Trucks) 700 33,378 Sanofi-Synthelabo SA (Medical) 700 45,850 Schneider Electric SA (Machinery) 620 34,382 STMicroelectronics NV (Electronics) 500 15,227 Television Francaise 1 SA (Media) 1,600 46,531 TotalFinaElf SA (Oil & Gas) 489 72,328 Vivendi Environnement SA (Utilities) 1,400 59,526 Vivendi Universal SA (Diversified Operations) 800 43,782 -------------- 574,089 -------------- Germany (6.21%) BASF AG (Chemicals) 1,200 49,091 Bayerische Motoren Werke AG (Automobile/Trucks) 1,300 41,778 Deutsche Bank AG (Banks - Foreign) 400 27,600 E.On AG (Diversified Operations) 1,000 54,591 Fresenius Medical Care AG (Medical) 200 15,891 Infineon Technologies AG (Electronics) 500 11,700 Muenchener Rueckversicherungs- Gesellschaft AG (Insurance) 158 45,332 SAP AG (Computers) 200 27,106 -------------- 273,089 -------------- Hong Kong (0.92%) China Mobile Ltd.* (Telecommunications) 6,500 20,292 Johnson Electric Holdings Ltd. (Electronics) 17,000 20,270 -------------- 40,562 -------------- Ireland (3.41%) Allied Irish Banks Plc (Banks - Foreign) 3,300 37,200 Bank of Ireland (Banks - Foreign) 2,700 25,650 Bank of Ireland (Banks - Foreign) 1,800 17,166 CRH Plc (Building) 2,000 33,637 Elan Corp. Plc* American Depositary Receipts (ADR) (Medical) 700 36,365 -------------- 150,018 -------------- Israel (0.97%) Teva Pharmaceutical Industries Ltd. (ADR) (Medical) 600 42,660 -------------- Italy (3.81%) Autostrade SpA (Transport) 8,500 59,501 ENI SpA (Oil & Gas) 2,800 37,164 Riunione Adriatica di Sicurta SpA (Insurance) 3,816 51,690 Telecom Italia SpA (Telecommunications) 2,300 19,048 -------------- 167,403 -------------- Japan (14.76%) Ajinomoto Co., Inc. (Food) 3,000 32,493 All Nippon Airways Co., Ltd.* (Transport) 1,000 3,184 Daikin Industries, Ltd. (Building) 2,000 32,206 Eisai Co., Ltd. (Beverages) 1,000 24,719 Fast Retailing Co., Ltd. (Retail) 200 25,266 Fuji Photo Film Co., Ltd. (Leisure) 1,000 37,226 Fujisawa Pharmaceutical Co., Ltd. (Medical) 1,000 19,413 Furukawa Electric Co., Ltd. (Wire & Cable Products) 1,000 7,546 Honda Motor Co., Ltd. (Automobile/Trucks) 500 18,065 Marui Co., Ltd. (Retail) 2,000 25,098 Nintendo Co., Ltd. (Leisure) 100 15,960 Nippon Telegraph & Telephone Corp. (Telecommunications) 3 13,644 Nissan Motor Co., Ltd. (Automobile/Trucks) 11,000 64,294 Nomura Securities Co., Ltd. (Broker Services) 2,000 34,025 NTT DoCoMo, Inc. (Telecommunications) 1 12,296 Oriental Land Co., Ltd. (Leisure) 400 28,635 Orix Corp. (Leasing Companies) 200 19,927 Seven-Eleven Japan Co., Ltd. (Retail) 1,000 33,183 Shionogi & Co., Ltd. (Medical) 1,000 17,939 Sumitomo Mitsui Banking Corp. (Banks - Foreign) 8,000 65,356 Takeda Chemical Industries, Ltd. (Medical) 1,000 41,184 Tokyo Electric Power Co., Inc. (Utilities) 900 23,270 Tokyo Electron Ltd. (Electronics) 500 27,456 Toray Industries, Inc. (Textile) 8,000 26,479 -------------- 648,864 -------------- Mexico (0.61%) America Movil SA de CV (ADR) (Telecommunications) 1,600 26,944 -------------- Netherlands (6.07%) Aegon NV (Insurance) 1,100 33,190 Akzo Nobel NV (Chemicals) 880 38,960 Fortis (NL) NV (Insurance) 1,300 36,578 Heineken NV (Beverages) 1,075 45,102 ING Groep NV (Insurance) 1,354 42,787 Koninklijke Ahold NV (Retail) 731 21,837 Unilever Plc (Food) 5,700 48,662 -------------- 267,116 -------------- Portugal (0.36%) Portugal Telecom SGPS SA* (Telecommunications) 2,500 15,955 -------------- Singapore (1.21%) Singapore Telecommunications Ltd. (Telecommunications) 46,000 53,372 -------------- South Africa (0.34%) South African Breweries Ltd. (Beverages) 2,000 14,801 -------------- South Korea (0.66%) Korea Telecom Corp. (ADR) (Telecommunications) 1,400 29,106 -------------- Spain (2.11%) Banco Popular Espanol SA (Banks - Foreign) 900 33,022 Sogecable SA* (Media) 2,000 44,110 Telefonica SA* (Telecommunications) 1,342 15,592 -------------- 92,724 -------------- Sweden (1.59%) Securitas AB (Protection - Safety Equip & Services) 1,600 25,243 Svenska Handelsbanken AB (Banks - Foreign) 3,100 44,448 -------------- 69,691 -------------- Switzerland (3.31%) Nestle SA (Food) 300 63,287 Novartis AG (Medical) 1,359 49,560 Serona SA (ADR) (Medical) 1,400 32,480 -------------- 145,327 -------------- United Kingdom (21.48%) Abbey National Plc (Banks - Foreign) 3,200 52,036 AstraZeneca Plc (Medical) 700 33,813 Barclays Plc (Banks - Foreign) 1,800 54,620 BG Group Plc (Oil & Gas) 8,200 34,050 BP Plc (Oil & Gas) 6,500 55,161 British Airways Plc (Transport) 5,200 23,103 British American Tobacco Plc (Tobacco) 5,700 48,745 British Sky Broadcasting Group Plc* (Media) 3,700 41,821 Centrica Plc (Utilities) 16,410 53,846 Compass Group Plc (Food) 5,300 40,399 Diageo Plc (Beverages) 5,900 59,535 Friends Provident Plc* (Insurance) 9,400 34,768 GlaxoSmithKline Plc (Medical) 2,000 53,081 Reckitt Benckiser Plc (Soap & Cleaning Preparations) 3,500 53,256 Royal Bank of Scotland Group Plc (Banks - Foreign) 2,300 57,437 Scottish Power Plc (Utilities) 6,300 44,820 Shire Pharmaceuticals Group Plc* (Medical) 2,600 37,787 South African Breweries Plc (Beverages) 2,700 20,032 Standard Chartered Plc (Banks - Foreign) 2,300 27,951 Tesco Plc (Retail) 11,600 43,873 Vodafone Group Plc (Telecommunications) 37,440 74,744 -------------- 944,878 -------------- United States (2.59%) Santa Fe International Corp. (Oil & Gas) 1,700 43,010 Schlumberger Ltd. (Oil & Gas) 800 39,200 Transocean Sedco Forex, Inc. (Oil & Gas) 1,100 31,790 -------------- 114,000 -------------- TOTAL COMMON STOCKS (Cost $4,360,979) (94.31%) 4,147,990 -------------- -------------- WARRANTS Germany (0.00%) Muenchener Rueckversicherungs- Gesellschaft AG* (Insurance) 2 140 -------------- TOTAL WARRANTS (Cost $90) (0.00%) 140 -------------- -------------- TOTAL COMMON STOCKS AND WARRANTS (Cost $4,361,069) (94.31%) 4,148,130 -------------- -------------- INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (3.85%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 08-31-01, due 09-04-01 (Secured by U.S. Treasury Bond, 5.25% due 11-15-28 and U.S. Treasury Note, 4.75% due 11-15-08) 3.64% $169 $169,000 NUMBER OF SHARES Cash Equivalents (13.32%) ---------------- Navigator Securities Lending Prime Portfolio** 585,960 585,960 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (17.17%) 754,960 -------------- -------------- TOTAL INVESTMENTS (111.48%) 4,903,090 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (11.48%) (504,801) -------------- -------------- TOTAL NET ASSETS (100.00%) $4,398,289 ============== ============== * Non-Income producing security. ** Represents investment of security lending collateral. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
Portfolio Concentration (Unaudited) - ---------------------------------------------------------------------- The Fund primarily invests in securities issued by companies of other countries. The performance of the Fund is closely tied to the economic conditions within the countries in which it invests. The concentration of investments by country for individual securities held by the Fund is shown in the schedule of investments. In addition, the concentration of investments can be aggregated by various industry groups. The table below shows the percentages of the Fund's investments at August 31, 2001, assigned to the various investment categories. MARKET VALUE OF SECURITIES INVESTMENT CATEGORIES AS A % OF NET ASSETS - --------------------- -------------------- Automobile/Trucks 4.42% Banks - Foreign 10.90 Beverages 3.73 Broker Services 0.77 Building 2.12 Chemicals 2.00 Computers 0.62 Diversified Operations 2.24 Electronics 1.70 Food 4.20 Insurance 8.83 Leasing Companies 0.45 Leisure 1.86 Machinery 1.77 Media 3.01 Medical 12.55 Oil & Gas 10.82 Paper & Paper Products 0.61 Protection - Safety Equipment & Services 0.57 Retail 5.04 Soap & Cleaning Preparations 1.21 Textile 0.60 Tobacco 1.11 Telecommunications 6.39 Transport 1.95 Utilities 4.67 Wire & Cable Products 0.17 Short-Term Investments 17.17 ------- TOTAL INVESTMENTS 111.48% ======= See notes to financial statements. NOTES TO FINANCIAL STATEMENTS John Hancock Funds - Institutional Series Trust (UNAUDITED) NOTE A -- ACCOUNTING POLICIES John Hancock Active Bond Fund ("Active Bond Fund"), John Hancock Dividend Performers Fund ("Dividend Performers Fund"), John Hancock Medium Capitalization Growth Fund ("Medium Capitalization Growth Fund"), John Hancock Focused Small Cap Growth Fund, (formerly John Hancock Small Capitalization Growth Fund) ("Focused Small Cap Growth Fund"), John Hancock Small Cap Equity Fund, (formerly John Hancock Small Capitalization Value Fund) ("Small Cap Equity Fund") and John Hancock International Equity Fund ("International Equity Fund") are separate portfolios of John Hancock Institutional Series Trust the ("Trust"), an open-end investment management company registered under the Investment Company Act of 1940, organized as a Massachusetts business trust in 1994. Each Fund's class of shares has equal rights as to voting, redemption, dividends and liquidation within their respective Fund. Effective November 15, 2000, the board of Trustees designated the existing shares of Focused Small Cap Growth Fund as Class I shares and authorized the issuance of Class A, Class B and Class C shares of the Fund, which will become available for sale to individuals at a later time. The Trustees may authorize the creation of additional portfolios from time to time to satisfy various investment objectives. The investment objective of the Active Bond Fund is a high rate of total return, consistent with prudent investment risk. The investment objective of the Dividend Performers Fund is long-term growth of capital, with income as a secondary objective. The investment objective of the Medium Capitalization Growth Fund is long-term capital appreciation. The investment objective of the Focused Small Cap Growth Fund is long-term growth of capital. The investment objective of the Small Cap Equity Fund is capital appreciation. The investment objective of the International Equity Fund is long-term growth of capital. Significant accounting policies of the Funds are as follows: VALUATION OF INVESTMENTS Securities in the Funds' portfolios are valued on the basis of market quotations, valuations provided by independent pricing services or, if quotations are not readily available or the value has been materially affected by events occurring after the closing of a foreign market, at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. All portfolio transactions initially expressed in terms of foreign currencies have been translated into U.S. dollars as described in "Foreign Currency Translation" below. JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Funds, along with other registered investment companies having a management contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, Inc., may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Funds' custodian bank receives delivery of the underlying securities for the joint account on the Funds' behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. FOREIGN CURRENCY TRANSLATION All assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars based on London currency exchange quotations as of 5:00 p.m., London time, on the date of any determination of the net asset value of the Funds. Transactions affecting statement of operations accounts and net realized gain (loss) on investments are translated at the rates prevailing at the dates of the transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Reported net realized foreign exchange gains or losses arise from sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Funds' books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, other than investments in securities, resulting from changes in the exchange rate. INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Capital gains realized on some foreign securities are subject to foreign taxes, which are accrued as applicable. Some securities may be purchased on a "when-issued" or "forward delivery" basis, which means that the securities will be delivered to the Funds at a future date, usually beyond customary settlement date. DISCOUNT AND PREMIUM ON SECURITIES The Funds accrete discount and amortize premium from par value on securities from either the date of issue or the date of purchase over the life of the security. EXPENSES The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. ORGANIZATION EXPENSES Expenses incurred in connection with the organization of the Funds have been capitalized and are being charged to the Funds' operations ratably over a five year period that began with the commencement of the investment operations of the Funds. BANK BORROWINGS The Funds are permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Funds have entered into a syndicated line of credit agreement with various banks. This agreement enables the Funds to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating funds. The Funds had no outstanding borrowings activity under the line of credit during the six months ended August 31, 2001. SECURITIES LENDING The Funds may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. These fees are included in interest income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Funds may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At August 31, 2001, Focused Small Cap Growth Fund loaned securities having a market value of $43,086 collateralized by securities in the amount of $46,374, Small Cap Equity Fund loaned securities having a market value of $4,218,150 collateralized by securities in the amount of $4,220,152 and International Equity Fund loaned securities having a market value of $555,000 collateralized by cash in the amount of $585,960. The cash collateral was invested in a short-term instrument. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Funds may enter into forward foreign currency exchange contracts as a hedge against the effect of fluctuations in currency exchange rates. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date at a set price. The aggregate principal amounts of the contracts are marked to market daily at the applicable foreign currency exchange rates. Any resulting unrealized gains and losses are included in the determination of the Funds' daily net assets. The Funds record realized gains and losses at the time the forward foreign currency exchange contract is closed out or offset by a matching contract. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of the contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. These contracts involve market or credit risk in excess of the unrealized gain or loss reflected in the Funds' Statement of Assets and Liabilities. The Funds may also purchase and sell forward contracts to facilitate the settlement of foreign currency denominated portfolio transactions, under which they intend to take delivery of the foreign currency. Such contracts normally involve no market risk if they are offset by the currency amount of the underlying transaction. The following Fund had open forward foreign currency exchange contracts at August 31, 2001: UNREALIZED PRINCIPAL AMOUNT EXPIRATION APPRECIATION CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION) - -------- ------------------- ---------- ------------ INTERNATIONAL EQUITY FUND Buys South African Rand 12,733 September '01 ($10) ============ Sells Euro 4,608 September '01 $41 Japanese Yen 38,189,551 September '01 (9,449) ------------ ($9,408) ============ FEDERAL INCOME TAXES Each Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the following Funds had capital loss carryforwards available to the extent provided by regulations to offset future net realized capital gains. To the extent such carryforwards are used by the Funds, no capital gain distributions will be made. CAPITAL LOSS CAPITAL LOSS CARRYFORWARD CARRYFORWARD EXPIRING EXPIRING FUND 2/29/08 2/28/09 - ---- ------- ------- Active Bond $49,819 $79,391 Focused Small Cap Growth -- 332,423 International Equity -- 636,448 Expired capital loss carryforwards are reclassified to capital paid-in, in the year of expiration. DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Funds identify the dividend. Interest income on investment securities is recorded on the accrual basis. Foreign income may be subject to foreign withholding taxes, which are accrued as applicable. The Funds record distributions to shareholders from net investment income and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. USE OF ESTIMATES The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. NOTE B -- MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS The Funds have an investment management contract with the Adviser. Under the investment management contract, the Funds pay a monthly management fee to the Adviser equivalent, on an annual basis, to the following:
FUND RATE - ---- ---- Active Bond 0.50% of average daily net assets up to $1.5 billion 0.45% of such assets in excess of $1.5 billion Dividend Performers 0.60% of average daily net assets up to $500 million 0.55% of such assets in excess of $500 million Medium Capitalization Growth 0.80% of average daily net assets up to $500 million 0.75% of such assets in excess of $500 million Focused Small Cap Growth 0.80% of average daily net assets Small Cap Equity 0.70% of average daily net assets up to $500 million 0.65% of such assets in excess of $500 million International Equity 0.90% of average daily net assets up to $500 million 0.65% of such assets in excess of $500 million
International Equity Fund and the Adviser have a subadvisory contract with Nicholas-Applegate Capital Management LP. The Fund is not responsible for payment of the subadvisory fees. The Adviser has agreed to limit each Fund's expenses to the following: 0.60% of Active Bond Fund's average daily net assets, 0.70% of Dividend Performers Fund's average daily net assets, 0.90% of Medium Capitalization Growth Fund's average daily net assets, 0.85% (excluding any 12b-1 and transfer agent fees) of Focused Small Cap Growth Fund's average daily net assets, 0.80% of Small Cap Equity Fund's average daily net assets and 1.00% of International Equity Fund's average daily net assets at least until June 30, 2002. Accordingly, for the period ended August 31, 2001, the reduction in the Funds' expenses amounted to as follows: $42,280 for the Active Bond Fund, $28,825 for the Dividend Performers Fund, $34,873 for the Medium Capitalization Growth Fund, $33,256 for the Focused Small Cap Growth Fund, $39,020 for the Small Cap Equity Fund and $84,411 for the International Equity Fund. The Adviser has the right to terminate this limitation in the future. The Funds have a distribution agreement with John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the Adviser. For the period ended August 31, 2001, all sales of shares of beneficial interest were sold at net asset value. JH Funds pays all expenses of printing prospectuses and other sales literature, all fees and expenses in connection with qualification as a dealer in various states, and all other expenses in connection with the sale and offering for sale of the shares of the Funds which have not been herein specifically allocated to the Trust. The Funds have a transfer agent agreement with John Hancock Signature Services, Inc., an indirect wholly owned subsidiary of John Hancock Life Insurance Company. Each Fund pays monthly transfer agent fees at an annual rate of 0.05% of its average daily net assets, plus certain out-of-pocket expenses. The Funds have an agreement with the Adviser to perform necessary tax, accounting and legal services for the Funds. The compensation for the period was at an annual rate of 0.02% of the average net assets of each Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Funds. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer, for tax purposes, their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Funds make investments into other John Hancock funds, as applicable, to cover their liability for the deferred compensation. Investments to cover the Funds' deferred compensation liability are recorded on the Funds' books as an other asset. The deferred compensation liability and the related other assets are always equal and are marked to market on a quarterly basis to reflect any income earned by the investments as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Funds. NOTE C -- INVESTMENT TRANSACTIONS Purchases and proceeds from sales of securities for the Funds, other than short-term securities and obligations of the U.S. government, during the six months ended August 31, 2001, were as follows: PURCHASES SALES ---------- ----------- Active Bond $9,955,086 $7,643,738 Dividend Performers 1,367,028 1,975,149 Medium Capitalization Growth 10,458,247 13,419,960 Focused Small Cap Growth 3,929,228 3,694,119 Small Cap Equity 13,540,663 12,310,143 International Equity 5,483,205 5,542,350 The cost of investments owned on August 31, 2001, (including short-term investments) and gross unrealized appreciation and depreciation in value of investments owned by the Funds, for federal income tax purposes, were as follows:
GROSS GROSS NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION COST APPRECIATION DEPRECIATION (DEPRECIATION) ---------- ------------ ------------ ------------ Active Bond $8,532,191 $204,603 ($24,095) $180,508 Dividend Performers 4,941,208 936,324 (477,849) 458,475 Medium Capitalization Growth 6,303,601 428,552 (487,146) (58,594) Focused Small Cap Growth 4,781,686 640,526 (569,560) 70,966 Small Cap Equity 35,596,383 4,898,886 (8,004,118) (3,105,232) International Equity 5,136,785 171,875 (405,570) (233,695)
NOTE D -- CHANGE IN ACCOUNTING PRINCIPLE Effective March 1, 2001, the Funds adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, and began amortizing premiums on debt securities. Prior to this date, the Funds did not amortize premiums on debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Funds, but for the Active Bond Fund resulted in a $16,519 reduction in the cost of the investments and a corresponding increase in unrealized appreciation on investments, based on securities held as of February 28, 2001. For the Active Bond Fund the effect of this change in the period ended August 31, 2001 was to decrease net investment income by $8,052, increase unrealized appreciation on investments by $2,776 and increase net realized gain on investments by $5,276. The effect of this change on the per share operating performance and the annualized ratio of net investment income to average net assets for the period ended August 31, 2001 was as follows: decrease in the net investment income by $0.01 per share, increase in net realized and unrealized gain on investments by $0.01 per share and decrease in the ratio of net investment income to average net assets by 0.20%. The Statements of Changes in Net Assets and the Financial Highlights for prior periods have not been restated to reflect this change in presentation. NOTE E -- SHAREHOLDER MEETING On April 25, 2001, shareholders of International Equity Fund approved a new subadvisory management contract among the International Equity Fund, the Adviser and Nicholas-Applegate Capital Management LP (487,052 FOR; 0 AGAINST; and 0 ABSTAINING). NOTES [This page intentionally left blank.] NOTES [This page intentionally left blank.] [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.] John Hancock Funds, Inc. MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 1-800-225-5291 1-800-554-6713 TDD 1-800-338-8080 EASI-Line www.jhfunds.com This report is for the information of shareholders of the John Hancock Institutional Series Trust. [A recycled logo in lower left hand corner with caption "Printed on Recycled Paper."] KB0SA 8/01 10/01 PART C OTHER INFORMATION ITEM 15. INDEMNIFICATION No change from the information set forth in Item 27 of the Registration Statement of John Hancock Sovereign Bond Fund (the "Registrant") on Form N-1A under the Securities Act of 1933 and the Investment company Act of 1940 (File Nos. 2-48925 and 811-2402), which information is incorporated herein by reference. ITEM 16. EXHIBITS: 1 Registrant's Amended and Restated Filed as Exhibit 99.a to Registrant's Declaration of Trust Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 47 (file nos. 811-2402 and 2-48925 on September 27, 1999, accession no. 0001010521-99-000377) ("PEA 47 ") 1.1 Amendment to Declaration of Trust Filed as Exhibit 99.a.1 to Registrant's Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 48 (file nos. 811-2402 and 2-48925 on July 25, 2000, accession no. 0001010521-00-000354) ("PEA 48") 1.2 Amendment to Declaration of Trust Filed as Exhibit 99.a.2 to Registrant's Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 51 (file nos. 811-2402 and 2-48925 on August 27, 2001, accession no. 0001010521-01-500145) ("PEA 51")
2 Amended and Restated By-Laws of Filed as Exhibit 99.b to Registrant's Registrant Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 42 (file nos. 811-2402 and 2-48925 on April 29, 1997, accession no. 0001010521-97-000276) ("PEA 42") 2.1 Amendment to Amended and Restated Filed herewith as Exhibit 2 By-Laws of Registrant 3 Not applicable 4 Form of Agreement and Plan of Filed herewith as Exhibit A to the Proxy reorganization Statement and Prospectus included as Part A of this Registration Statement. 5 Not applicable 6 Investment Management Contract Filed as Exhibit 99.d to Registrant's between John Hancock Bond Fund Registration Statement on Form N-1A and and John Hancock Advisers, LLC incorporated herein by reference to post-effective amendment no. 39 (file nos. 811-2402 and 2-48925 on April 26, 1995, accession no.0000950146-95-000178) ("PEA 39") 7 Distribution Agreement between the Filed as Exhibit 99.e to PEA 39 and Registrant and John Hancock Funds incorporated herein by reference. LLC. (formerly named John Hancock Broker Distribution Services, Inc 7.1 Amendment to Distribution Agreement Filed as Exhibit 99.e.1 to PEA 47 and between the Registrant and John incorporated herein by reference. Hancock Funds, LLC
7.2 Amendment to Distribution Agreement Filed as Exhibit 99.e.2 to PEA 39 and between the Registrant and John incorporated herein by reference. Hancock Funds, LLC 8 Not applicable 9 Master Custodian Agreement between Filed as Exhibit 99.g to Registrant's John Hancock Mutual Funds (including Registration Statement on Form N-1A and Registrant) and The Bank of New York incorporated herein by reference to post-effective amendment no. 52 (file nos. 811-2402 and 2-48925 on October 25, 2001, accession no. 0001010521-01-500237) ("PEA 52") 10 Amended & Restate Master Transfer Filed as Exhibit 99.h to Registrant's Agent Service Agreement between John Registration Statement on Form N-1A and Hancock Mutual Funds (including incorporated herein by reference to Registrant) and John Hancock Funds, post-effective amendment no. 45 (file LLC nos. 811-2402 and 2-48925 on July 16, 1998, accession no.0001010521-98-000293) ("PEA 45") 10.1 Accounting and Legal Services Filed as Exhibit 99. h.1 to Registrant's Agreement Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 40 (file nos. 811-2402 and 2-48925 on April 29, 1996, accession no. 0001010521-96-000046) ("PEA 40") 10.2 Service Agreement between Charles Filed as Exhibit 99.h.2 to Registrant's Schwab and John Hancock Bond Fund Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 49 (file nos. 811-2402 and 2-48925 on September 25, 2000, accession no. 0001010521-00-000426) ("PEA 49")
11 Class A and Class B Distribution Filed as Exhibit 99.m to PEA 45 and Plans between Registrant and John incorporated herein by reference. Hancock Funds, LLC 11.1 Class C Distribution Plans between Filed as Exhibit 99.m.1 to Registrant's Registrant and John Hancock Funds, LLC Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 46 (file nos. 811-2402 and 2-48925 on September 28, 1998, accession no. 0001010521-98-000334) ("PEA 46") 12 John Hancock Funds Class A, Class B, Filed herewith as Exhibit 12 Class C and Class I Amended and restated Multiple Class Plan pursuant to Rule 18f-3 13 Code of Ethics John Hancock Funds, LLC Filed as Exhibit 99.p to PEA 48 and incorporated herein by reference. 14 Opinion as to legality of shares and Filed herewith as Exhibit 14 consent. 15 Form of opinion as to tax matters and Filed herewith as Exhibit 15 consent. 16 Not applicable 17 Consents of Ernst & Young LLP Filed herewith as Exhibit 17 regarding the audited financial statements of John Hancock Bond Fund and Consents of Deloitte & Touche LLP regarding the audited financial statements of John Hancock Active Bond Fund. 18 Not applicable
19 Powers of Attorney Filed as addendum to signature pages and incorporated herein by reference. 20 Prospectus of John Hancock Bond Filed herewith as Exhibit B to Part B of Fund-Class I, dated March 1, 2002 this Registration Statement. 20.1 Prospectus of John Hancock Filed herewith as Exhibit B to Part B of Active Bond Fund, dated July this Registration Statement. 2, 2001 21 Statement of Additional Filed herewith as Exhibit A and B Information John Hancock to Part B of this Registration Active Bond Fund, dated Statement. July 1, 2001 21.1 Statement of Additional Filed herewith as Exhibit A and B information of John Hancock to Part B of this Registration Bond Fund dated January 1, 2002 Statement. ITEM 17. UNDERTAKINGS. (1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is part of this registration statement by any person or party which is deemed to be an underwriter within the meaning of Rule 145(c) under the Securities Act of 1933, the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them.
SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has caused this Registration Statement on Form N-14 to be signed on its behalf by the undersigned, duly authorized, in the City of Boston, and The Commonwealth of Massachusetts on the 8th day of March, 2002. JOHN HANCOCK SOVEREIGN BOND FUND By: * ------------------------------------- Maureen R. Ford Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- * - ----------------------- Trustee, Chairman, President and March 8, 2002 Maureen R. Ford Chief Executive Officer * - ----------------------- Senior Vice President and Richard A. Brown Chief Financial Officer /s/William H. King Vice President, Treasurer - ----------------------- (Chief Accounting Officer) William H. King * Trustee - ------------------------ Dennis S. Aronowitz * Trustee - ------------------------ Richard P. Chapman, Jr. * Trustee - ------------------------ William J. Cosgrove * Trustee - ------------------------ John M. DeCiccio Signature Title Date --------- ----- ---- * Trustee - ------------------------ Richard A. Farrell * Trustee - ------------------------ Gail D. Fosler * Trustee - ------------------------ William F. Glavin * Trustee - ------------------------ John A. Moore * Trustee - ------------------------ Patti McGill Peterson * Trustee - ------------------------ John W. Pratt *By: /s/Susan S. Newton ------------------ March 8, 2002 Susan S. Newton Attorney-in-Fact. Power of Attorney dated June 23, 2001 and September 12, 2001. Panel A - ------- John Hancock Capital Series John Hancock Strategic Series John Hancock Declaration Trust John Hancock Tax-Exempt Series Fund John Hancock Income Securities Trust John Hancock World Fund John Hancock Investors Trust John Hancock Investment Trust II John Hancock Equity Trust John Hancock Investment Trust III John Hancock Sovereign Bond Fund Panel B - ------- John Hancock Bank and Thrift Opportunity Fund John Hancock Patriot Global Dividend Fund John Hancock Bond Trust John Hancock Patriot Preferred Dividend Fund John Hancock California Tax-Free Income Fund John Hancock Patriot Premium Dividend Fund I John Hancock Current Interest John Hancock Patriot Premium Dividend Fund II John Hancock Institutional Series Trust John Hancock Patriot Select Dividend Trust John Hancock Investment Trust John Hancock Series Trust John Hancock Cash Reserve, Inc. John Hancock Tax-Free Bond Trust POWER OF ATTORNEY ----------------- The undersigned Officer of each of the above listed Trusts, each a Massachusetts business trust, or Maryland Corporation, does hereby severally constitute and appoint SUSAN S. NEWTON, WILLIAM H. KING, AND AVERY P. MAHER, and each acting singly, to be my true, sufficient and lawful attorneys, with full power to each of them, and each acting singly, to sign for me, in my name and in the capacity indicated below, any Registration Statement on Form N-1A and any Registration Statement on Form N-14 to be filed by the Trust under the Investment Company Act of 1940, as amended (the "1940 Act"), and under the Securities Act of 1933, as amended (the "1933 Act"), and any and all amendments to said Registration Statements, with respect to the offering of shares and any and all other documents and papers relating thereto, and generally to do all such things in my name and on my behalf in the capacity indicated to enable the Trust to comply with the 1940 Act and the 1933 Act, and all requirements of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by said attorneys or each of them to any such Registration Statements and any and all amendments thereto. IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as of the 23rd day of June, 2001. /s/Richard A. Brown ------------------- Richard A. Brown Chief Financial Officer Commonwealth of Massachusetts )ss - ---------------------------------------------------------- COUNTY OF Suffolk ) ------------------------------------------------ Then personally appeared the above-named Richard A. Brown, who acknowledged the foregoing instrument to be his free act and deed, before me, this 23rd day of June, 2001. /s/Erika L. Nager ----------------- Notary Public My Commission Expires: June 14, 2007 ------------- s:\general\prwattn\01June23.doc John Hancock Capital Series John Hancock Strategic Series John Hancock Declaration Trust John Hancock Tax-Exempt Series Fund John Hancock Income Securities Trust John Hancock World Fund John Hancock Investors Trust John Hancock Investment Trust II John Hancock Equity Trust John Hancock Investment Trust III John Hancock Sovereign Bond Fund POWER OF ATTORNEY The undersigned Trustee/Officer of each of the above listed Trusts, each a Massachusetts business trust or Maryland corporation, does hereby severally constitute and appoint Susan S. Newton, WILLIAM h. KING, and AVERY P. MAHER, and each acting singly, to be my true, sufficient and lawful attorneys, with full power to each of them, and each acting singly, to sign for me, in my name and in the capacity indicated below, any Registration Statement on Form N-1A and any Registration Statement on Form N-14 to be filed by the Trust under the Investment Company Act of 1940, as amended (the "1940 Act"), and under the Securities Act of 1933, as amended (the "1933 Act"), and any and all amendments to said Registration Statements, with respect to the offering of shares and any and all other documents and papers relating thereto, and generally to do all such things in my name and on my behalf in the capacity indicated to enable the Trust to comply with the 1940 Act and the 1933 Act, and all requirements of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by said attorneys or each of them to any such Registration Statements and any and all amendments thereto. IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as of the 12th day of September, 2001. /s/ Maureen R. Ford /s/Gail D. Fosler - ------------------- ----------------- Maureen R. Ford, as Chairman and Chief Gail D. Fosler Exective Officer /s/John M. DeCiccio /s/William F. Glavin - ------------------- -------------------- John M. DeCiccio, as Trustee William F. Glavin /s/Dennis S. Aronowitz /s/John A. Moore - ---------------------- ---------------- Dennis S. Aronowitz John A. Moore /s/Richard P. Champman, Jr. /s/Patti McGill Peterson - --------------------------- ------------------------ Richard P. Chapman, Jr. Patti McGill Peterson /s/William J. Cosgrove /s/John W. Pratt - ---------------------- ---------------- William J. Cosgrove John W. Pratt /s/Richard A. Farell - -------------------- Richard A. Farrell COMMONWEALTH OF MASSACHIUSETTS) - ------------------------------ )ss COUNTY OF SUFFOLK ) - ----------------- Then personally appeared the above-named Richard A. Brown, who acknowledged the foregoing instrument to be his free act and deed, before me, this 23rd day of June, 2001. /s/Erika Nager -------------- Notary Public My Commission Expires: June 14, 2007 ------------- s:\general\prwattn\01Sept12.doc
EXHIBIT INDEX The following exhibits are filed as part of this Registration Statement: Exhibit No. Description 2 Amendment to Amended and Restated By-Laws of Registrant 6 Agreement and Plan of Reorganization between the John Hancock Bond Fund (the "Acquiring Fund") and John Hancock Active Bond Fund (the "Acquired Fund") (filed as EXHIBIT A to Part A of this Registration Statement). 12 John Hancock Funds Class A, Class B, Class C and Class I Amended and restated Multiple Class Plan pursuant to Rule 18f-3. 14 Opinion as to legality of shares and consent. 15 Form of opinion as to tax matters and consent. 17 Consent of Ernst & Young LLP regarding the audited financial statements and highlights of the Registrant. Consent of Deloitte & Touche LLP regarding the audited financial statements and highlights of the John Hancock Active Bond Fund. EX-99 3 ex21.txt AMENDMENT Effective March 1, 2002 All Open End Funds AMENDMENT TO BY-LAWS -------------------- RESOLVED, that the By-Laws of the Trust be and hereby are amended to delete Article III, Sub-Section 3.5 of the By-Laws and replace it with the following: Section 3.5 Abstentions and Broker Non-Votes. Outstanding Shares represented in person or by proxy (including Shares which abstain or do not vote with respect to one or more of any proposals presented for Shareholder approval) will be counted for purposes of determining whether a quorum is present at a meeting. Abstentions will be treated as Shares that are present and entitled to vote for purposes of determining the number of Shares that are present and entitled to vote with respect to any particular proposal, but will not be counted as a vote in favor of such proposal. If a broker or nominee holding Shares in "street name" indicates on the proxy that it does not have discretionary authority to vote as to a particular proposal, those Shares will be treated as Shares that are present and entitled to vote for purposes of determining the number of Shares that are present and entitled to vote with respect to such proposal, but will not be counted as a vote in favor of such proposal. EX-99 4 ex12.txt MULTIPLE CLASS PLAN John Hancock Funds Class A, Class B, Class C and Class I Multiple Class Plan Pursuant to Rule 18f-3 Each class of shares of each of the John Hancock Funds listed in Appendix A attached hereto (each the "Fund") will have the same relative rights and privileges and be subject to the same sales charges, fees and expenses, except as set forth below. The Board of Trustees/Directors, as the case may be, may determine in the future that other allocations of expenses (whether ordinary or extraordinary) or other services to be provided to a class of shares are appropriate and amend this Plan accordingly without the approval of shareholders of any class. Except as set forth in the Fund's prospectus and statement of additional information ("prospectus"), shares may be exchanged only for shares of the same class of another fund in the John Hancock group of funds. Class A Shares Class A Shares are sold at net asset value and subject to the initial sales charge schedule or contingent deferred sales charge and the minimum purchase requirements set forth in the Fund's prospectus. Class A Shares are subject to fees under the Fund's Class A Rule 12b-1 Distribution Plan on the terms set forth in the Fund's prospectus. The Class A Shareholders have exclusive voting rights, if any, with respect to the Class A Distribution Plan. Class A Shares shall be entitled to the shareholder services set forth from time to time in the Fund's prospectus with respect to Class A Shares. Class A Shares will convert to Class I Shares at any time after the initial date that Class A Shares commenced operations upon shareholder request if the requesting shareholder meets the criteria for investment in Class I Shares as set forth in the Fund's Class I prospectus. The conversion of Class A Shares to Class I Shares may be suspended if it is determined that the conversion constitutes or is likely to constitute a taxable event under federal income tax law. Class B Shares Class B Shares are sold at net asset value per share without the imposition of an initial sales charge. However, Class B shares redeemed within a specified number of years of purchase will be subject to a contingent deferred sales charge as set forth in the Fund's prospectus. Class B Shares are sold subject to the minimum purchase requirements set forth in the Fund's prospectus. Class B Shares are subject to fees under the Class B Rule 12b-1 Distribution Plan on the terms set forth in the Fund's prospectus. The Class B Shareholders of the Fund have exclusive voting rights, if any, with respect to the Fund's Class B Distribution Plan. Class B Shares shall be entitled to the shareholder services set forth from time to time in the Fund's prospectus with respect to Class B Shares. Class B Shares will automatically convert to Class A Shares of the Fund at the end of a specified number of years after the initial purchase date of Class B shares, except as provided in the Fund's prospectus. The initial purchase date for Class B shares acquired through reinvestment of dividends on Class B Shares will be deemed to be the date on which the original Class B shares were purchased. Such conversion will occur at the relative net asset value per share of each class. Redemption requests placed by shareholders who own both Class A and Class B Shares of the Fund will be satisfied first by redeeming the shareholder's Class A Shares, unless the shareholder has made a specific election to redeem Class B Shares. The conversion of Class B Shares to Class A Shares may be suspended if it is determined that the conversion constitutes or is likely to constitute a taxable event under federal income tax law. Class C Shares Class C Shares are sold at net asset value and subject to the initial sales charge schedule set forth in the Fund's prospectus. In addition, Class C shares redeemed within one year of purchase will be subject to a contingent deferred sales charge as set forth in the Fund's prospectus. Class C Shares are sold subject to the minimum purchase requirements set forth in the Fund's prospectus. Class C Shares are subject to fees under the Class C Rule 12b-1 Distribution Plan on the terms set forth in the Fund's prospectus. The Class C Shareholders of the Fund have exclusive voting rights, if any, with respect to the Fund's Class C Distribution Plan. Class C Shares shall be entitled to the shareholder services set forth from time to time in the Fund's prospectus with respect to Class C Shares. Class I Shares Class I Shares are sold at net asset value and are not subject to an initial sales charge schedule or contingent deferred sales charge but are subject to the minimum purchase requirements set forth in the Fund's prospectus. Class I Shares are not subject to Rule 12b-1 distribution and/or service fees. Class I Shares shall be entitled to the shareholder services set forth from time to time in the Fund's prospectus with respect to Class I Shares. s:\agrcont\plans\multicla\4clsplan.doc EX-99 5 ex14.txt LEGAL OPINION March 8, 2002 John Hancock Sovereign Bond Fund on behalf of John Hancock Bond Fund 101 Huntington Avenue Boston, MA 02199 Ladies and Gentlemen: In connection with the filing of a registration statement under the Securities Act of 1933, as amended (the "Act"), on Form N-14, with respect to the shares of beneficial interest of John Hancock Bond Fund (the "Fund"), a series of John Hancock Sovereign Bond Fund, a Massachusetts business trust (the "Trust"), it is the opinion of the undersigned that these shares when issued, will be legally issued, fully paid and non-assessable. In connection with this opinion it should be noted that the Trust is an entity of the type generally known as a "Massachusetts business trust." Under Massachusetts law, shareholders of a Massachusetts business trust may be held personally liable for the obligations of the trust. However, the Trust's Declaration of Trust disclaims shareholder liability for obligations of the Trust and indemnifies any shareholder of the Fund, with this indemnification to be paid solely out of the assets of the Fund. Therefore, the shareholder's risk is limited to circumstances in which the assets of the Fund are insufficient to meet the obligations asserted against the Fund's assets. The undersigned hereby consents to the filing of a copy of this opinion as an exhibit to the Trust's registration statement on Form N-14 and with the Securities and Exchange Commission. Sincerely, /s/Brian E.Langenfeld - --------------------- Brian E.Langenfeld Attorney and Assistant Secretary John Hancock Advisers, LLC. EX-99 6 ex15.txt TAX OPINION HALE AND DORR LLP Counsellors At Law www.haledorr.com 60 STATE STREET o BOSTON, MA 02109 617-526-6000 o FAX 617-526-5000 _____________, 2002 John Hancock Sovereign Bond Fund, on behalf of John Hancock Bond Fund 101 Huntington Avenue Boston, MA 02199 John Hancock Institutional Series Trust, on behalf of John Hancock Active Bond Fund 101 Huntington Avenue Boston, MA 02199 Ladies and Gentlemen: This opinion is being delivered to you in connection with the Agreement and Plan of Reorganization (the "Agreement") made as of ___________, 2002 between John Hancock Sovereign Bond Fund on behalf of John Hancock Bond Fund ("Acquiring Fund"), and John Hancock Institutional Series Trust on behalf of John Hancock Active Bond Fund ("Acquired Fund"). Pursuant to the Agreement, Acquiring Fund will acquire all of the assets of Acquired Fund in exchange solely for (i) the assumption by Acquiring Fund of all of the liabilities of Acquired Fund (the "Acquired Fund Liabilities") and (ii) the issuance of shares of beneficial interest of Acquiring Fund (the "Acquiring Fund Shares") to Acquired Fund, followed by the distribution by Acquired Fund, in liquidation of Acquired Fund, of the Acquiring Fund Shares to the shareholders of Acquired Fund and the termination of Acquired Fund (the foregoing together constituting the "Transaction"). All section references, unless otherwise indicated, are to the United States Internal Revenue Code of 1986, as amended (the "Code"). In rendering this opinion, we have examined and relied upon (i) the prospectus for Acquiring Fund, dated___________; (ii) the statement of additional information for Acquiring Fund, dated________; (iii) the prospectus for Acquired Fund, dated__________; (iv) the statement of additional information for Acquired Fund, dated__________; (v) the Notice of Meeting of Shareholders Scheduled for ___________and the accompanying proxy statement and prospectus on Form N-14 (the "Proxy Statement"); (vi) the Agreement; (vii) the tax representation certificates attached to the Agreement and relevant to this opinion (the "Representation Certificates"); and (viii) such other documents as we deemed necessary or relevant to our analysis. In our examination of documents, we have assumed the authenticity of original documents, the accuracy of copies, the genuineness of signatures, and the legal capacity of signatories. We have assumed that all parties to the Agreement and to any other documents examined by us have acted, and will act, in accordance with the terms of such Agreement and documents and that the Transaction will be consummated pursuant to the terms and conditions set forth in the Agreement without the waiver or modification of any such terms and conditions. Furthermore, we have assumed that all representations contained in the Agreement, as well as those representations contained in the Representation - -------------------------------------------------------------------------------- BOSTON WASHINGTON, DC NEW YORK RESTON LONDON* - -------------------------------------------------------------------------------- Hale and Dorr LLP Includes Professional Corporations *an independent joint venture law firm John Hancock Sovereign Bond Fund, et al. ______________, 2002 Page 2 Certificates are, on the date hereof, and will be, at the consummation of the Transaction, true and complete in all material respects, and that any representation made in any of the documents referred to herein "to the knowledge and belief" (or similar qualification) of any person or party is, and at the consummation of the Transaction will be, correct without such qualification. We have also assumed that as to all matters for which a person or entity has represented that such person is not a party to, does not have, or is not aware of any plan, intention, understanding or agreement, there is no such plan, intention, understanding or agreement. We have not attempted to verify independently such representations. The conclusions expressed herein represent our judgment regarding the proper treatment of the Transaction under the income tax laws of the United States based upon the Code, case law, Treasury Regulations, and the rulings and other pronouncements of the Internal Revenue Service (the "Service") in effect on the date of this opinion. No assurances can be given that such laws will not be amended or otherwise changed after the consummation of the Transaction or that such changes will not affect the conclusions expressed herein. Nevertheless, we undertake no responsibility to advise you of any developments after the consummation of the Transaction in the application or interpretation of the income tax laws of the United States. Our opinion represents our best judgment regarding how a court would decide if presented with the issues addressed herein and is not binding upon the Service or any court. Moreover, our opinion does not provide any assurance that a position taken in reliance on such opinion will not be challenged by the Service and does not constitute any representation or warranty that such position, if so challenged, will not be rejected by a court. This opinion addresses only the specific United States federal income tax consequences of the Transaction set forth below, and does not address any other federal, state, local, or foreign income, estate, gift, transfer, sales, or other tax consequences that may result from the Transaction or any other action (including any action taken in connection with the Transaction). On the basis of and subject to the foregoing and in reliance upon the representations, facts and assumptions described above, we are of the opinion that the acquisition by Acquiring Fund of all of the assets of Acquired Fund solely in exchange for the issuance of Acquiring Fund Shares to Acquired Fund and the assumption of the Acquired Fund Liabilities by Acquiring Fund, followed by the distribution by Acquired Fund, in liquidation of Acquired Fund, of Acquiring Fund Shares to Acquired Fund shareholders in exchange for their Acquired Fund Shares and the termination of Acquired Fund, will constitute a "reorganization" within the meaning of Section 368(a) of the Code. No opinion is expressed or implied regarding the tax consequences of any other aspects of the Transaction, including but not limited to its effect, if any, on the availability of, or limitations on, any capital loss carryforwards of Acquired Fund, and the payment of any Acquired Fund or Acquiring Fund expenses by John Hancock Advisers, LLC, except as expressly set forth above. John Hancock Sovereign Bond Fund, et al. ______________, 2002 Page 3 This opinion is being delivered to you solely in connection with the closing condition set forth in Section 8.6 of the Agreement. It may not be relied upon for any other purpose or by any other person or entity, and may not be made available to any other person or entity without our prior written consent. Very truly yours, /s/HALE AND DORR LLP -------------------- EX-99 7 ex17.txt AUDITOR'S CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement of John Hancock Institutional Series Trust on Form N-14 of our report dated March 30, 2001 appearing in the Annual Reports of John Hancock Active Bond Fund, John Hancock Independence Balanced Fund, John Hancock International Equity Fund, John Hancock Medium Capitalization Growth Fund and John Hancock Small Cap Equity Fund Y (formerly John Hancock Small Capitalization Value Fund) of John Hancock Institutional Series Trust for the year ended February 28, 2001 and to the reference to us under the heading "Experts" in the Prospectus/Proxy Statement, which is a part of this Registration Statement. /s/ Deloitte & Touche LLP - ------------------------- March 7, 2002 Boston, Massachusetts CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Financial Highlights" in the Prospectus dated March 1, 2002 of the John Hancock Bond Fund, the John Hancock Balanced Fund, and the John Hancock Small Cap Equity Fund (formerly, Small Cap Value Fund) and "Independent Auditors" and "Financial Statements" in the Statements of Additional Information dated January 1, 2002 of the John Hancock Bond fund; March 1, 2002 of the John Hancock Small Cap Equity Fund and John Hancock Balanced Fund; and to the incorporation by reference of our reports dated July 9, 2001 for the John Hancock Bond Fund, December 10, 2001 for the John Hancock Small Cap Equity Fund, and February 8, 2002 for the John Hancock Balanced Fund with respect to the financial statements and financial highlights in the annual reports dated May 31, 2001 for the John Hancock Bond Fund; October 31, 2001 for the Small Cap Equity Fund; and December 31, 2001 for the Balanced Fund, which Prospectuses and Statements of Additional Information are incorporated by reference in to the Combined Prospectus/Proxy Statement included in this Registration Statement on Form N-14 of John Hancock Funds. We further consent to the reference to our firm under the caption "Experts" for the John Hancock Balanced Fund, the John Hancock Bond Fund, and the John Hancock Small Cap Equity Fund in the Combined Prospectus/Proxy Statement in the Registration Statement on Form N-14 of John Hancock Funds. /s/ERNST & YOUNG LLP -------------------- Boston, Massachusetts March 7, 2002 -----END PRIVACY-ENHANCED MESSAGE-----