-----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, V89xnpZDnrvmnXOd1d27l0Lz1u4sFi2DucwpHOQ2PyYnDmzTqaAC6dihPNgJXh9j TrloY8szJ1n0rk3wEioVgQ== 0001005477-02-001157.txt : 20020415 0001005477-02-001157.hdr.sgml : 20020415 ACCESSION NUMBER: 0001005477-02-001157 CONFORMED SUBMISSION TYPE: N-14 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20020308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN CAPITAL SERIES CENTRAL INDEX KEY: 0000045291 IRS NUMBER: 042443211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-14 SEC ACT: 1933 Act SEC FILE NUMBER: 333-84032 FILM NUMBER: 02570924 BUSINESS ADDRESS: STREET 1: 101 HUNTINGTON AVE STREET 2: JOHN HANCOCK FUNDS CITY: BOSTON STATE: MA ZIP: 02199 BUSINESS PHONE: 6173751702 MAIL ADDRESS: STREET 1: JOHN HANCOCK FUNDS STREET 2: 101 HUNTINGTON AVENUE CITY: BOSTON STATE: MA ZIP: 02199 FORMER COMPANY: FORMER CONFORMED NAME: HANCOCK JOHN GROWTH FUND INC DATE OF NAME CHANGE: 19850423 FORMER COMPANY: FORMER CONFORMED NAME: HANCOCK JOHN GROWTH TRUST /MA/ DATE OF NAME CHANGE: 19910704 N-14 1 capsries.txt JOHN HANCOCK CAPITAL SERIES 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 CAPITAL SERIES - -------------------------------------------------------------------------------- (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 Capital Series. Approximate Date of Proposed Public Offering: As soon as practicable after the effectiveness of the registration statement. No filing fee is required because an indefinite number of shares has previously been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended. This Registration Statement relates to shares previously registered on Form N-1A (File Nos. 2-29502 and 811-1677). It is proposed that this filing will become effective on 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 John Hancock Core Growth Fund and/or John Hancock Core Value Fund. You may be aware that in addition to Core Growth Fund and Core Value Fund, John Hancock offers the John Hancock Core Equity Fund, which has a similar investment process but invests across both growth and value style equities. The trustees of your fund(s) are proposing the merger of Core Growth Fund and Core Value Fund into Core Equity Fund. As a result of the merger of your fund(s), you will receive shares of Core Equity Fund. The fund merger proposals have been unanimously approved by each fund's board of trustees, who believe the mergers will benefit you by increased diversification and economies of scale and the potential for lower fund operating expenses. The proposed changes will also allow your investments(s) to be part of a larger investment pool. 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 - 1-800-225-5291 |_| 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 1-800-225-5291, 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, /s/Maureen R. Ford ------------------ Maureen R. Ford Chairman and Chief Executive Officer Q: What are the changes being proposed? A: Core Equity Fund has a larger asset base than Core Growth Fund and Core Value Fund. In addition, Core Growth Fund and Core Value Fund's operating expenses are both currently higher than Core Equity Fund's operating expenses. This expense differential exists although the Adviser is currently subsidizing both Core Growth Fund's and Core Value Fund's expenses. As a result of a merger with Core Equity Fund, shareholders of Core Growth Fund and Core Value Fund should experience lower overall expenses. Core Equity's larger asset level and broader investment objective will also allow Core Growth Fund and Core Value Fund a larger universe of investment opportunities from which to choose and may offer greater opportunity for future growth. Q: What are the benefits of merging Core Growth Fund and Core Value Fund into Core Equity Fund ? 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 and may result in lower expenses. 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 Core Equity Fund will differ from those currently held in your Fund(s). 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 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 - 1-800-225-5291 |_| By email - www. |_| By Internet: www.jhfunds.com --------------- 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. JOHN HANCOCK CORE GROWTH FUND JOHN HANCOCK CORE VALUE FUND (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 Core Growth Fund ("Core Growth Fund") and John Hancock Core Equity Fund ("Core Equity Fund"). Under this Agreement, your fund would transfer all of its assets to Core Equity Fund in exchange for shares of Core Equity Fund. These shares would be distributed proportionately to you and the other shareholders of Core Growth Fund. Core Equity Fund would also assume Core Growth Fund's liabilities. Core Growth 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 Core Value Fund ("Core Value Fund") and John Hancock Core Equity Fund ("Core Equity Fund"). Under this Agreement, your fund would transfer all of its assets to Core Equity Fund in exchange for shares of Core Equity Fund. These shares would be distributed proportionately to you and the other shareholders of Core Value Fund. Core Equity Fund would also assume Core Value Fund's liabilities. Core Value Fund's board of trustees recommends that you vote FOR this proposal. 3. 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 PROXY STATEMENT OF JOHN HANCOCK CORE GROWTH FUND JOHN HANCOCK CORE VALUE FUND (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 CORE EQUITY FUND (the "Acquiring Fund" and a series of John Hancock Capital Series) 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 Core Growth Fund Core Equity Fund Core Growth Fund shareholders - --------------------------------------------------------------------------------------------- Proposal 2 Core Value Fund Core Equity Fund Core Value Fund shareholders - ---------------------------------------------------------------------------------------------
o Each Acquired Fund will transfer all of its assets to the Acquiring Fund. The Acquiring Fund will assume the Acquired Fund's liabilities. o The Acquiring Fund will issue Class A shares to each Acquired Fund in an amount equal to the value of each Acquired Fund's net assets attributable to its Class A shares. These shares will be distributed to each Acquired Fund's Class A shareholders in proportion to their holdings on the reorganization date. o The Acquiring Fund will issue Class B shares to each Acquired Fund in an amount equal to the value of each Acquired Fund's net assets attributable to its Class B shares. These shares will be distributed to each Acquired Fund's Class B shareholders in proportion to their holdings on the reorganization date. o The Acquiring Fund will issue Class C shares to each Acquired Fund in an amount equal to the value of each Acquired Fund's net assets attributable to its Class C shares. These shares will be distributed to each Acquired Fund's Class C shareholders in proportion to their holdings on the reorganization date. o The Acquiring Fund will issue Class I shares to each Acquired Fund in an amount equal to the value of each Acquired Fund's net assets attributable to its Class I shares. These shares will be distributed to each Acquired Fund's Class I shareholders in proportion to their holdings on the reorganization date. o Each Acquired Fund will be terminated and fund shareholders will become shareholders of the Acquiring Fund. o Each reorganization will be tax-free to shareholders. Shares of the Acquiring Fund 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 Fund have not been approved or disapproved by the Securities and Exchange Commission. The Securities and Exchange Commission has not passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. 2 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 - ----------------------------------------------------------------------------------------------------------------------------- Class A, B and C prospectus of Core Equity Fund (the In the same envelope as this proxy statement and prospectus. "Acquiring Fund") dated March 1, 2002. Class I Incorporated by reference into this proxy statement and prospectus of the Acquiring Fund dated March 1, 2002. prospectus. - ----------------------------------------------------------------------------------------------------------------------------- The Acquiring Fund's annual report to shareholders dated December 31, 2001. - ----------------------------------------------------------------------------------------------------------------------------- Class A, B and C prospectus for the Aquired Funds On file with the Securities and Exchange Commission ("SEC") and dated March 1, 2002. Class I prospectus for the available at no charge by calling 1-800-225-5291. Incorporated by Acquired Funds dated July 2, 2001. The Acquired Funds' reference into this proxy statement and prospectus. annual and semiannual reports to shareholders. - ----------------------------------------------------------------------------------------------------------------------------- A statement of additional information dated April 15, 2002. It contains additional information about the Acquired Funds and the Acquiring Fund. - ----------------------------------------------------------------------------------------------------------------------------- To ask questions about this proxy statement and Call our toll-free telephone number: 1-800-225-5291 prospectus. - -----------------------------------------------------------------------------------------------------------------------------
The date of this proxy statement and prospectus is April 15, 2002. TABLE OF CONTENTS - -------------------------------------------------------------------------------- Page - -------------------------------------------------------------------------------- INTRODUCTION............................................................... - -------------------------------------------------------------------------------- PROPOSAL 1 - CORE GROWTH FUND.............................................. - -------------------------------------------------------------------------------- Summary............................................................... - -------------------------------------------------------------------------------- Investment risks...................................................... - -------------------------------------------------------------------------------- Proposal To Approve The Agreement And Plan Of Reorganization.......... - -------------------------------------------------------------------------------- PROPOSAL 2 - CORE VALUE FUND............................................... - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 3 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 Fund. 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. In addition, 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 materials. 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. PROPOSAL 1 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN CORE GROWTH FUND AND CORE EQUITY FUND A proposal to approve an Agreement and Plan of Reorganization between Core Growth Fund and Core Equity Fund. Under this Agreement, Core Growth Fund would transfer all of its assets to Core Equity Fund in exchange for shares of Core Equity Fund. These shares would be distributed proportionately to the shareholders of Core Growth Fund. Core Equity Fund would also assume Core Growth Fund's liabilities. Core Growth Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of Core Growth Fund to Core Equity Fund
- ------------------------------------------------------------------------------------------------------------------------------- Core Growth Fund Core Equity Fund - ------------------------------------------------------------------------------------------------------------------------------- Business A diversified series of John Hancock A diversified series of John Hancock Capital Institutional Series Trust. The Trust is an Series, an open-end investment management open-end investment management company organized company organized as a Massachusetts Business as a Massachusetts Business Trust. Trust. - ------------------------------------------------------------------------------------------------------------------------------ Net assets as of $48.2 million $662.8 million December 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------ Investment adviser, Investment Adviser: Investment Adviser: subadviser and portfolio John Hancock Advisers, LLC John Hancock Advisers, LLC managers Subadviser: Subadviser: Independence Investment LLC Independence Investment LLC -A subsidiary of John Hancock Financial -A subsidiary of John Hancock Financial Services, Inc. Services, Inc. -Founded in 1982 -Founded in 1982 -Supervised by the adviser -Supervised by the adviser Portfolio Managers: Portfolio Managers: -Team responsible for day-to-day investment -Team responsible for day-to-day investment management management - ------------------------------------------------------------------------------------------------------------------------------
4 - ------------------------------------------------------------------------------------------------------------------------------ Investment objective The fund seeks capital appreciation. This The fund seeks above-average total return objective can be changed without shareholder (capital appreciation plus income). approval. - ------------------------------------------------------------------------------------------------------------------------------ Primary Investments The fund invests in a diversified portfolio of The fund normally invests at least 80% of its primarily large-capitalization stocks and assets in a diversified portfolio of equity emphasizes stocks of companies with relatively securities which are primarily large high potential long-term earnings growth. The capitalization stocks. Equity securities fund's risk profile is substantially similar to include common and preferred stocks and their that of the Russell 1000 Growth Index. In normal equivalents. The portfolio's risk profile is market conditions, the fund is almost entirely similar to that of the S&P 500 Index. Under invested in stocks. normal circumstances, the fund is almost entirely invested in stocks. - ------------------------------------------------------------------------------------------------------------------------------ Foreign Securities Each fund may invest in foreign securities that are U.S. dollar-denominated. - ------------------------------------------------------------------------------------------------------------------------------ Diversification The fund is diversified and, with respect to 75% The fund is diversified and cannot invest more of total assets, cannot invest more than 5% of than 5% of total assets in securities of a total assets in securities of a single issuer. single issuer. - ------------------------------------------------------------------------------------------------------------------------------ Derivatives Each fund may make limited use of certain derivatives (investments whose value is based on indexes or securities). - ------------------------------------------------------------------------------------------------------------------------------ Temporary defensive In abnormal market conditions, the fund may In abnormal circumstances, the fund may positions temporarily invest extensively in temporarily invest more than 20% of its assets investment-grade short-term securities. In these in investment-grade short-term securities. In and other cases, the fund might not achieve its these and other cases, the fund might not goal. achieve its goal. - ------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------- CLASSES OF SHARES - ---------------------------------------------------------------------------------------------------- Core Growth Fund Core Equity Fund - ---------------------------------------------------------------------------------------------------- Class A sales charges The Class A shares of both funds have the same characteristics and fee and 12b-1 fees: structure. o Class A shares are offered with front-end sales charges ranging from 2% to 5% of the fund's offering price, depending on the amount invested. o Class A shares are subject to a 12b-1 distribution fee equal to 0.30% annually of average net assets. o There is no front-end sales charge for investments of $1 million or more, but there is a contingent deferred sales charge ranging from 0.25% to 1.00% on shares sold within one year of purchase. o Investors can combine multiple purchases of Class A shares to take advantage of breakpoints in the sales charge schedule. o Sales charges are waived for the categories of investors listed in the funds' prospectuses. - ----------------------------------------------------------------------------------------------------
5 - ---------------------------------------------------------------------------------------------------- Class B sales charges The Class B shares of both funds have the same characteristics and fee and 12b-1 fees: structure. o Class B shares are offered without a front-end sales charge, but are subject to a contingent deferred sales charge (CDSC) if sold within six years after purchase. The CDSC ranges from 1.00% to 5.00% depending on how long the shares are held. No CDSC is imposed on shares held more than six years. o Class B shares are subject to 12b-1 distribution and service fees equal to 1.00% annually of average net assets. o CDSCs are waived for the categories of investors listed in the funds' prospectus. o Class B shares automatically convert to Class A shares after eight years. - ---------------------------------------------------------------------------------------------------- Class C sales charges The Class C shares of both funds have the same characteristics and fee and 12b-1 fees: structure. o Class C shares are offered with a front-end sales charge equal to 1.00% of the fund's offering price. o Class C shares are subject to a contingent deferred sales charge of 1.00% on shares sold within one year of purchase. o Class C shares are subject to 12b-1 distribution and service fees equal to 1.00% annually of average net assets. o No automatic conversion to Class A shares, so annual expenses continue at the Class C level throughout the life of the investment. - ---------------------------------------------------------------------------------------------------- Class I sales charges The Class I shares of both funds have the same characteristics and fee and 12b-1 fees structure. o Class I shares of both funds have no sales charge and no 12b-1 fee. o Class I shares are offered to certain types of investors, as listed in each fund's prospectus for Class I shares. - ---------------------------------------------------------------------------------------------------- 12b-1 fees: o These fees are paid out of a fund's assets on an on-going basis. Over time these fees will increase the cost of investments and may cost more than other types of sales charges. - ----------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------- BUYING, SELLING AND EXCHANGING SHARES - ---------------------------------------------------------------------------------------------------- Both Core Growth Fund and Core Equity Fund - ---------------------------------------------------------------------------------------------------- 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 Core Growth Fund but can add to existing accounts. - ---------------------------------------------------------------------------------------------------- Minimum initial Class A, Class B and Class C Shares: $1,000 for non-retirement accounts investment: and $250 for retirement accounts and group investments. Class I shares: $10,000. No minimum investment for retirement plans with at least 350 eligible employees. - ---------------------------------------------------------------------------------------------------- Exchanging shares: Shareholders may exchange their shares at net asset value with no sales charge for shares of the same class of any other John Hancock 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. Core Equity Fund's Class I shares have no operational history. As a result, Class I expenses were projected based on expenses incurred by other classes of the Fund. Future expenses for all classes 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 6 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 board of trustees of another John Hancock fund, John Hancock Core Value Fund, has recommended that Core Value Fund also reorganize into Core Equity Fund. The reorganization of Core Growth Fund with Core Equity Fund, however, does not depend upon whether the reorganization involving Core Value Fund occurs. Your trustees expect the total expenses paid by Core Equity Fund to increase slightly if both reorganizations do occur. The following expense table shows the hypothetical ("pro forma") expenses of Core Equity Fund assuming (1) that a reorganization with Core Growth Fund, but not John Hancock Core Value Fund, occurred on December 31, 2000 or (2) that a reorganization with both your fund and John Hancock Core Value Fund occurred on December 31, 2000. The expenses shown in both tables are based on fees and expenses incurred during the twelve months ended December 31, 2001. Core Equity Fund's Class I shares have no operational history. As a result, Class I expenses were projected based on expenses incurred by other classes of the Fund. Core Equity Fund's actual expenses after the reorganization may be greater or less than those shown. The pro forma examples contained in the expense table show what you would pay on a $10,000 investment if the reorganization had occurred on December 31, 2000. Each example assumes that you reinvested all dividends and that the average annual return was 5%. The pro forma examples are for comparison purposes only and are not a representation of Core Equity Fund's actual expenses or returns, either past or future.
Core Equity Fund (PRO FORMA Core Equity Fund for the year (PRO FORMA ended 12/31/01) for the year (Assuming ended 12/31/01) reorganization (Assuming with Core reorganization with Core Growth Fund Growth Core Equity Core Growth Fund and Core Value Fund Fund only) Fund) Shareholder transaction expenses Class A Class A Class A Class A - ----------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases 5.00% 5.00% 5.00% 5.00% (as a % of purchase price) Maximum sales charge imposed on reinvested none none none none dividends Maximum deferred sales charge (load) as a % of none none none none purchase or sale price, whichever is less(1) Redemption fee(2) none none none none Exchange fee none none none none Annual fund operating expenses (as a % of average net assets) Class A Class A Class A Class A - ----------------------------------------------------------------------------------------------------------------------------------- Management fee 0.80% 0.75% 0.75% 0.75% Distribution and service (12b-1) fee 0.30% 0.30% 0.30% 0.30% Other expenses 1.02% 0.42% 0.45% 0.45% Total fund operating expenses 2.12% 1.47% 1.50% 1.50% Expense reduction(3) 0.21% none none none Net fund operating expenses 1.91% 1.47% 1.50% 1.50%
7
Core Equity Fund Core Equity Fund (PRO FORMA (PRO FORMA for the year for the year ended 12/31/01) ended 12/31/01) (Assuming (Assuming reorganization reorganization with Core with Core Growth Fund Growth Core Equity Core Growth Fund and Core Value Fund Fund only) Fund) - ----------------------------------------------------------------------------------------------------------------------------------- Shareholder transaction expenses Class B Class B Class B Class B - ----------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases none none none none (as a % of purchase price) Maximum sales charge imposed on reinvested none none none none dividends Maximum deferred sales charge (load) as a % of 5.00% 5.00% 5.00% 5.00% purchase or sale price, whichever is less Redemption fee(2) none none none none Exchange fee none none none none - ----------------------------------------------------------------------------------------------------------------------------------- Annual fund operating expenses (as a % of average net assets) Class B Class B Class B Class B - ----------------------------------------------------------------------------------------------------------------------------------- Management fee 0.80% 0.75% 0.75% 0.75% Distribution and service (12b-1) fee 1.00% 1.00% 1.00% 1.00% Other expenses 1.02% 0.42% 0.45% 0.45% Total fund operating expenses 2.82% 2.17% 2.20% 2.20% Expense reduction(3) 0.21% none none none Net fund operating expenses 2.61% 2.17% 2.20% 2.20% Shareholder transaction expenses Class C Class C Class C Class C - ----------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases 1.00% 1.00% 1.00% 1.00% (as a % of purchase price) Maximum sales charge imposed on reinvested none none none none dividends Maximum deferred sales charge (load) as a % of 1.00% 1.00% 1.00% 1.00% purchase or sale price, whichever is less Redemption fee(2) none none none none Exchange fee none none none none Annual fund operating expenses (as a % of average net assets) Class C Class C Class C Class C - ----------------------------------------------------------------------------------------------------------------------------------- Management fee 0.80% 0.75% 0.75% 0.75% Distribution and service (12b-1) fee 1.00% 1.00% 1.00% 1.00% Other expenses 1.02% 0.42% 0.45% 0.45% Total fund operating expenses 2.82% 2.17% 2.20% 2.20% Expense reduction(3) 0.21% none none none Net fund operating expenses 2.61% 2.17% 2.20% 2.20%
8
Core Equity Fund Core Equity Fund (PRO FORMA (PRO FORMA for the year for the year ended 12/31/01) ended 12/31/01) (Assuming (Assuming reorganization reorganization with Core with Core Growth Fund Growth Core Equity Core Growth Fund and Core Value Fund Fund only) Fund) - ----------------------------------------------------------------------------------------------------------------------------------- Shareholder transaction expenses Class I Class I Class I Class I - ----------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases none none none none (as a % of purchase price) Maximum sales charge imposed on reinvested none none none none dividends Maximum deferred sales charge (load) as a % of none none none none purchase or sale price, whichever is less Redemption fee none none none none Exchange fee none none none none Annual fund operating expenses (as a % of average net assets) Class I Class I Class I Class I - ----------------------------------------------------------------------------------------------------------------------------------- Management fee 0.80% 0.75% 0.75% 0.75% Distribution and service (12b-1) fee none none none none Other expenses 0.36% 0.11% 0.12% 0.12% Total fund operating expenses 1.16% 0.86% 0.87% 0.87% Expense reduction(3) 0.21% none none none Net fund operating expenses 0.95% 0.86% 0.87% 0.87%
(1) Except for investments of $1 million or more. (2 Does not include wire redemption fee (currently $4.00). (3) The Adviser has agreed to limit Core Growth Fund's operating expenses, excluding 12b-1 and transfer agent fees, to 0.90% of the Fund's average daily net assets. EXAMPLES
Core Equity Fund Core Equity Fund (PRO FORMA) (PRO FORMA) (Assuming (Assuming Core reorganization with reorganization with Class A Core Growth Equity Core Growth Fund Core Growth Fund and Fund Fund only) Core Value Fund) - -------------------------------------------------------------------------------------------------------------- Year 1 $ 695 $ 642 $ 645 $ 645 Year 3 $1,122 $ 942 $ 950 $ 950 Year 5 $1,573 $1,263 $1,278 $1,278 Year 10 $2,822 $2,170 $2,201 $2,201
9
Core Equity Fund Core Equity Fund (PRO FORMA (PRO FORMA for the year for the year ended 12/31/01) ended 12/31/01) (Assuming (Assuming reorganization with Core Growth Core Equity reorganization with Core Growth Fund and Core Fund Fund Core Growth Fund only) Value Fund) Class B - assuming redemption at end of period - ------------------------------------------------------------------------------------------------------------------------------- Year 1 $ 775 $ 720 $ 723 $ 723 Year 3 $1,165 $ 979 $ 988 $ 988 Year 5 $1,680 $1,364 $1,380 $1,380 Year 10 $2,974 $2,326 $2,357 $2,357 Class B - assuming no redemption - ------------------------------------------------------------------------------------------------------------------------------- Year 1 $ 275 $ 220 $ 223 $ 223 Year 3 $ 865 $ 679 $ 688 $ 688 Year 5 $1,480 $1,164 $1,180 $1,180 Year 10 $2,974 $2,326 $2,357 $2,357 Class C - assuming redemption at end of period - ------------------------------------------------------------------------------------------------------------------------------- Year 1 $ 471 $ 417 $ 420 $ 420 Year 3 $ 956 $ 772 $ 781 $ 781 Year 5 $1,565 $1,253 $1,268 $1,268 Year 10 $3,209 $2,578 $2,609 $2,609 Class C - assuming no redemption - ------------------------------------------------------------------------------------------------------------------------------- Year 1 $ 372 $ 318 $ 321 $ 321 Year 3 $ 956 $ 772 $ 781 $ 781 Year 5 $1,565 $1,253 $1,268 $1,268 Year 10 $3,209 $2,578 $2,609 $2,609 Class I - ------------------------------------------------------------------------------------------------------------------------------- Year 1 $ 108 $ 88 $ 89 $ 89 Year 3 $ 359 $ 274 $ 278 $ 278 Year 5 $ 629 $ 477 $ 482 $ 482 Year 10 $1,400 $1,061 $1,073 $1,073
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. Core Growth Fund will transfer all of its assets to Core Equity Fund. Core Equity Fund will assume Core 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 Core Equity Fund will issue to Core Growth Fund Class A shares in an amount equal to the net assets attributable to Core Growth Fund's Class A shares. These shares will immediately be distributed to Core Growth Fund's Class A shareholders in proportion to their holdings on the reorganization date. As a result, Class A shareholders of Core Growth Fund will end up as Class A shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Growth Fund Class B shares in an amount equal to the net assets 10 attributable to Core Growth Fund's Class B shares. These shares will immediately be distributed to Core Growth Fund's Class B shareholders in proportion to their holdings on the reorganization date. As a result, Class B shareholders of Core Growth Fund will end up as Class B shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Growth Fund Class C shares in an amount equal to the net assets attributable to Core Growth Fund's Class C shares. These shares will immediately be distributed to Core Growth Fund's Class C shareholders in proportion to their holdings on the reorganization date. As a result, Class C shareholders of Core Growth Fund will end up as Class C shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Growth Fund Class I shares in an amount equal to the net assets attributable to Core Growth Fund's Class I shares. These shares will immediately be distributed to Core Growth Fund's Class I shareholders in proportion to their holdings on the reorganization date. As a result, Class I shareholders of Core Growth Fund will end up as Class I shareholders of Core Equity Fund. o After the shares are issued, Core 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. The following diagram shows how the reorganization would be carried out. - --------------------------- ---------------------------- Core Growth Fund Core Growth Fund Core Equity Fund transfers assets & assets and receives assets & assumes liabilities to Core Equity liabilities liabilities of Core Growth Fund Fund - --------------------------- ---------------------------- - ------------ ------------ ------------ ------------ Class A & B Class C & I Issues Class Issues Class shareholders shareholders C & I A & B Shares Shares - ------------ ------------ ------------ ------------ Core Growth Fund receives Core Equity Fund Class A, B, C & I shares and distributes them to Core Growth Fund's Class A, B, C & I 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 Core Growth Fund - --------------------------------------------------- First $500 Million 0.800% - --------------------------------------------------- Amount over $500 Million 0.750% - --------------------------------------------------- - --------------------------------------------------- Fund Asset Breakpoints Core Equity Fund - --------------------------------------------------- First $750 Million 0.750% - --------------------------------------------------- Amount over $750 Million 0.700% - --------------------------------------------------- Independence Investment, LLC ("Independence"), a wholly-owned subsidiary of John Hancock Financial Services, Inc., serves as subadviser to both the Acquired Fund and the Acquiring Fund. In this capacity, Independence has 11 primary responsibility for making investment decisions for each Fund's investment portfolio and placing orders with brokers and dealers to implement those decisions. Independence receives its compensation from the Adviser, and the Funds pay no subadvisory fees over and above the management fee they pay to the Adviser. Independence receives subadvisory fees from the Adviser at the same rate for the Acquired Fund and the Acquiring Fund: 55% of the advisory fee received by the Adviser. With respect to Core Growth Fund, Independence waived its subadvisory fee during the twelve month period ended December 31, 2001. Effective June 7, 2002, for Core Equity Fund, the subadvisory fee paid by the Adviser to Independence will be reduced to 51% of the advisory fee received by the Adviser. Core Equity Fund's management fee rate of 0.75% and its pro forma management fee rate of 0.75% are lower than Core Growth Fund's management fee rate of 0.80%. Core Equity Fund's other expenses of 0.42% and its pro forma other expenses of 0.45% are also substantially lower than Core Growth Fund's other expenses of 1.02%. Both funds have the same 12b-1 fees for Class A shares (0.30%) and Class B and Class C shares (1.00%). Core Equity Fund's current annual Class A expense ratio (equal to 1.47% of average net assets) and its pro forma Class A expense ratio (equal to 1.50% of average net assets) are substantially lower than Core Growth Fund's current Class A expense ratio (equal to 1.91% of average net assets). Core Equity Fund's current annual Class B and Class C expense ratio (equal to 2.17% of average net assets) and its pro forma Class B and Class C expense ratio (equal to 2.20% of average net assets) are also substantially lower than Core Growth Fund's current Class B and Class C expense ratio (equal to 2.61% of average net assets). Core Equity Fund's pro forma expense ratio for Class I of 0.87% is also lower than Core Growth Fund's current annual Class I expense ratio of 0.95%. Core Growth Fund's expense ratios referenced above are after the expense reduction and are substantially higher without the expense reduction, which may not 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.
- -------------------------------------------------------------------------------------------------------------------------------- Core Growth Fund Core 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 The large capitalization growth stocks in which The large capitalization stocks in which the category risk the fund primarily invests could fall out of fund primarily invests could fall out of favor favor with the market, causing the fund to with the market, causing the fund to underperform funds that focus on small or medium underperform funds that focus on small or capitalization stocks or on value stocks. medium capitalization stocks. - -------------------------------------------------------------------------------------------------------------------------------- Small and medium The fund's investments in small or medium capitalization companies may be capitalization subject to larger and more erratic price movements than investments in large company risk capitalization companies. - -------------------------------------------------------------------------------------------------------------------------------- Foreign securities Foreign investments involve additional risks, including potentially inadequate risk 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. - -------------------------------------------------------------------------------------------------------------------------------- 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. - --------------------------------------------------------------------------------------------------------------------------------
12 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. Core Growth Fund will transfer all of its assets to Core Equity Fund and Core Equity Fund will assume all of Core Growth Fund's liabilities. This will result in the addition of Core Growth Fund's assets to Core 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 Core Equity Fund will issue to Core Growth Fund Class A shares in an amount equal to the net assets attributable to Core Growth Fund's Class A shares. As part of the liquidation of Core Growth Fund, these shares will immediately be distributed to Class A shareholders of record of Core Growth Fund in proportion to their holdings on the reorganization date. As a result, Class A shareholders of Core Growth Fund will end up as Class A shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Growth Fund Class B shares in an amount equal to the net assets attributable to Core Growth Fund's Class B shares. As part of the liquidation of Core Growth Fund, these shares will immediately be distributed to Class B shareholders of record of Core Growth Fund in proportion to their holdings on the reorganization date. As a result, Class B shareholders of Core Growth Fund will end up as Class B shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Growth Fund Class C shares in an amount equal to the net assets attributable to Core Growth Fund's Class C shares. As part of the liquidation of Core Growth Fund, these shares will immediately be distributed to Class C shareholders of record of Core Growth Fund in proportion to their holdings on the reorganization date. As a result, Class C shareholders of Core Growth Fund will end up as Class C shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Growth Class I shares in an amount equal to the net assets attributable to Core Growth's Class I shares. These shares will immediately be distributed to Core Growth's Class I shareholders in proportion to their holdings on the reorganization date. As a result, Class I shareholders of Core Growth will end up as Class I shareholders of Core Equity Fund. o After the shares are issued, the existence of Core Growth Fund will be terminated. Reasons for the Proposed Reorganization The board of trustees of Core Growth Fund believes that the proposed reorganization will be advantageous to the shareholders of Core Growth Fund for several reasons. The board of trustees considered the following matters, among others, in approving the proposal. First, that shareholders may be better served by a fund offering greater diversification. Core Equity Fund has a larger asset size than your fund and invests in similar types of securities. Combining the funds' assets into a single investment portfolio will afford greater diversification. Second, Core Equity Fund's expenses are lower than Core Growth Fund's total expenses. As a result of the reorganization, shareholders of Core Growth Fund will experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay. Third, that Core Equity Fund's Class A, B and C shares have performed better than Core Growth Fund's Class A, B and C shares over the one year period and since the inception of Core Growth Fund's Class A, B and C shares on 13 July 1, 1999. (Core Equity Fund's Class I shares have no operational history.) While past performance cannot predict future result, the trustees believe that Core Equity Fund is better positioned than Core Growth Fund to continue to generate strong returns. Fourth, that a combined fund offers economies of scale that may lead to lower per share expenses. Both funds incur substantial 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 Core Equity Fund's expense ratio over time because of economies of scale if the funds are combined. The board of trustees of Core Equity Fund considered that the reorganization presents an excellent opportunity for Core Equity 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 Core 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 Core Growth Fund are lower than the rates paid by Core Equity Fund. Core Equity Fund's management fee rate of 0.75% and pro forma management fee rate of 0.75% are lower than Core Growth Fund's management fee rate of 0.80%. Core Equity Fund's other expenses of 0.42% and its pro forma other expenses of 0.45% are also substantially lower than Core Growth Fund's other expenses of 1.02%. Both funds have the same 12b-1 fees for Class A (0.30%) and Class B and Class C shares (1.00%). Core Equity Fund's current annual Class A expense ratio (1.47% of average net assets) and pro forma Class A expense ratio (1.50% of average net assets) are both substantially lower than Core Growth Fund's current Class A expense ratio (1.91% of average net assets). Core Equity Fund's current annual Class B and Class C expense ratio (2.17% of average net assets) and pro forma Class B and Class C expense ratio (2.20% of average net assets) are both also substantially lower than Core Growth Fund's current Class B and Class C expense ratio (2.61% of average net assets). Core Equity Fund's pro forma Class I expense ratio (0.87% of average net assets) is also lower than Core Growth Fund's current annual Class I expense ratio (0.95% of average net assets). Core Growth Fund's expense ratios referenced above are after the expense reduction and are substantially higher without the expense reduction, which may not be extended beyond June 30, 2002. Comparative Performance. The trustees also took into consideration the relative performance of your fund and Core Equity Fund. Unreimbursed Distribution and Shareholder Service Expenses The boards of trustees of Core Growth Fund and Core Equity Fund have determined that, if the reorganization occurs, unreimbursed distribution and shareholder service expenses incurred under Core Growth Fund's Rule 12b-1 Plans will be reimbursable expenses under Core Equity Fund's Rule 12b-1 Plans. However, the maximum amounts payable annually under Core Equity Fund's Rule 12b-1 Plans (0.30%, 1.00%, 1.00% and 0.00% of average daily net assets attributable to Class A shares, Class B shares, Class C shares and Class I shares, respectively) will not increase. The following table shows the actual and pro forma unreimbursed distribution and shareholder service expenses of shares of Core Growth Fund and Core Equity Fund. The table shows both the dollar amount of these expenses and the percentage of each class' average net assets that they represent. Class I shares of Core Growth Fund and Class I shares of Core Equity Fund are not included in the table because these classes do not have Rule 12b-1 Plans. 14 Rule 12b-1 Payments and Unreimbursed Expenses Aggregate Dollar Amount of 12b-1 Fees Unreimbursed Unreimbursed Name of Fund Paid (for year Rule 12b-1 Expenses as % ended Expenditures of Each Class's December 31, (as of December Average Net 2001) 31, 2001) Assets Core Growth $ 94,264(A) $2,126,015(A) 7.46%(A) $ 221,526(B) $ 830,075(B) 3.92%(B) $ 18,980(C) $ 46,950(C) 2.45%(C) Core Equity $ 905,642(A) $ 562,627(A) 0.19%(A) $4,253,417(B) $ 120,190(B) 0.03%(B) $ 304,622(C) $ 79,545(C) 0.26%(C) Pro Forma: Core Equity Assuming $ 999,906(A) $2,688,642(A) 0.82%(A) reorganization with $4,474,943(B) $ 950,265(B) 0.21%(B) Core Growth Fund only $ 323,602(C) $ 125,795(C) 0.39%(C) Assuming $1,035,205(A) $2,760,322(A) 0.81%(A) reorganization with $4,637,287(B) $1,001,678(B) 0.22%(B) Core Growth Fund and $ 348,753(C) $ 140,745(C) 0.40%(C) Core Value Fund If the reorganization had taken place on December 31, 2000, the pro forma combined unreimbursed expenses of Core Equity Fund's Class A, Class B and Class C shares would have been higher than if no reorganization had occurred. Nevertheless, Core Equity Fund's assumption of Core Growth Fund's unreimbursed Rule 12b-1 expenses will have no immediate effect upon the payments made under Core Equity Fund's Rule 12b-1 Plans. These payments will continue to be 0.30%, 100%, 1.00% and 0.00% of average daily net assets attributable to Class A, Class B, Class C and Class I shares, respectively. John Hancock Funds, Inc. may recover unreimbursed distribution and shareholder service expenses for Class B and Class C shares in future years. However, if Core Equity Fund's board terminates either class's Rule 12b-1 Plan, that class will not be obligated to reimburse these distribution and shareholder service expenses. Accordingly, until they are paid or accrued, unreimbursed distribution and shareholder service expenses do not and will not appear as an expense or liability in the financial statements of either fund. In addition, unreimbursed expenses are not reflected in a fund's net asset value or the formula for calculating Rule 12b-1 payments. The staff of the SEC has not approved or disapproved the treatment of the unreimbursed distribution and shareholder service expenses described in this proxy statement. 15 PROPOSAL 2 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN CORE VALUE FUND AND CORE EQUITY FUND A proposal to approve an Agreement and Plan of Reorganization between Core Value Fund and Core Equity Fund. Under this Agreement, Core Value Fund would transfer all of its assets to Core Equity Fund in exchange for shares of Core Equity Fund. These shares would be distributed proportionately to the shareholders of Core Value Fund. Core Equity Fund would also assume Core Value Fund's liabilities. Core Value Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of Core Value Fund to Core Equity Fund
- --------------------------------------------------------------------------------------------------------------------------------- Core Value Fund Core Equity Fund - --------------------------------------------------------------------------------------------------------------------------------- Business A diversified series of John Hancock A diversified series of John Hancock Capital Institutional Series Trust. The Trust is an Series, an open-end investment management open-end investment management company organized company organized as a Massachusetts Business as a Massachusetts Business Trust. Trust. - --------------------------------------------------------------------------------------------------------------------------------- Net assets as of $34.8 million $662.8 million December 31, 2001 - --------------------------------------------------------------------------------------------------------------------------------- Investment adviser, Investment Adviser: Investment Adviser: subadviser and portfolio John Hancock Advisers, LLC John Hancock Advisers, LLC managers Subadviser: Subadviser: Independence Investment LLC Independence Investment LLC -A subsidiary of John Hancock Financial -A subsidiary of John Hancock Financial Services, Inc. Services, Inc. -Founded in 1982 -Founded in 1982 -Supervised by the adviser -Supervised by the adviser Portfolio Managers: Portfolio Managers: -Team responsible for day-to-day investment -Team responsible for day-to-day investment management management - --------------------------------------------------------------------------------------------------------------------------------- Investment objective The fund seeks above-average total return (capital The fund seeks above-average total return appreciation plus income). This objective can be (capital appreciation plus income). changed without shareholder approval. - --------------------------------------------------------------------------------------------------------------------------------- Primary Investments The fund invests in a diversified portfolio of The fund normally invests at least 80% of its primarily large-capitalization stocks and assets in a diversified portfolio of equity emphasizes relatively undervalued stocks and high securities which are primarily large dividend yields. The fund's risk profile is capitalization stocks. Equity securities substantially similar to that of the Russell 1000 include common and preferred stocks and their Value Index. In normal market conditions, the equivalents. The portfolio's risk profile is fund is almost entirely invested in stocks. similar to that of the S&P 500 Index. Under normal circumstances, the fund is almost entirely invested in stocks. - --------------------------------------------------------------------------------------------------------------------------------- Foreign Securities Each fund may invest in foreign securities that are U.S. dollar-denominated. - --------------------------------------------------------------------------------------------------------------------------------- Diversification The fund is diversified and, with respect to 75% The fund is diversified and cannot invest more of total assets, cannot invest more than 5% of than 5% of total assets in securities of a total assets in securities of a single issuer. single issuer. - ---------------------------------------------------------------------------------------------------------------------------------
16 - --------------------------------------------------------------------------------------------------------------------------------- Derivatives Each fund may make limited use of certain derivatives (investments whose value is based on indexes or securities). - --------------------------------------------------------------------------------------------------------------------------------- Temporary defensive In abnormal market conditions, the fund may In abnormal circumstances, the fund may positions temporarily invest extensively in temporarily invest more than 20% of its assets investment-grade short-term securities. In these in investment-grade short-term securities. In and other cases, the fund might not achieve its these and other cases, the fund might not goal. achieve its goal. - ---------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- CLASSES OF SHARES - -------------------------------------------------------------------------------------------------------------------- Core Value Fund Core Equity Fund - -------------------------------------------------------------------------------------------------------------------- Class A sales charges The Class A shares of both funds have the same characteristics and fee structure. and 12b-1 fees: o Class A shares are offered with front-end sales charges ranging from 2% to 5% of the fund's offering price, depending on the amount invested. o Class A shares are subject to a 12b-1 distribution fee equal to 0.30% annually of average net assets. o There is no front-end sales charge for investments of $1 million or more, but there is a contingent deferred sales charge ranging from 0.25% to 1.00% on shares sold within one year of purchase. o Investors can combine multiple purchases of Class A shares to take advantage of breakpoints in the sales charge schedule. o Sales charges are waived for the categories of investors listed in the funds' prospectuses. - -------------------------------------------------------------------------------------------------------------------- Class B sales charges The Class B shares of both funds have the same characteristics and fee structure. and 12b-1 fees: o Class B shares are offered without a front-end sales charge, but are subject to a contingent deferred sales charge (CDSC) if sold within six years after purchase. The CDSC ranges from 1.00% to 5.00% depending on how long the shares are held. No CDSC is imposed on shares held more than six years. o Class B shares are subject to 12b-1 distribution and service fees equal to 1.00% annually of average net assets. o CDSCs are waived for the categories of investors listed in the funds' prospectus. o Class B shares automatically convert to Class A shares after eight years. - -------------------------------------------------------------------------------------------------------------------- Class C sales charges The Class C shares of both funds have the same characteristics and fee structure. and 12b-1 fees: o Class C shares are offered with a front-end sales charge equal to 1.00% of the fund's offering price. o Class C shares are subject to a contingent deferred sales charge of 1.00% on shares sold within one year of purchase. o Class C shares are subject to 12b-1 distribution and service fees equal to 1.00% annually of average net assets. o No automatic conversion to Class A shares, so annual expenses continue at the Class C level throughout the life of the investment. - -------------------------------------------------------------------------------------------------------------------- Class I sales charges The Class I shares of both funds have the same characteristics and fee and 12b-1 fees structure. o Class I shares of both funds have no sales charge and no 12b-1 fee. o Class I shares are offered to certain types of investors, as listed in each fund's prospectus for Class I shares. - -------------------------------------------------------------------------------------------------------------------- 12b-1 fees: o These fees are paid out of a fund's assets on an on-going basis. Over time these fees will increase the cost of investments and may cost more than other types of sales charges. - --------------------------------------------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------------------------------- BUYING, SELLING AND EXCHANGING SHARES - --------------------------------------------------------------------------------------------------------- Both Core Value Fund and Core Equity Fund - --------------------------------------------------------------------------------------------------------- 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 Core Value Fund but can add to existing accounts. - --------------------------------------------------------------------------------------------------------- Minimum initial Class A, Class B and Class C Shares: $1,000 for non-retirement accounts and $250 investment: for retirement accounts and group investments. Class I shares: $10,000. No minimum investment for retirement plans with at least 350 eligible employees. - --------------------------------------------------------------------------------------------------------- Exchanging shares: Shareholders may exchange their shares at net asset value with no sales charge for shares of the same class of any other John Hancock 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. Core Equity Fund's Class I shares have no operational history. As a result, Class I expenses were projected based on expenses incurred by other classes of the Fund. Future expenses for all share classes 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 board of trustees of another John Hancock fund, John Hancock Core Growth Fund, has recommended that Core Growth Fund also reorganize into Core Equity Fund. The reorganization of Core Value Fund with Core Equity Fund, however, does not depend upon whether the reorganization involving Core Growth Fund occurs. Your trustees expect the total expenses paid by Core Equity Fund to increase slightly if both reorganizations do occur. The following expense table shows the hypothetical ("pro forma") expenses of Core Equity Fund assuming (1) that a reorganization with Core Value Fund, but not John Hancock Core Growth Fund, occurred on December 31, 2000 or (2) that a reorganization with both Core Value Fund and John Hancock Core Growth Fund occurred on December 31, 2000. The expenses shown in both tables are based on fees and expenses incurred during the twelve months ended December 31, 2001. Core Equity Fund's Class I shares have no operational history. As a result, Class I expenses were projected based on expenses incurred by other classes of the Fund. Core Equity Fund's actual expenses after the reorganization may be greater or less than those shown. The pro forma examples contained in the expense table show what you would pay on a $10,000 investment if the reorganization had occurred on December 31, 2000. Each example assumes that you reinvested all dividends and that the average annual return was 5%. The pro forma examples are for comparison purposes only and are not a representation of Core Equity Fund's actual expenses or returns, either past or future. 18
Core Equity Fund Core Equity Fund (PRO FORMA (PRO FORMA for the year for the year ended 12/31/01) ended 12/31/01) (Assuming (Assuming reorganization with reorganization with Core Value Core Equity Core Value Fund Core Value Fund and Fund Fund only) Core Growth Fund) Shareholder transaction expenses Class A Class A Class A Class A - ----------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases 5.00% 5.00% 5.00% 5.00% (as a % of purchase price) Maximum sales charge imposed on reinvested dividends none none none none Maximum deferred sales charge (load) as a % of none none none none purchase or sale price, whichever is less(1) Redemption fee(2) none none none none Exchange fee none none none none Annual fund operating expenses (as a % of average net assets) Class A Class A Class A Class A - ----------------------------------------------------------------------------------------------------------------------------------- Management fee 0.80% 0.75% 0.75% 0.75% Distribution and service (12b-1) fee 0.30% 0.30% 0.30% 0.30% Other expenses 0.74% 0.42% 0.43% 0.45% Total fund operating expenses 1.84% 1.47% 1.48% 1.50% Expense reduction(3) 0.32% none none none Net fund operating expenses 1.52% 1.47% 1.48% 1.50% Shareholder transaction expenses Class B Class B Class B Class B - ----------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases none none none none (as a % of purchase price) Maximum sales charge imposed on reinvested none none none none dividends Maximum deferred sales charge (load) as a % of 5.00% 5.00% 5.00% 5.00% purchase or sale price, whichever is less Redemption fee(2) none none none none Exchange fee none none none none Annual fund operating expenses (as a % of average net assets) Class B Class B Class B Class B - ----------------------------------------------------------------------------------------------------------------------------------- Management fee 0.80% 0.75% 0.75% 0.75% Distribution and service (12b-1) fee 1.00% 1.00% 1.00% 1.00% Other expenses 0.74% 0.42% 0.43% 0.45% Total fund operating expenses 2.54% 2.17% 2.18% 2.20% Expense reduction(3) 0.32% none none none Net fund operating expenses 2.22% 2.17% 2.18% 2.20%
19
Core Equity Fund Core Equity Fund (PRO FORMA (PRO FORMA for the year for the year ended 12/31/01) ended 12/31/01) (Assuming (Assuming reorganization with reorganization with Core Value Core Equity Core Value Fund Core Value Fund and Fund Fund only) Core Growth Fund) Shareholder transaction expenses Class C Class C Class C Class C - ----------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases 1.00% 1.00% 1.00% 1.00% (as a % of purchase price) Maximum sales charge imposed on reinvested none none none none dividends Maximum deferred sales charge (load) as a % of 1.00% 1.00% 1.00% 1.00% purchase or sale price, whichever is less Redemption fee(2) none none none none Exchange fee none none none none Annual fund operating expenses (as a % of average net assets) Class C Class C Class C Class C - ----------------------------------------------------------------------------------------------------------------------------------- Management fee 0.80% 0.75% 0.75% 0.75% Distribution and service (12b-1) fee 1.00% 1.00% 1.00% 1.00% Other expenses 0.74% 0.42% 0.43% 0.45% Total fund operating expenses 2.54% 2.17% 2.18% 2.20% Expense reduction(3) 0.32% none none none Net fund operating expenses 2.22% 2.17% 2.18% 2.20% Shareholder transaction expenses Class I Class I Class I Class I - ----------------------------------------------------------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases none none none none (as a % of purchase price) Maximum sales charge imposed on reinvested none none none none dividends Maximum deferred sales charge (load) as a % of none none none none purchase or sale price, whichever is less Redemption fee none none none none Exchange fee none none none none Annual fund operating expenses (as a % of average net assets) Class I Class I Class I Class I - ----------------------------------------------------------------------------------------------------------------------------------- Management fee 0.80% 0.75% 0.75% 0.75% Distribution and service (12b-1) fee none none none none Other expenses 0.47% 0.11% 0.12% 0.12% Total fund operating expenses 1.27% 0.86% 0.87% 0.87% Expense reduction(3) 0.32% none none none Net fund operating expenses 0.95% 0.86% 0.87% 0.87%
(1) Except for investments of $1 million or more. (2 Does not include wire redemption fee (currently $4.00). (3) The Adviser has agreed to limit Core Value Fund's operating expenses, excluding 12b-1 and transfer agent fees, to 0.90% of the Fund's average daily net assets. 20 EXAMPLES
Core Equity Fund Core Equity Fund (PRO FORMA) (PRO FORMA) (Assuming (Assuming reorganization Core Value Core Equity reorganization with with Core Value Fund and Fund Fund Core Value Fund Core Growth Fund) Class A only) - --------------------------------------------------------------------------------------------------------------------------- Year 1 $ 662 $ 642 $ 643 $ 645 Year 3 $1,035 $ 942 $ 945 $ 950 Year 5 $1,432 $1,263 $1,268 $1,278 Year 10 $2,538 $2,170 $2,180 $2,201 Class B - assuming redemption at end of period - --------------------------------------------------------------------------------------------------------------------------- Year 1 $ 741 $ 720 $ 721 $ 723 Year 3 $1,075 $ 979 $ 982 $ 988 Year 5 $1,536 $1,364 $1,390 $1,380 Year 10 $2,692 $2,326 $2,336 $2,357 Class B - assuming no redemption - --------------------------------------------------------------------------------------------------------------------------- Year 1 $ 241 $ 220 $ 221 $ 223 Year 3 $ 775 $ 679 $ 682 $ 688 Year 5 $1,336 $1,164 $1,390 $1,180 Year 10 $2,692 $2,326 $2,336 $2,357 Class C - assuming redemption at end of period - --------------------------------------------------------------------------------------------------------------------------- Year 1 $ 437 $ 417 $ 418 $ 420 Year 3 $ 868 $ 772 $ 775 $ 781 Year 5 $1,423 $1,253 $1,258 $1,268 Year 10 $2,935 $2,578 $2,588 $2,609 Class C - assuming no redemption - --------------------------------------------------------------------------------------------------------------------------- Year 1 $ 339 $ 318 $ 319 $ 420 Year 3 $ 868 $ 772 $ 775 $ 781 Year 5 $1,423 $1,253 $1,258 $1,268 Year 10 $2,935 $2,578 $2,588 $2,609 Class I - --------------------------------------------------------------------------------------------------------------------------- Year 1 $ 113 $ 88 $ 89 $ 89 Year 3 $ 387 $ 274 $ 278 $ 278 Year 5 $ 682 $ 477 $ 482 $ 482 Year 10 $1,520 $1,061 $1,073 $1,073
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. Core Value Fund will transfer all of its assets to Core Equity Fund. Core Equity Fund will assume Core Value 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 Core Equity Fund will issue to Core Value Fund Class A shares in an amount equal to the net assets attributable to Core Value Fund's Class A shares. These shares will immediately be distributed to Core Value Fund's Class A shareholders in proportion to their holdings on the reorganization date. As a result, 21 Class A shareholders of Core Value Fund will end up as Class A shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Value Fund Class B shares in an amount equal to the net assets attributable to Core Value Fund's Class B shares. These shares will immediately be distributed to Core Value Fund's Class B shareholders in proportion to their holdings on the reorganization date. As a result, Class B shareholders of Core Value Fund will end up as Class B shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Value Fund Class C shares in an amount equal to the net assets attributable to Core Value Fund's Class C shares. These shares will immediately be distributed to Core Value Fund's Class C shareholders in proportion to their holdings on the reorganization date. As a result, Class C shareholders of Core Value Fund will end up as Class C shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Value Fund Class I shares in an amount equal to the net assets attributable to Core Value Fund's Class I shares. These shares will immediately be distributed to Core Value Fund's Class I shareholders in proportion to their holdings on the reorganization date. As a result, Class I shareholders of Core Value Fund will end up as Class I shareholders of Core Equity Fund. o After the shares are issued, Core Value 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. The following diagram shows how the reorganization would be carried out. - ------------------------- --------------------------- Core Value Fund Transfers Core Value Fund Core Equity Fund assets & liabilities assets and receives assets & assumes Core Equity Fund liabilities liabilities of Core Value Fund - ------------------------- --------------------------- - ------------ ------------- ------------ ------------ Class A & B Class C& I Issues Class Issues Class shareholders shareholders C & I A & B Shares Shares - ------------ ------------- ------------ ------------ Core Value Fund receives Core Equity Fund Class A, B, C & I shares and distributes them to Core Value Fund's Class A, B, C & I shareholders 22 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 Core Value Fund - ----------------------------------------------------- First $500 Million 0.800% - ----------------------------------------------------- Amount over $500 Million 0.750% - ----------------------------------------------------- - ----------------------------------------------------- Fund Asset Breakpoints Core Equity Fund - ----------------------------------------------------- First $750 Million 0.750% - ----------------------------------------------------- Amount over $750 Million 0.700% - ----------------------------------------------------- Independence Investment, LLC ("Independence"), a wholly-owned subsidiary of John Hancock Financial Services, Inc., serves as subadviser to both the Acquired Fund and the Acquiring Fund. In this capacity, Independence has primary responsibility for making investment decisions for each Fund's investment portfolio and placing orders with brokers and dealers to implement those decisions. Independence receives its compensation from the Adviser, and the Funds pay no subadvisory fees over and above the management fee they pay to the Adviser. Independence receives subadvisory fees from the Adviser at the same rate for the Acquired Fund and the Acquiring Fund: 55% of the advisory fee received by the Adviser. With respect to Core Value Fund, Independence waived its subadvisory fee during the twelve month period ended December 31, 2001. Effective June 7, 2002, for Core Equity Fund, the subadvisory fee paid by the Adviser to Independence will be reduced to 51% of the investment advisory fee received by the Adviser. Core Equity Fund's management fee rate of 0.75% and its pro forma management fee rate of 0.75% are lower than Core Value Fund's management fee rate of 0.80%. Core Equity Fund's other expenses of 0.42% and its pro forma other expenses of 0.43% are also substantially lower than Core Value Fund's other expenses of 0.74%. Both Funds have the same 12b-1 fees for Class A shares (0.30%) and Class B and Class C shares (1.00%) although Core Value Fund's Class B distribution payment last year was 0.98%. Core Equity Fund's current annual Class A expense ratio (equal to 1.47% of average net assets) and its pro forma Class A expense ratio (equal to 1.48% of average net assets) are lower than Core Value Fund's current Class A expense ratio (equal to 1.52% of average net assets). Core Equity Fund's current annual Class B and Class C expense ratio (equal to 2.17% of average net assets) and its pro forma Class B and Class C expense ratio (equal to 2.18% of average net assets) are also lower than Core Value Fund's current Class B and Class C expense ratio (equal to 2.22% of average net assets). Core Equity Fund's pro forma expense ratio for Class I of 0.87% is also lower than Core Value Fund's current annual Class I expense ratio of 0.95%. Core Value Fund's expense ratios referenced above are after the expense reduction and are substantially higher without the expense reduction, which may not be extended beyond June 30, 2002. 23 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.
- ------------------------------------------------------------------------------------------------------------------------------ Core Value Fund Core 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 The large capitalization value stocks in The large capitalization stocks in which the fund risk which the fund primarily invests could fall primarily invests could fall out of favor with the out of favor with the market, causing the market, causing the fund to underperform funds that fund to underperform funds that focus on focus on small or medium capitalization stocks. small 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 erratic price movements than investments in large capitalization companies. company risk - ------------------------------------------------------------------------------------------------------------------------------ Foreign securities Foreign investments involve additional risks, including potentially inadequate risk 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. - ------------------------------------------------------------------------------------------------------------------------------ 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. Core Value Fund will transfer all of its assets to Core Equity Fund and Core Equity Fund will assume all of Core Value Fund's liabilities. This will result in the addition of Core Value Fund's assets to Core 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 Core Equity Fund will issue to Core Value Fund Class A shares in an amount equal to the net assets attributable to Core Value Fund's Class A shares. As part of the liquidation of Core Value Fund, these shares will immediately be distributed to Class A shareholders of record of Core Value Fund in proportion to their holdings on the reorganization date. As a result, Class A shareholders of Core Value Fund will end up as Class A shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Value Fund Class B shares in an amount equal to the net assets attributable to Core Value Fund's Class B shares. As part of the liquidation of Core Value Fund, these shares will immediately be distributed to Class B shareholders of record of Core Value Fund in proportion 24 to their holdings on the reorganization date. As a result, Class B shareholders of Core Value Fund will end up as Class B shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Value Fund Class C shares in an amount equal to the net assets attributable to Core Value Fund's Class C shares. As part of the liquidation of Core Value Fund, these shares will immediately be distributed to Class C shareholders of record of Core Value Fund in proportion to their holdings on the reorganization date. As a result, Class C shareholders of Core Value Fund will end up as Class C shareholders of Core Equity Fund. o Core Equity Fund will issue to Core Value Class I shares in an amount equal to the net assets attributable to Core Value's Class I shares. These shares will immediately be distributed to Core Value's Class I shareholders in proportion to their holdings on the reorganization date. As a result, Class I shareholders of Core Value will end up as Class I shareholders of Core Equity Fund. o After the shares are issued, the existence of Core Value Fund will be terminated. Reasons for the Proposed Reorganization The board of trustees of Core Value Fund believes that the proposed reorganization will be advantageous to the shareholders of Core Value Fund for several reasons. The board of trustees considered the following matters, among others, in approving the proposal. First, that shareholders may be better served by a fund offering greater diversification. Core Equity Fund has a larger asset size than your fund and invests in similar types of securities. Combining the funds' assets into a single investment portfolio will afford greater diversification. Second, Core Equity Fund's expenses are lower than Core Value Fund's total expenses. As a result of the reorganization, shareholders of Core Value Fund will experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay. Third, that a combined fund offers economies of scale that may lead to lower per share expenses. Both funds incur substantial 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 Core Equity Fund's expense ratio over time because of economies of scale if the funds are combined. The board of trustees of Core Equity Fund considered that the reorganization presents an excellent opportunity for Core Equity 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 Core 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 Core Value Fund are lower than the rates paid by Core Equity Fund. Core Equity Fund's management fee rate of 0.75% and pro forma management fee rate of 0.75%, are lower than Core Value Fund's management fee rate of 0.80%. Core Equity Fund's other expenses of 0.42% and its pro forma other expenses of 0.43%, are also lower than Core Value Fund's other expenses of 0.74%. Both funds have the same 12b-1 fees for Class A shares (0.30%) and Class B and Class C shares (1.00%), although Core Value Fund's Class B distribution payment last year was 0.98%. Core Equity Fund's current annual Class A expense ratio (1.47% of average net assets) and pro forma Class A expense ratio (1.48% of average net assets) are both lower than Core Value Fund's current Class A expense ratio (1.52% of average net assets). Core Equity Fund's current annual Class 25 B and Class C expense ratio (2.17% of average net assets) and pro forma Class B and Class C expense ratio (2.18% of average net assets) are both also lower than Core Value Fund's current Class B and Class C expense ratio (2.22% of average net assets). Core Equity Fund's pro forma Class I expense ratio (0.87% of average net assets) is also lower than Core Value Fund's current annual Class I expense ratio (0.95% of average net assets). Core Value Fund's expense ratios referenced above are after the expense reduction and are substantially higher without the expense reduction, which may not be extended beyond June 30, 2002. Comparative Performance. The trustees also took into consideration the relative performance of your fund and Core Equity Fund. Unreimbursed Distribution and Shareholder Service Expenses The boards of trustees of Core Value Fund and Core Equity Fund have determined that, if the reorganization occurs, unreimbursed distribution and shareholder service expenses incurred under Core Value Fund's Rule 12b-1 Plans will be reimbursable expenses under Core Equity Fund's Rule 12b-1 Plans. However, the maximum amounts payable annually under Core Equity Fund's Rule 12b-1 Plans (0.30%, 1.00%, 1.00% and 0.00% of average daily net assets attributable to Class A shares, Class B shares, Class C shares and Class I shares, respectively) will not increase. The following table shows the actual and pro forma unreimbursed distribution and shareholder service expenses of shares of Core Value Fund and Core Equity Fund. The table shows both the dollar amount of these expenses and the percentage of each class' average net assets that they represent. Class I shares of Core Value Fund and Class I shares of Core Equity Fund are not included in the table because these classes do not have Rule 12b-1 Plans. Rule 12b-1 Payments and Unreimbursed Expenses Aggregate Dollar Amount of 12b-1 Unreimbursed Rule Unreimbursed Fees Paid (for 12b-1 Expenses as % of Name of Fund year ended Expenditures (as Each Class's December 31, of December 31, Average Net 2001) 2001) Assets Core Value $ 35,299(A) $ 71,680(A) 0.60%(A) $ 162,344(B) $ 51,413(B) 0.30%(B) $ 25,151(C) $ 14,950(C) 0.58%(C) Core Equity $ 905,642(A) $ 562,627(A) 0.19%(A) $4,253,417(B) $ 120,190(B) 0.03%(B) $ 304,622(C) $ 79,545(C) 0.26%(C) Pro Forma: Core Equity Assuming $ 940,941(A) $ 634,307(A) 0.20%(A) reorganization with $4,415,761(B) $ 171,603(B) 0.04%(B) Core Value Fund only $ 329,773(C) $ 94,495(C) 0.29%(C) Assuming $1,035,205(A) $2,760,322(A) 0.81%(A) reorganization with $4,637,287(B) $1,001,678(B) 0.22%(B) Core Value Fund and $ 348,753(C) $ 140,745(C) 0.40%(C) Core Growth Fund If the reorganization had taken place on December 31, 2000, the pro forma combined unreimbursed expenses of Core Equity Fund's Class A and Class B shares would have been higher than if no reorganization had occurred. 26 Nevertheless, Core Equity Fund's assumption of Core Value Fund's unreimbursed Rule 12b-1 expenses will have no immediate effect upon the payments made under Core Equity Fund's Rule 12b-1 Plans. These payments will continue to be 0.30%, 100%, 1.00% and 0.00% of average daily net assets attributable to Class A, Class B, Class C and Class I shares, respectively. John Hancock Funds, Inc. may recover unreimbursed distribution and shareholder service expenses for Class B and Class C shares in future years. However, if Core Equity Fund's board terminates either class's Rule 12b-1 Plan, that class will not be obligated to reimburse these distribution and shareholder service expenses. Accordingly, until they are paid or accrued, unreimbursed distribution and shareholder service expenses do not and will not appear as an expense or liability in the financial statements of either fund. In addition, unreimbursed expenses are not reflected in a fund's net asset value or the formula for calculating Rule 12b-1 payments. The staff of the SEC has not approved or disapproved the treatment of the unreimbursed distribution and shareholder service expenses described in this proxy statement. FURTHER INFORMATION ON EACH REORGANIZATION Tax Status of Each 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 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 the 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 the Acquiring Fund; o The basis of the assets of each Acquired Fund acquired by the 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 the 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 27 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 Core Equity Fund shares. Shareholders may not redeem or transfer Core Equity Fund shares received in the reorganization until they have surrendered their fund share certificates or delivered an Affidavit. Core Equity Fund 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 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 the Acquiring Fund to consummate the reorganization is subject to the satisfaction of certain conditions, including the 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 Fund and the 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 Acquired Funds' declaration of trust and by-laws. The funds' obligations are also subject to the receipt of a favorable opinion of Hale and Dorr LLP as to the federal income tax consequences of the reorganization (see Agreement, paragraph 8). Termination of Agreement. The board of trustees of each respective Acquired Fund or the 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 the Acquiring Fund will pay its costs incurred in connection with entering into and carrying out the provisions of the Agreements, whether or not the reorganization occurs. With respect to each proposal, the expenses for each fund are estimated to be approximately $29,000 for Core Growth Fund and $15,500 for Core Equity Fund; and $29,000 for Core Value Fund and $15,500 for Core Equity Fund. CAPITALIZATION With respect to each Proposal, the following tables set forth the capitalization of each fund as of December 31, 2001, 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 December 31, 2001 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 the 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. If the reorganization of your fund(s) had taken place on December 31, 2001:
- -------------------------------------------------------------------------------------------------- Core Growth Core Equity Pro Pro Proposal 1 Fund Fund Forma(1) Forma(2) - -------------------------------------------------------------------------------------------------- Net Assets (Millions) $48.2 $662.8 $711.0 $745.8 - -------------------------------------------------------------------------------------------------- Net Asset Value Per Share - -------------------------------------------------------------------------------------------------- Class A $13.15 $26.61 $26.61 $26.61 - -------------------------------------------------------------------------------------------------- Class B $12.93 $25.71 $25.71 $25.71 - -------------------------------------------------------------------------------------------------- Class C $12.93 $25.70 $25.70 $25.70 - --------------------------------------------------------------------------------------------------
28 - -------------------------------------------------------------------------------------------------- Class I $13.34 n/a* n/a* n/a* - -------------------------------------------------------------------------------------------------- Shares Outstanding - -------------------------------------------------------------------------------------------------- Class A 1,836,806 9,589,956 10,497,706 10,950,690 - -------------------------------------------------------------------------------------------------- Class B 1,538,150 14,666,844 15,440,380 16,177,467 - -------------------------------------------------------------------------------------------------- Class C 179,395 1,186,056 1,276,309 1,384,019 - -------------------------------------------------------------------------------------------------- Class I 141,058 n/a* n/a* n/a* - --------------------------------------------------------------------------------------------------
(1) Assuming the reorganization of Core Value Fund into Core Equity Fund does not occur. If the reorganization of your fund only had taken place on December 31, 2001, approximately _____ Core Equity Fund shares would have been issued for each share of Core Growth Fund. (2) Assuming the reorganization of Core Value Fund into Core Equity Fund occurs. If both reorganizations had taken place on December 31, 2001, approximately ____ Core Equity Fund shares would have been issued for each share of Core Growth Fund.
- -------------------------------------------------------------------------------------------------- Core Growth Core Equity Pro Pro Proposal 2 Fund Fund Forma(1) Forma(2) - -------------------------------------------------------------------------------------------------- Net Assets (Millions) $34.8 $662.8 $697.6 $745.8 - -------------------------------------------------------------------------------------------------- Net Asset Value Per Share - -------------------------------------------------------------------------------------------------- Class A $11.92 $26.61 $26.61 $26.61 - -------------------------------------------------------------------------------------------------- Class B $11.84 $25.71 $25.71 $25.71 - -------------------------------------------------------------------------------------------------- Class C $11.84 $25.70 $25.70 $25.70 - -------------------------------------------------------------------------------------------------- Class I $11.91 n/a* n/a* n/a* - -------------------------------------------------------------------------------------------------- Shares Outstanding - -------------------------------------------------------------------------------------------------- Class A 1,011,124 9,589,956 10,042,940 10,950,690 - -------------------------------------------------------------------------------------------------- Class B 1,600,624 14,666,844 15,403,931 16,177,467 - -------------------------------------------------------------------------------------------------- Class C 233,797 1,186,056 1,293,766 1,384,019 - -------------------------------------------------------------------------------------------------- Class I 84,457 n/a* n/a* n/a* - --------------------------------------------------------------------------------------------------
(1) Assuming the reorganization of Core Growth Fund into Core Equity Fund does not occur. If the reorganization of your fund only had taken place on December 31, 2001, approximately _____ Core Equity Fund shares would have been issued for each share of Core Value Fund. (2) Assuming the reorganization of Core Growth Fund into Core Equity Fund occurs. If both reorganizations had taken place on December 31, 2001, approximately _____ Core Equity Fund shares would have been issued for each share of Core Value Fund. *Core Equity Fund's Class I shares have not commenced operations. 29 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 policies Goal and Strategy / Main Risks - ------------------------------------------------------------------------------- Portfolio Management Portfolio Management - ------------------------------------------------------------------------------- Expenses Your Expenses - ------------------------------------------------------------------------------- Custodian Business Structure - ------------------------------------------------------------------------------- Shares of beneficial interest Your Account: Choosing a Share Class - ------------------------------------------------------------------------------- Purchase of shares Your Account: Choosing a Share Class, How Sales Charges are Calculated, Sales Charge Reductions and Waivers, Opening an Account, Buying Shares, Transaction Policies, Additional Investor Services - ------------------------------------------------------------------------------- Redemption of sales of shares Your Account: Selling Shares, How Sales Charges are Calculated, Transactions Policies - ------------------------------------------------------------------------------- Dividends, distributions and taxes Dividends and Account Policies - ------------------------------------------------------------------------------- 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 respective reorganization or the adviser ("independent trustees"), approved the reorganization. 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 Core Equity Fund, including the independent trustees, approved the reorganization. They also determined that the reorganization is in the best interests of Core Equity Fund and that the interests of Core Equity Fund's 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. 30
- ---------------------------------------------------------------------------------------------------------------------- Shares Quorum Voting - ---------------------------------------------------------------------------------------------------------------------- In General All shares "present" in Shares "present" in person will be voted in person at the person or by proxy are meeting. Shares present by proxy will be voted in accordance counted towards a quorum. with 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 $5,000 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 02217-1000, or o By returning a duly executed proxy with a later date before the time of the meeting, or o If a shareholder has executed a proxy but is present at the meeting and wishes to vote in person, by notifying the secretary of your fund (without complying with any formalities) at any time before it is voted. Being present at the meeting alone does not revoke a previously executed and returned proxy. Outstanding Shares and Quorum As of March 15, 2002 (the "record date"), the number of shares of beneficial interest of each Acquired Fund outstanding were as follows: 31 - ------------------------------------------------------------ FUND SHARES OUTSTANDING - ------------------------------------------------------------ Core Growth Fund - ------------------------------------------------------------ Class A - ------------------------------------------------------------ Class B - ------------------------------------------------------------ Class C - ------------------------------------------------------------ Class I - ------------------------------------------------------------ Core Value Fund - ------------------------------------------------------------ Class A - ------------------------------------------------------------ Class B - ------------------------------------------------------------ Class C - ------------------------------------------------------------ Class I - ------------------------------------------------------------ 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. 32 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. 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 Core Growth Fund - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Names and Addresses of Owners of More Core Value Fund Than 5% of Shares - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Names and Addresses of Owners of More Core Equity Fund Than 5% of Shares - -------------------------------------------------------------------------------- 33 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 Core Equity Fund for the period ended December 31, 2001 and Core Growth and Core Value Funds for the period ended August 31, 2001 are incorporated by reference into this proxy statement and prospectus. The financial statements and financial highlights for Core Growth Fund and Core Value Fund have been independently audited by Deloitte & Touche, LLP, and for Core Equity 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. 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. 34 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 John Hancock Core Equity Fund (the "Acquiring Fund"), a series of John Hancock Capital Series, 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 A shares, Class B shares, Class C shares, and 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 Class A, Class B, Class C and/or Class I 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, in the case of each class of Acquiring Fund Shares, to the value of the assets, less such liabilities (herein referred to as the "net value of the assets") attributable to the applicable class, 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. 35 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 and class of Acquiring Fund Shares due such shareholders. Acquired Fund shareholders who own Class A shares of the Acquired Fund will receive Class A Acquiring Fund Shares, Acquired Fund shareholders who own Class B shares of the Acquired Fund will receive Class B Acquiring Fund Shares, Acquired Fund shareholders who own Class C shares of the Acquired Fund will receive Class C Acquiring Fund Shares, and Acquired Fund shareholders who own Class I shares of the Acquired Fund will receive Class I Acquiring Fund Shares. 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 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 Class A, Class B, Class C, and Class I Acquiring Fund Shares and the net values of the assets and liabilities of the Acquired Fund attributable to its Class A, Class B, Class C, and Class I shares 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 Class A, Class B, Class C, and Class I 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 attributable to its Class A, Class B, Class C, and Class I shares to be transferred shall be computed by the Custodian by calculating the value of the assets of each class transferred by the Acquired Fund and by subtracting therefrom the amount of the liabilities of each class 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. 36 2.2 The number of shares of each class 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 attributable to a class, less the liabilities attributable to that class assumed by the Acquiring Fund, by the Acquiring Fund's net asset value per share of the same class, 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, 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 each class 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 37 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 incurrence 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; (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 and classes set forth in the Shareholder List submitted to 38 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 Class A, Class B, and Class C prospectus of the Acquired Fund, dated ____________ and the Class I prospectus of the Acquired Fund, dated _____________ (the "Acquired Fund Prospectuses"), 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; 39 (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 for Class A, Class B, Class C and Class I shares of the Acquiring Fund, dated March 1, 2002, and any amendments or supplements thereto on or prior to the Closing Date, and the Registration 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 December 31, 2001 and the related statement of operations (copies of which have been furnished to the Acquired Fund), present fairly in all material respects the financial condition of the Acquiring Fund as of December 31, 2001 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 December 31, 2001, 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; 40 (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 (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. 41 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; 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; 42 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 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 43 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. 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 44 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. 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 or on behalf of the Acquiring Fund or the Acquired Fund under this Agreement. 45 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. JOHN HANCOCK CAPITAL SERIES on behalf of JOHN HANCOCK CORE EQUITY FUND 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 46 Thank You for mailing your proxy card promptly! [LOGO] JOHN HANCOCK - -------------------------------------------------------------------------------- Prospectus 3.1.02 Core Equity Fund [LOGO](R) As with all mutual funds, the Securities and Exchange - ------------------ Commission has not approved or disapproved this fund JOHN HANCOCK FUNDS or determined whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. Contents - -------------------------------------------------------------------------------- A summary of the fund's Core Equity Fund 4 goals, strategies, risks, performance and expenses. Policies and instructions for Your account opening, maintaining and closing an account. Choosing a share class 6 How sales charges are calculated 6 Sales charge reductions and waivers 7 Opening an account 8 Buying shares 9 Selling shares 10 Transaction policies 12 Dividends and account policies 12 Additional investor services 13 Further information on the Fund details fund. Business structure 14 Financial highlights 15 For more information back cover 3 Core Equity Fund GOAL AND STRATEGY [Clip Art] The fund seeks above-average total return (capital appreciation plus income). To pursue this goal, the fund normally invests at least 80% of its assets in a diversified portfolio of equity securities (including common and preferred stocks and their equivalents) which are primarily large-capitalization stocks. The portfolio's risk profile is similar to that of the Standard & Poor's 500 Index. The managers select from a menu of stocks of approximately 600 companies that evolves over time. Approximately 70% to 80% of these companies also are included in the Standard & Poor's 500 Index. The subadviser's investment research team is organized by industry and tracks these companies to develop earnings estimates and five-year projections for growth. A series of proprietary computer models use this in-house research to rank the stocks according to their combination of: o value, meaning they appear to be underpriced o improving fundamentals, meaning they show potential for strong growth This process, together with a risk/return analysis against the Standard & Poor's 500 Index, results in a portfolio of approximately 100 to 130 of the stocks from the top 60% of the menu. The fund generally sells stocks that fall into the bottom 20% of the menu. In normal circumstances, the fund is almost entirely invested in stocks. The fund may invest in dollar-denominated foreign securities and make limited use of certain derivatives (investments whose value is based on indexes or securities). In abnormal circumstances, the fund may temporarily invest more than 20% of its 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. ================================================================================ 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. 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 before and after taxes does not indicate future results. Class A, total returns Best quarter: Q4 '98, 24.17% Worst quarter: Q3 '01, -15.72% After-tax returns After-tax returns are shown for Class A shares only and would be different for the other classes. They are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. Index (reflects no fees or taxes) Standard & Poor's 500 Index, an unmanaged index of 500 stocks. - -------------------------------------------------------------------------------- Class A calendar year total returns (without sales charges) - -------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 9.01% 16.12% -2.14% 37.20% 21.24% 29.19% 28.84% 12.37% -7.75% -10.87%
- -------------------------------------------------------------------------------------------- Average annual total returns (including sales charge) for periods ending 12-31-01 - -------------------------------------------------------------------------------------------- 1 year 5 year 10 year Life of Life of Class B Class C Class A before tax -15.32% 7.88% 11.65% -- -- Class A after tax on distributions -15.33% 7.23% 10.76% -- -- Class A after tax on distributions, with sale -9.33% 6.31% 9.56% -- -- Class B before tax (began 9-7-95) -15.91% 7.96% -- 11.01% -- Class C before tax (began 5-1-98) -13.24% -- -- -- -0.53% Standard & Poor's 500 Index -11.89% 10.70% 12.94% 13.49% 1.97%
4 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on small- or medium-capitalization stocks. The fund's management strategy has a significant influence on fund performance. If the investment research team's earnings estimates or projections turn out to be inaccurate, or if the proprietary computer models do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially inadequate or inaccurate financial information and social or political instability. Investments in the fund are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. You could lose money by investing in this fund. ================================================================================ YOUR EXPENSES [Clip Art] Transaction expenses are charged directly to your account. Operating expenses are paid from the fund's assets, and therefore are paid by shareholders indirectly. - -------------------------------------------------------------------------------- Shareholder transaction expenses(1) Class A Class B Class C - -------------------------------------------------------------------------------- Maximum sales charge (load) 5.00% 5.00% 2.00% Maximum front-end sales charge (load) on purchases as a % of purchase price 5.00% none 1.00% Maximum deferred sales charge (load) as a % of purchase or sale price, whichever is less none(2) 5.00% 1.00% - -------------------------------------------------------------------------------- Annual operating expenses Class A Class B Class C - -------------------------------------------------------------------------------- Management fee 0.75% 0.75% 0.75% Distribution and service (12b-1) fees 0.30% 1.00% 1.00% Other expenses 0.42% 0.42% 0.42% Total fund operating expenses 1.47% 2.17% 2.17% The hypothetical example below shows what your expenses would be if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions and that the average annual return was 5%. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future. - -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10 - -------------------------------------------------------------------------------- Class A $642 $942 $1,263 $2,170 Class B with redemption $720 $979 $1,364 $2,326 Class B without redemption $220 $679 $1,164 $2,326 Class C with redemption $417 $772 $1,253 $2,578 Class C without redemption $318 $772 $1,253 $2,578 (1) A $4.00 fee will be charged for wire redemptions. (2) Except for investments of $1 million or more; see "How sales charges are calculated." ================================================================================ SUBADVISER Independence Investment LLC Team responsible for day-to-day investment management A subsidiary of John Hancock Financial Services, Inc. Founded in 1982 Supervised by the adviser FUND CODES Class A Ticker JHDCX CUSIP 409902707 Newspaper CoreEqA SEC number 811-1677 JH fund number 25 Class B Ticker JHIDX CUSIP 409902806 Newspaper CoreEqB SEC number 811-1677 JH fund number 125 Class C Ticker JHCEX CUSIP 409902863 Newspaper CoreEqC SEC number 811-1677 JH fund number 525 5 Your account - -------------------------------------------------------------------------------- CHOOSING A SHARE CLASS Each share class has its own cost structure, including a Rule 12b-1 plan that allows it to pay fees for the sale, distribution and service of its shares. Your financial representative can help you decide which share class is best for you. - -------------------------------------------------------------------------------- Class A - -------------------------------------------------------------------------------- o A front-end sales charge, as described at right. o Distribution and service (12b-1) fees of 0.30%. - -------------------------------------------------------------------------------- Class B - -------------------------------------------------------------------------------- o No front-end sales charge; all your money goes to work for you right away. o Distribution and service (12b-1) fees of 1.00%. o A deferred sales charge, as described on following page. o Automatic conversion to Class A shares after eight years, thus reducing future annual expenses. - -------------------------------------------------------------------------------- Class C - -------------------------------------------------------------------------------- o A front-end sales charge, as described at right. o Distribution and service (12b-1) fees of 1.00%. o A 1.00% contingent deferred sales charge on shares sold within one year of purchase. o No automatic conversion to Class A shares, so annual expenses continue at the Class C level throughout the life of your investment. For actual past expenses of each share class, see the fund-by-fund information earlier in this prospectus. Because 12b-1 fees are paid on an ongoing basis, they may cost shareholders more than other types of sales charges. Investors purchasing $1 million or more of Class B or Class C shares may want to consider the lower operating expenses of Class A shares. Your broker receives a percentage of these sales charges and fees. In addition, John Hancock Funds may pay significant compensation out of its own resources to your broker. Your broker or agent may charge you a fee to effect transactions in fund shares. - -------------------------------------------------------------------------------- HOW SALES CHARGES ARE CALCULATED Class A and Class C Sales charges are as follows: - -------------------------------------------------------------------------------- Class A sales charges - -------------------------------------------------------------------------------- As a % of As a % of your Your investment offering price investment Up to $49,999 5.00% 5.26% $50,000 - $99,999 4.50% 4.71% $100,000 - $249,999 3.50% 3.63% $250,000 - $499,000 2.50% 2.56% $500,000 - $999,999 2.00% 2.04% $1,000,000 and over See below - -------------------------------------------------------------------------------- Class C sales charges - -------------------------------------------------------------------------------- As a % of As a % of your Your investment offering price investment Up to $1,000,000 1.00% 1.01% $1,000,000 and over none Investments of $1 million or more Class A and Class C shares are available with no front-end sales charge. However, there is a contingent deferred sales charge (CDSC) on any Class A shares sold within one year of purchase, as follows: - -------------------------------------------------------------------------------- CDSC on $1 million+ investments - -------------------------------------------------------------------------------- CDSC on shares Your investment being sold First $1M - $4,999,999 1.00% Next $1 - $5M above that 0.50% Next $1 or more above that 0.25% For purposes of this CDSC, all purchases made during a calendar month are counted as having been made on the first day of that month. 6 YOUR ACCOUNT The CDSC is based on the lesser of the original purchase cost or the current market value of the shares being sold, and is not charged on shares you acquired by reinvesting your dividends. To keep your CDSC as low as possible, each time you place a request to sell shares we will first sell any shares in your account that are not subject to a CDSC. Class B Shares are offered at their net asset value per share, without any initial sales charge. Class B and Class C A CDSC may be charged if you sell Class B or Class C shares within a certain time after you bought them, as described in the tables below. There is no CDSC on shares acquired through reinvestment of dividends. The CDSC is based on the original purchase cost or the current market value of the shares being sold, whichever is less. The CDSCs are as follows: - -------------------------------------------------------------------------------- Class B deferred charges - -------------------------------------------------------------------------------- Years after purchase CDSC on shares being sold 1st year 5.00% 2nd year 4.00% 3rd or 4th year 3.00% 5th year 2.00% 6th year 1.00% After 6th year none - -------------------------------------------------------------------------------- Class C deferred charges - -------------------------------------------------------------------------------- Years after purchase CDSC 1st year 1.00% After 1st year none For purposes of these CDSCs, all purchases made during a calendar month are counted as having been made on the first day of that month. CDSC calculations are based on the number of shares involved, not on the value of your account. To keep your CDSC as low as possible, each time you place a request to sell shares we will first sell any shares in your account that carry no CDSC. If there are not enough of these to meet your request, we will sell those shares that have the lowest CDSC. - -------------------------------------------------------------------------------- SALES CHARGE REDUCTIONS AND WAIVERS Reducing your Class A sales charges There are several ways you can combine multiple purchases of Class A shares of John Hancock funds to take advantage of the breakpoints in the sales charge schedule. The first three ways can be combined in any manner. o Accumulation Privilege -- lets you add the value of any Class A shares you already own to the amount of your next Class A investment for purposes of calculating the sales charge. Retirement plans investing $1 million in Class B shares may add that value to Class A purchases to calculate charges. o Letter of Intention -- lets you purchase Class A shares of a fund over a 13-month period and receive the same sales charge as if all shares had been purchased at once. o Combination Privilege -- lets you combine Class A shares of multiple funds for purposes of calculating the sales charge. To utilize: complete the appropriate section of your application, or contact your financial representative or Signature Services, or consult the SAI (see the back cover of this prospectus). Group Investment Program A group may be treated as a single purchaser under the accumulation and combination privileges. Each investor has an individual account, but the group's investments are lumped together for sales charge purposes, making the investors potentially eligible for reduced sales charges. There is no charge or obligation to invest (although initial investments must total at least $250) and individual investors may close their accounts at any time. To utilize: contact your financial representative or Signature Services to find out how to qualify, or consult the SAI (see the back cover of the prospectus). CDSC waivers As long as Signature Services is notified at the time you sell, the CDSC for each share class will generally be waived in the following cases: o to make payments through certain systematic withdrawal plans o to make certain distributions from a retirement plan o because of shareholder death or disability To utilize: If you think you may be eligible for a CDSC waiver, contact your financial representative or Signature Services, or consult the SAI (see the back cover of this prospectus). YOUR ACCOUNT 7 Reinstatement privilege If you sell shares of a John Hancock fund, you may reinvest some or all of the proceeds in the same share class of any John Hancock fund within 120 days without a sales charge, as long as Signature Services is notified before you reinvest. If you paid a CDSC when you sold your shares, you will be credited with the amount of the CDSC. All accounts involved must have the same registration. To utilize: contact your financial representative or Signature Services. Waivers for certain investors Class A shares may be offered without front-end sales charges or CDSCs to various individuals and institutions, including: o selling brokers and their employees and sales representatives o financial representatives utilizing fund shares in fee-based investment products under signed agreement with John Hancock Funds o fund trustees and other individuals who are affiliated with these or other John Hancock funds o individuals transferring assets from an employee benefit plan into a John Hancock fund o participants in certain retirement plans with at least 100 eligible employees (one-year CDSC applies) Class C shares may be offered without front-end sales charges to various individuals and institutions. To utilize: if you think you may be eligible for a sales charge waiver, contact Signature Services or consult the SAI (see the back cover of this prospectus). - -------------------------------------------------------------------------------- OPENING AN ACCOUNT 1 Read this prospectus carefully. 2 Determine how much you want to invest. The minimum initial investments for the John Hancock funds are as follows: o non-retirement account: $1,000 o retirement account: $250 o group investments: $250 o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest at least $25 a month o fee-based clients of selling brokers who have placed at least $2 billion in John Hancock funds: $250 3 Complete the appropriate parts of the account application, carefully following the instructions. You must submit additional documentation when opening trust, corporate or power of attorney accounts. You must notify your financial representative or Signature Services if this information changes. For more details, please contact your financial representative or call Signature Services at 1-800-225-5291. 4 Complete the appropriate parts of the account privileges application. By applying for privileges now, you can avoid the delay and inconvenience of having to file an additional application if you want to add privileges later. 5 Make your initial investment using the table on the next page. You and your financial representative can initiate any purchase, exchange or sale of shares. 8 YOUR ACCOUNT - -------------------------------------------------------------------------------- Buying shares - -------------------------------------------------------------------------------- Opening an account Adding to an account By check [Clip Art] o Make out a check for the 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 financial representative, or account statement. If no slip mail them to Signature is available, include a note Services (address below). specifying the fund name, your share class, your account number and the name(s) in which the account is registered. o Deliver the check and your investment slip or note to your financial representative, or mail them to Signature Services (address below). By exchange [Clip Art] o Call your financial o Log on to www.jhfunds.com to representative or Signature process exchanges between Services to request an funds. exchange. o Call EASI-Line for automated service 24 hours a day using your touch-tone phone at 1-800-338-8080. o Call your financial representative or Signature Services to request an exchange. By wire [Clip Art] o Deliver your completed o Instruct your bank to wire application to your financial the amount of your investment representative, or mail it to to: Signature Services. First Signature Bank & Trust Account # 900000260 o Obtain your account number by Routing # 211475000 calling your financial representative or Signature Specify the fund name, your Services. share class, your account number and the name(s) in which o Instruct your bank to wire the account is registered. Your the amount of your investment bank may charge a fee to wire to: funds. First Signature Bank & Trust Account # 900000260 Routing # 211475000 Specify the fund name, your choice of share class, the new account number and the name(s) in which the account is registered. Your bank may charge a fee to wire funds. By Internet [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 "Bank Information" section on your account application. o Log on to www.jhfunds.com to initiate purchases using your authorized bank account. By phone [Clip Art] See "By exchange" and "By o Verify that your bank or wire." credit union is a member of the Automated Clearing House (ACH) system. o Complete the "Bank Information" section on your account application. o Call EASI-Line for automated service 24 hours a day using your touch-tone phone at 1-800-338-8080. o Call your financial representative or Signature Services between 8 A.M. and 4 P.M. Eastern Time on most business days. - ---------------------------------------------- Address: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 Phone Number: 1-800-225-5291 Or contact your financial representative for instructions and assistance. - ---------------------------------------------- To open or add to an account using the Monthly Automatic Accumulation Program, see "Additional investor services." YOUR ACCOUNT 9 - -------------------------------------------------------------------------------- Selling shares - -------------------------------------------------------------------------------- Designed for To sell some or all of your shares By letter [Clip Art] o Accounts of any type. o Write a letter of instruction or complete a stock power o Sales of any amount. indicating the fund name, your share class, your account number, the name(s) in which the account is registered and the dollar value or number of shares you wish to sell. o Include all signatures and any additional documents that may be required (see next page). o Mail the materials to Signature Services. o A check will be mailed to the name(s) and address in which the account is registered, or otherwise according to your letter of instruction. By Internet [Clip Art] o Most accounts. o Log on to www.jhfunds.com to initiate redemptions from o Sales of up to $100,000. your funds. By phone [Clip Art] o Most accounts. o Call EASI-Line for automated service 24 hours a day using o Sales of up to $100,000. your touch-tone phone at 1-800-338-8080. o Call your financial representative or Signature Services between 8 A.M. and 4 P.M. Eastern Time on most business days. By wire or electronic funds transfer (EFT) [Clip Art] o Requests by letter to sell o To verify that the Internet any amount. or telephone redemption privilege is in place on an o Requests by Internet or phone account, or to request the to sell up to $100,000. form to add it to an existing account, call Signature Services. o Amounts of $1,000 or more will be wired on the next business day. A $4 fee will be deducted from your account. o Amounts of less than $1,000 may be sent by EFT or by check. Funds from EFT transactions are generally available by the second business day. Your bank may charge a fee for this service. By exchange [Clip Art] o Accounts of any type. o Obtain a current prospectus for the fund into which you o Sales of any amount. are exchanging by Internet or by calling your financial representative or Signature Services. o Log on to www.jhfunds.com to process exchanges between your funds. o Call EASI-Line for automated service 24 hours a day using your touch-tone phone at 1-800-338-8080. o Call your financial representative or Signature Services to request an exchange. To sell shares through a systematic withdrawal plan, see "Additional investor services." 10 YOUR ACCOUNT Selling shares in writing In certain circumstances, you will need to make your request to sell shares in writing. You may need to include additional items with your request, unless they were previously provided to Signature Services and are still accurate. These items are shown in the table below. You may also need to include a signature guarantee, which protects you against fraudulent orders. You will need a signature guarantee if: o your address of record has changed within the past 30 days o you are selling more than $100,000 worth of shares o you are requesting payment other than by a check mailed to the address of record and payable to the registered owner(s) You will need to obtain your signature guarantee from a member of the Signature Guarantee Medallion Program. Most brokers and securities dealers are members of this program. A notary public CANNOT provide a signature guarantee. - -------------------------------------------------------------------------------- Seller Requirements for written requests - -------------------------------------------------------------------------------- [Clip Art] Owners of individual, joint or o Letter of instruction. UGMA/UTMA accounts (custodial accounts for minors). o On the letter, the signatures and titles of all persons authorized to sign for the account, exactly as the account is registered. o Signature guarantee if applicable (see above). Owners of corporate, sole 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 Signature guarantee if applicable (see above). Owners or trustees of trust accounts. o Letter of instruction. o On the letter, the signature(s) of the trustee(s). o Copy of the trust document certified within the past 12 months or a John Hancock Funds trust certification form. o Signature guarantee if applicable (see above). Joint tenancy shareholders with o Letter of instruction signed by rights of survivorship whose surviving tenant. co-tenants are deceased. o Copy of death certificate. o Signature guarantee if applicable (see above). Executors of shareholder estates. o Letter of instruction signed by executor. o Copy of order appointing executor, certified within the past 12 months. o Signature guarantee if applicable (see above). Administrators, conservators, o Call 1-800-225-5291 for guardians and other sellers or instructions. account types not listed above. - ---------------------------------------------- Address: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 Phone Number: 1-800-225-5291 Or contact your financial representative for instructions and assistance. - ---------------------------------------------- YOUR ACCOUNT 11 - -------------------------------------------------------------------------------- TRANSACTION POLICIES Valuation of shares The net asset value (NAV) per share for each class of the fund is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4 P.M. Eastern Time). The fund uses market prices in valuing portfolio securities, but may use fair-value estimates if reliable market prices are unavailable. The fund may also value securities at fair value if the value of these securities has been materially affected by events occurring after the close of a foreign market. Foreign stock or other portfolio securities held by the fund may trade on U.S. holidays and weekends, even though the fund's shares will not be priced on those days. This may change the fund's NAV on days when you cannot buy or sell shares. Buy and sell prices When you buy shares, you pay the NAV plus any applicable sales charges, as described earlier. When you sell shares, you receive the NAV minus any applicable deferred sales charges. Execution of requests The fund is open on those days when the New York Stock Exchange is open, typically Monday through Friday. Buy and sell requests are executed at the next NAV to be calculated after Signature Services receives your request in good order. At times of peak activity, it may be difficult to place requests by phone. During these times, consider using EASI-Line, accessing www.jhfunds.com, or sending your request in writing. In unusual circumstances, the fund may temporarily suspend the processing of sell requests, or may postpone payment of proceeds for up to three business days or longer, as allowed by federal securities laws. Telephone transactions For your protection, telephone requests may be recorded in order to verify their accuracy. Also for your protection, telephone redemption transactions are not permitted on accounts whose names or addresses have changed within the past 30 days. Proceeds from telephone transactions can only be mailed to the address of record. Exchanges You may exchange shares of one John Hancock fund for shares of the same class of any other, generally without paying any additional sales charges. The registration for both accounts involved must be identical. Class B and Class C shares will continue to age from the original date and will retain the same CDSC rate. However, if the new fund's CDSC rate is higher, then the rate will increase. A CDSC rate that has increased will drop again with a future exchange into a fund with a lower rate. To protect the interests of other investors in the fund, the fund may cancel the exchange privileges of any parties who, in the opinion of the fund, are using market timing strategies or making more than seven exchanges per owner or controlling party per calendar year. The fund may also refuse any exchange order. The fund may change or cancel its exchange policies at any time, upon 60 days' notice to its shareholders. 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 the fund will not release the proceeds to you until your purchase payment clears. This may take up to ten business days after the purchase. - -------------------------------------------------------------------------------- DIVIDENDS AND ACCOUNT POLICIES Account statements In general, you will receive account statements as follows: o after every transaction (except a dividend reinvestment) that affects your account balance o after any changes of name or address of the registered owner(s) o in all other circumstances, every quarter Every year you should also receive, if applicable, a Form 1099 tax information statement, mailed by January 31. Dividends The fund generally distributes most or all of its net earnings in the form of dividends. The fund declares and pays any income dividends annually. Capital gains, if any, are typically distributed annually. Dividend reinvestments Most investors have their dividends reinvested in additional shares of the same fund and class. If you choose this option, or if you do not indicate any choice, your dividends will be reinvested on the dividend record date. Alternatively, you can choose to have a check for your dividends and capital gains in the amount of more than $10 mailed to you. However, if the check is not deliverable or the combined dividend and capital gains amount is $10 or less, your proceeds will be reinvested. 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. 12 YOUR ACCOUNT Taxability of dividends Dividends you receive from a fund, whether reinvested or taken as cash, are generally considered taxable. Dividends from the fund's long-term capital gains are taxable as capital gains; dividends from the fund's income and short-term capital gains are generally taxable as ordinary income. Whether gains are short-term or long-term depends on the fund's holding period. Some dividends paid in January may be taxable as if they had been paid the previous December. The Form 1099 that is mailed to you every January details your dividends and their federal tax category, although you should verify your tax liability with your tax professional. Taxability of transactions Any time you sell or exchange shares, it is considered a taxable event for you. Depending on the purchase price and the sale price of the shares you sell or exchange, you may have a gain or a loss on the transaction. You are responsible for any tax liabilities generated by your transactions. Small accounts (non-retirement only) If you draw down a non-retirement account so that its total value is less than $1,000, you may be asked to purchase more shares within 30 days. If you do not take action, your fund may close out your account and mail you the proceeds. Alternatively, Signature Services may charge you $10 a year to maintain your account. You will not be charged a CDSC if your account is closed for this reason, and your account will not be closed if its drop in value is due to fund performance or the effects of sales charges. - -------------------------------------------------------------------------------- ADDITIONAL INVESTOR SERVICES Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular investments from your paycheck or bank account to the John Hancock fund(s) of your choice. You determine the frequency and amount of your investments, and you can terminate your program at any time. To establish: o Complete the appropriate parts of your account application. o If you are using MAAP to open an account, make out a check ($25 minimum) for your first investment amount payable to "John Hancock Signature Services, Inc." Deliver your check and application to your financial representative or Signature Services. Systematic withdrawal plan This plan may be used for routine bill payments or periodic withdrawals from your account. To establish: o Make sure you have at least $5,000 worth of shares in your account. o Make sure you are not planning to invest more money in this account (buying shares during a period when you are also selling shares of the same fund is not advantageous to you, because of sales charges). o Specify the payee(s). The payee may be yourself or any other party, and there is no limit to the number of payees you may have, as long as they are all on the same payment schedule. o Determine the schedule: monthly, quarterly, semi-annually, annually or in certain selected months. o Fill out the relevant part of the account application. To add a systematic withdrawal plan to an existing account, contact your financial representative or Signature Services. Retirement plans John Hancock Funds offers a range of retirement plans, including traditional, Roth and Education IRAs, SIMPLE plans and SEPs. Using these plans, you can invest in any John Hancock fund (except tax-free income funds) with a low minimum investment of $250 or, for some group plans, no minimum investment at all. To find out more, call Signature Services at 1-800-225-5291. YOUR ACCOUNT 13 Fund details - -------------------------------------------------------------------------------- BUSINESS STRUCTURE The diagram below shows the basic business structure used by the fund. The fund's board of trustees oversees the fund's business activities and retains the services of the various firms that carry out the fund's operations. The trustees 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 management firm The fund is managed by John Hancock Advisers, LLC. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial Services, Inc. and manages approximately $30 billion in assets. Management fee For the fiscal year ended December 31, 2001, the fund paid the investment adviser management fees of 0.75% of average net assets. ----------------------- Shareholders ----------------------- Distribution and shareholder services --------------------------------------------------- Financial services firms and their representatives Advise current and prospective share- holders on their fund investments, often in the context of an overall financial plan. --------------------------------------------------- --------------------------------------------------- Principal distributor John Hancock Funds, LLC Markets the fund and distributes shares through selling brokers, financial planners and other financial representatives. --------------------------------------------------- --------------------------------------------------- Transfer agent John Hancock Signature Services, Inc. Handles shareholder services, including record- keeping and statements, distribution of dividends and processing of buy and sell requests. --------------------------------------------------- Asset management --------------------------------------------------- Investment adviser John Hancock Advisers, LLC 101 Huntington Avenue Boston, MA 02199-7603 Manages the fund's business and investment activities. --------------------------------------------------- --------------------------------------------------- Subadvisers Independence Investment LLC 53 State Street Boston, MA 02109 Provide portfolio management to the fund. --------------------------------------------------- --------------------------------------------------- Custodian The Bank of New York One Wall Street New York, New York 10286 Holds the fund's assets, settles all portfolio trades and collects most of the valuation data required for calculating the fund's NAV. --------------------------------------------------- --------------------------------------------------- Trustees Oversee the fund's activities. --------------------------------------------------- 14 FUND DETAILS FINANCIAL HIGHLIGHTS These tables detail the performance of the fund's share classes, including total return information showing how much an investment in the fund has increased or decreased each year. Core Equity Fund Figures audited by PricewaterhouseCoopers LLP.
CLASS A SHARES PERIOD ENDED: 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01 - -------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE - -------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $19.42 $23.93 $30.14 $33.21 $29.87 Net investment income (loss)(1) 0.10 0.05 (0.02) (0.06) (0.03) Net realized and unrealized gain (loss) on investments 5.55 6.81 3.72 (2.49) (3.22) Total from investment operations 5.65 6.86 3.70 (2.55) (3.25) Less distributions From net investment income (0.04) -- -- -- -- From net realized gain (1.10) (0.65) (0.63) (0.42) (0.01) In excess of net realized gain -- -- -- (0.37) -- (1.14) (0.65) (0.63) (0.79) (0.01) Net asset value, end of period $23.93 $30.14 $33.21 $29.87 $26.61 Total return(2) (%) 29.19(3) 28.84 12.37 (7.75) (10.87) - -------------------------------------------------------------------------------------------------------------------------------- RATIOS AND SUPPLEMENTAL DATA - -------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $92 $201 $394 $373 $255 Ratio of expenses to average net assets (%) 1.42 1.39 1.37 1.41 1.47 Ratio of adjusted expenses to average net assets(4) (%) 1.44 -- -- -- -- Ratio of net investment income (loss) to average net assets (%) 0.45 0.17 (0.06) (0.19) (0.12) Portfolio turnover (%) 62 50 98 82 76 CLASS B SHARES PERIOD ENDED: 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01 - -------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE - -------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $19.41 $23.80 $29.75 $32.54 $29.06 Net investment loss(1) (0.06) (0.14) (0.24) (0.27) (0.22) Net realized and unrealized gain (loss) on investments 5.56 6.74 3.66 (2.42) (3.12) Total from investment operations 5.50 6.60 3.42 (2.69) (3.34) Less distributions From net investment income (0.01) -- -- -- -- From net realized gain (1.10) (0.65) (0.63) (0.42) (0.01) In excess of net realized gain -- -- -- (0.37) -- (1.11) (0.65) (0.63) (0.79) (0.01) Net asset value, end of period $23.80 $29.75 $32.54 $29.06 $25.71 Total return(2) (%) 28.39(3) 27.90 11.59 (8.35) (11.49) - -------------------------------------------------------------------------------------------------------------------------------- RATIOS AND SUPPLEMENTAL DATA - -------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $135 $347 $664 $499 $377 Ratio of expenses to average net assets (%) 2.12 2.09 2.07 2.07 2.17 Ratio of adjusted expenses to average net assets(4) (%) 2.14 -- -- -- -- Ratio of net investment income (loss) to average net assets (%) (0.25) (0.53) (0.77) (0.86) (0.82) Portfolio turnover (%) 62 50 98 82 76
FUND DETAILS 15
CLASS C SHARES PERIOD ENDED: 12-31-99(5) 12-31-00 12-31-01(1) - ------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE - ------------------------------------------------------------------------------------------------- Net asset value, beginning of period $14.60 $14.05 $13.03 Net investment income(2) 0.19 0.24 0.21 Net realized and unrealized loss on investments (0.37) (0.59) (0.99) Total from investment operations (0.18) (0.35) (0.78) Less distributions From net investment income (0.19) (0.24) (0.24) In excess of net investment income --(3) -- -- From net realized gain (0.18) (0.43) -- (0.37) (0.67) (0.24) Net asset value, end of period $14.05 $13.03 $12.01 Total return(4) (%) (1.15)(6) (2.51) (5.99) - ------------------------------------------------------------------------------------------------- RATIOS AND SUPPLEMENTAL DATA - ------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) --(7) $1 $2 Ratio of expenses to average net assets (%) 1.84(8) 2.01 2.07 Ratio of net investment income to average net assets (%) 1.88(8) 1.93 1.76 Portfolio turnover (%) 94 99 98
(1) As required, effective January 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, and began amortizing premiums on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per share by $0.01, decrease net realized and unrealized losses per share by $0.01, and, had the fund not amortized premiums on debt securities, the annualized ratio of net investment income to average net assets would have been 2.50%, 1.80% and 1.80% for Class A, Class B and Class C shares, respectively. Per share ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment and does not reflect the effect of sales charges. (5) Class C shares began operations on 5-3-99. (6) Not annualized. (7) Less than $500,000. (8) Annualized. 16 FUND DETAILS For more information Two documents are available that offer further information on the John Hancock Core Equity 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 1000 Boston, MA 02217-1000 By phone: 1-800-225-5291 By EASI-Line: 1-800-338-8080 By TDD: 1-800-544-6713 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 SPONSOR 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 250PN 3/02 JOHN HANCOCK - -------------------------------------------------------------------------------- Prospectus 3.1.02 Core Equity 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 Core Equity Fund 4 goals, strategies, risks, performance and expenses. Policies and instructions Your account for 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 Core Equity Fund GOAL AND STRATEGY [Clip Art] The fund seeks above-average total return (capital appreciation plus income). To pursue this goal, the fund normally invests at least 80% of its assets in a diversified portfolio of equities securities (including common and preferred stocks and their equivalents) which are primarily large-capitalization stocks. The portfolio's risk profile is similar to that of the Standard & Poor's 500 Index. The managers select from a menu of stocks of approximately 600 companies that evolves over time. Approximately 70% to 80% of these companies also are included in the Standard & Poor's 500 Index. The subadviser's investment research team is organized by industry and tracks these companies to develop earnings estimates and five-year projections for growth. A series of proprietary computer models uses this in-house research to rank the stocks according to their combination of: o value, meaning they appear to be underpriced o improving fundamentals, meaning they show potential for strong growth This process, together with a risk/return analysis against the Standard & Poor's 500 Index, results in a portfolio of approximately 100 to 130 of the stocks from the top 60% of the menu. The fund generally sells stocks that fall into the bottom 20% of the menu. In normal circumstances, the fund is almost entirely invested in stocks. The fund may invest in dollar-denominated foreign securities and make limited use of certain derivatives (investments whose value is based on indexes or securities). In abnormal circumstances, the fund may temporarily invest more than 20% of its 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. 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 no operational history, 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 before and after taxes does not indicate future results. Class A, total returns Best quarter: Q4 '98, 24.17% Worst quarter: Q3 '01, -15.72% After-tax returns After-tax returns are shown for Class A shares only and would be different for the other classes. They are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. Index (reflects no fees or taxes) Standard & Poor's 500 Index, an unmanaged index of 500 stocks. - -------------------------------------------------------------------------------- Class A calendar year total returns (without sales charges) - -------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 9.01% 16.12% -2.14% 37.20% 21.24% 29.19% 28.84% 12.37% -7.75% -10.87% - -------------------------------------------------------------------------------- Average annual total returns (including sales charge) for periods ending 12-31-01 - -------------------------------------------------------------------------------- 1 year 5 year 10 year - -------------------------------------------------------------------------------- Class A before tax -15.32% 7.88% 11.65% Class A after tax on distributions -15.33% 7.23% 10.76% Class A after tax on distributions, with sale -9.33% 6.31% 9.56% Class I before tax (no operational history) -- -- -- Standard & Poor's 500 Index -11.89% 10.70% 12.94% 4 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on small- or medium-capitalization stocks. The fund's management strategy has a significant influence on fund performance. If the investment research team's earnings estimates or projections turn out to be inaccurate, or if the proprietary computer models do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially inadequate or inaccurate financial information and social or political instability. 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 0.75% Other expenses 0.13% Total fund operating expenses 0.88% 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 $90 $281 $488 $1,084 ================================================================================ SUBADVISER Independence Investment LLC Team responsible for day-to-day investment management A subsidiary of John Hancock Financial Services, Inc. Founded in 1982 Supervised by the adviser FUND CODES Class I Ticker -- CUSIP 409902848 Newspaper -- SEC number 811-1677 JH fund number 423 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 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 financial representative, or account statement. If no slip mail them to Signature is 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 o You may only exchange for shares of other institutional shares of other institutional funds or 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 financial the amount of your investment representative, or mail it to to: Signature Services. First Signature Bank & Trust Account # 900022260 o Obtain your account number by Routing # 211475000 calling your financial representative or Signature Specify the fund name(s), your Services. share class, your account number and the name(s) in which o Instruct your bank to wire the account is registered. Your the amount of your investment bank may charge a fee to wire to: funds. 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, however, o Write a letter of sales of $5 million or more instruction indicating the must be made by letter. fund name, your account number, your share class, o Certain requests will require. the name(s) in which the a Medallion signature guarantee. account is registered and Please refer to "Selling shares the dollar value or number in writing." of shares you wish to sell. o Include all signatures and any additional documents that may be required (see next page). o Mail the materials to Signature Services. o A check 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 o To verify that the telephone any amount. redemption privilege is in place on an account, or to o Requests by phone to sell up request the forms to add it to $5 million (accounts with to an existing account, call 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 - -------------------------------------------------------------------------------- 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 o Letter of instruction signed by with rights of survivorship surviving tenant. whose 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, o Call 1-888-972-8696 for instructions. conservators, guardians and other sellers or 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 valuing portfolio securities, but may use fair-value estimates if reliable market prices are unavailable. The fund may also value securities at fair value if the value of these securities has been materially affected by events occurring after the close of a foreign market. 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 I shares 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 fund generally distributes most or all of its net earnings in the form of dividends. Any capital gains are distributed annually. The fund declares and pays any income dividends 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. 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 a 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. Subadviser Independence Investment LLC, 53 State Street, Boston, MA 02109. Management fees For the period ended December 31, 2001, the fund paid the investment adviser management fees at a rate of 0.75% of average net assets. YOUR ACCOUNT 11 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS Since Class I shares have no operational history, financial highlights are provided for the fund's Class A shares, which are offered in a separate prospectus. This table details the performance of the fund's Class A shares, including total return information showing how much an investment in the fund has increased or decreased each year. Core Equity Fund Figures Figures audited by PricewaterhouseCoopers LLP.
CLASS A SHARES PERIOD ENDED: 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01 - ---------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE - ---------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $19.42 $23.93 $30.14 $33.21 $29.87 Net investment income (loss)(1) 0.10 0.05 (0.02) (0.06) (0.03) Net realized and unrealized gain (loss) on investments 5.55 6.81 3.72 (2.49) (3.22) Total from investment operations 5.65 6.86 3.70 (2.55) (3.25) Less distributions (0.04) -- -- -- -- From net investment income (1.10) (0.65) (0.63) (0.42) (0.01) From net realized gain -- -- -- (0.37) -- In excess of net realized gain (1.14) (0.65) (0.63) (0.79) (0.01) Net asset value, end of period $23.93 $30.14 $33.21 $29.87 $26.61 Total return(2) (%) 29.19(3) 28.84 12.37 (7.75) (10.87) - ---------------------------------------------------------------------------------------------------------------------------- RATIOS AND SUPPLEMENTAL DATA - ---------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $ 92 $ 201 $ 394 $373 $ 255 Ratio of expenses to average net assets (%) 1.42 1.39 1.37 1.41 1.47 Ratio of adjusted expenses to average net assets(4) 1.44 -- -- -- -- Ratio of net investment income (loss) to average net assets (%) 0.45 0.17 (0.06) (0.19) (0.12) Portfolio turnover (%) 62 50 98 82 76 - ----------------------------------------------------------------------------------------------------------------------------
(1) Based on the average of the shares outstanding at the end of each month. (2) Assumes dividend reinvestment and does not reflect the effect of sales charges. (3) The total return would have been lower had certain expenses not been reduced during the period shown. (4) Does not take into consideration expense reductions during the periods shown. - -------------------------------------------------------------------------------- The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for Class A for the year ended December 31, 1997 would have been 29.17%. 12 FUND DETAILS For more information Two documents are available that offer further information on the John Hancock Core Equity 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, MA02217-1001 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 - ------------------------- 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 46IPN 3/02 John Hancock Core Equity Fund ANNUAL REPORT 12.31.01 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 12 For your information page 25 Dear Fellow Shareholders, The U.S. stock market produced double-digit losses for the second year in a row in 2001 -- the first back-to-back down years for stocks since the 1973-74 bear market. The economy slipped into recession, wreaking havoc with corporate profits, and the tragic events of September 11 further rattled investors. Even a strong fourth quarter rally was not enough to lift the major indexes into positive territory. The Standard & Poor's 500 Index finished the year losing 11.88%, including reinvested dividends, and the Dow Jones Industrial Average lost 5.42%. The tech-heavy Nasdaq Composite Index fell 21.05% -- tamer than 2000's loss thanks to a late-year rebound in the beleaguered technology and telecommunications sectors. Stock mutual fund investors didn't find many places to hide, and 83% of U.S. stock funds posted negative returns in 2001, with the average stock fund falling 10.89%, according to Lipper, Inc. In stark contrast, bonds beat stocks for the second straight year and produced positive results, buoyed by falling interest rates and investors' search for safety. These last two years couldn't have provided a more vivid example of the importance of being well diversified, since a portfolio concentrated solely in stocks would have fallen more in the last two years than one combining investments in both stocks and bonds. Two disappointing years of stock performance could also be a reason to re-evaluate with your investment professional whether you are still on track to meet your long-term financial goals. It's possible that downsized results, and modified expectations, could foster some changes in your investing strategies. And now is certainly a good time to perform this review, given the increased opportunities for retirement and college savings offered in President Bush's major tax-cut legislation enacted in June. With the market's fourth quarter rally, and the growing expectation that the economy would rebound sometime in 2002, we begin the year on a positive note, confident in the resilience of the economy, the financial markets and the nation. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer YOUR FUND AT A GLANCE The Fund seeks above-average total return (capital apprecia- tion plus income) by investing in a diversified portfolio of primarily large- capitalization stocks. The portfolio's risk profile is similar to that of the Standard & Poor's 500 Index. Over the last twelve months * The economy slipped into recession, and declining corporate earnings hurt stock market results. * The Fed continued to cut interest rates aggressively. * The Fund's blend of growth and value helped its relative performance. [Bar chart with heading "John Hancock Core Equity Fund." Under the heading is a note that reads "Fund performance for the year ended December 31, 2001." The chart is scaled in increments of 4% with -12% at the bottom and 0% at the top. The first bar represents the -10.87% total return for Class A. The second bar represents the -11.49% total return for Class B. The third bar represents the -11.49% total return for Class C. A note below the chart reads "Total returns for the Fund are at net asset value with all distributions reinvested."] Top 10 holdings 3.4% Pfizer 3.4% Citigroup 3.3% Microsoft 2.9% Exxon Mobil 2.9% General Electric 2.5% Intel 2.2% American Home Products 2.2% Tyco International 2.1% IBM 2.0% Philip Morris As a percentage of net assets on December 31, 2001. MANAGERS' REPORT BY PAUL MCMANUS, FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock Core Equity Fund While 2001 was undoubtedly a difficult year for many investors, a strong year-end rally helped to offset some of the stock-market damage inflicted earlier in the year. During the first half, the key question was whether the U.S. economy would enter a recession. As the summer progressed, the answer to this question was still in doubt, as the economy experienced clear but contained weakening. The manufacturing sector continued to be the most troublesome spot, while consumer spending held up fairly well. In September some economic data, such as the National Association of Purchasing Management's index of manufacturing activity, began to indicate that the rate of economic deceleration might be decreasing. Then September 11 changed everything, and suddenly the question became how long the recession would last. "...a strong year-end rally helped to offset some of the stock-market damage inflicted earlier in the year." The silver lining in all of these clouds was the Federal Reserve Board's proactive response to the situation. By September 11, the Fed had already reduced short-term interest rates seven times in 2001. The central bank reacted swiftly and decisively to the terrorist crisis, cutting rates another four times before the end of the period and aggressively adding reserves to the banking system. Seeing the Fed's commitment to reviving the economy, investors looked ahead to the possibility of a recovery in 2002 and drove the popular stock averages back up to their pre-attack levels by the end of the period. PERFORMANCE REVIEW The Fund's strategy of maintaining broad diversification and seeking out undervalued stocks of companies with improving fundamentals served it well. In the first and third quarters of the year, when most stocks suffered their worst declines, value outperformed growth. Conversely, the second and fourth quarters saw growth stocks take the lead when the markets rallied. Because our methodology includes growth and value components, we benefited from both scenarios on a relative basis. Similarly, our exposure to stocks from all market capitalizations enabled the Fund to take advantage of the relative outperformance of medium- and small-cap shares. Consequently, although we finished a difficult year with negative returns, we managed to outperform our benchmark and peer group average. For the 12 months ended December 31, 2001, the John Hancock Core Equity Fund's Class A, Class B and Class C shares returned -10.87%, -11.49% and -11.49%, respectively, at net asset value. These returns compared favorably with the -11.88% return of the S&P 500 Index, including reinvested dividends, and with the -13.77% return of the average large-cap core fund, according to Lipper, Inc.1 Keep in mind that your returns will differ from those listed above if you were not invested in the Fund for the entire period or did not reinvest all distributions. Historical performance information can be found on pages six and seven. "...our exposure to stocks from all market capitaliza- tions enabled the Fund to take advantage of the relative outperformance of medium- and small-cap shares." INDIVIDUAL TECHNOLOGY STANDOUTS While technology stocks were the hardest hit sector during the year, there were some exceptions. Software giant Microsoft was the Fund's most positive contributor. Investors were less fearful of the U.S. Department of Justice's antitrust suit against the company once a Republican administration regained the White House. Another positive factor for Microsoft was the introduction of Windows XP, its updated version of the widely used Windows personal computer operating system. A second technology stalwart, IBM, also aided the Fund's performance. The company did a good job of meeting its earnings estimates, and investors liked the company's prospects in the improving economic environment anticipated for 2002. Software firms Intuit and Cadence Design Systems benefited from the comparative reliability of their earnings stream. [Table at top left-hand side of page entitled "Top five industry groups." The first listing is Medical 16%, the second is Computers 15%, the third Retail 9%, the fourth Electronics 8%, and the fifth Oil & gas 7%. BIG-CAP LOSERS On the downside, we were hurt most by Cisco Systems, which reflected the tech sector's moves, doing well in the fourth quarter but struggling for the year as a whole. Downward revisions in earnings and revenues early in the year were particularly damaging, and we underweighted the stock for most of the year compared with our benchmark. Pharmaceutical stock Merck dropped sharply in December when the company announced that it was scaling back its earnings guidance and delaying product development targets for 2002. Enron, the bankrupt energy trading firm, detracted from the Fund's performance, but we smelled trouble and liquidated the position in October, when the stock was still trading near $20. Finally, General Electric lost some of its luster due to concerns about its jet engine business in the wake of September 11. A dip in orders for GE's generators in response to the overbuilding of power generating capacity during the past few years was another point of concern. [Pie chart at middle of page with heading "Portfolio diversification As a percentage of net assets on 12-31-01." The chart is divided into two sections (from top to left): Common stocks 99% and Short-term investments 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 Microsoft followed by an up arrow with the phrase "Relatively stable earnings growth, updated Windows version." The second listing is Cisco Systems followed by a down arrow with the phrase "Earnings shortfalls, overbuilding of networks." The third listing is Merck followed by a down arrow with the phrase "Disappointing December earnings forecast."] LOOKING AHEAD As happened just before September 11, we are again beginning to see signs of an economy that could be bottoming. We believe that the main effect of the terrorist attacks was to delay a recovery, but that they did not deal the economy an irreparable blow. The big question now is when corporate earnings will rebound. We expect that companies will attempt to get most of their bad news out of the way and write off the maximum allowable losses in the fourth quarter, leaving them with essentially a clean slate in the new year. That fact, together with the robust fourth quarter rally that might have boosted share prices a little too far, too fast, leaves us with only a mixed outlook for stocks over the very short term. However, we are considerably more confident about the long-term picture, which should benefit from historically low interest rates and the government's stimulative fiscal policies. We look forward to the possibility of applying our disciplined methodology under better conditions in 2002 than we saw in 2001. "...we are considerably more confident about the long- term picture, which should benefit from historically low interest rates and the government's stimulative fiscal policies." This commentary reflects the views of the portfolio management team through the end of the Fund's period discussed in this report. Of course, the team's 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 December 31, 2001 The index used for comparison is the Standard & Poor's 500 Index, an unmanaged index that includes 500 widely traded common stocks. It is not possible to invest in an index. Class A Class B Class C Index Inception date 6-10-91 9-7-95 5-1-98 -- Average annual returns with maximum sales charge (POP) One year -15.32% -15.91% -13.24% -11.88% Five years 7.88% 7.96% -- 10.70% Ten years 11.65% -- -- 12.93% Since inception -- 11.01% -0.53% -- Cumulative total returns with maximum sales charge (POP) One year -15.32% -15.91% -13.24% -11.88% Five years 46.10% 46.67% -- 66.26% Ten years 200.97% -- -- 237.32% Since inception -- 93.43% -1.93% -- Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 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. 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. 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 Standard & Poor's 500 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 $33,732 as of December 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Core Equity Fund, before sales charge, and is equal to $31,685 as of December 31, 2001. The third bar represents the same hypothetical $10,000 investment made in the John Hancock Core Equity Fund, after sales charge, and is equal to $30,097 as of December 31, 2001. Class B 1 Class C 1 Inception date 9-7-95 5-1-98 Without sales charge $19,343 $9,906 With maximum sales charge -- $9,807 Index $22,584 $10,832 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 December 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 December 31, 2001 This schedule is 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.
SHARES ISSUER VALUE COMMON STOCKS 99.61% $660,153,603 (Cost $560,671,244) Aerospace 1.53% $10,174,535 23,800 General Dynamics Corp. 1,895,432 128,100 United Technologies Corp. 8,279,103 Automobiles/Trucks 1.67% 11,068,922 250,200 Ford Motor Co. 3,933,144 67,800 General Motors Corp. 3,295,080 100,700 Lear Corp.* 3,840,698 Banks -- United States 3.53% 23,413,367 97,300 Bank of America Corp. 6,125,035 186,500 J.P. Morgan Chase & Co. 6,779,275 52,000 TCF Financial Corp. 2,494,960 382,900 U.S. Bancorp 8,014,097 Beverages 1.44% 9,519,036 96,500 Anheuser-Busch Cos., Inc. 4,362,765 105,900 PepsiCo, Inc. 5,156,271 Business Services -- Misc. 0.31% 2,069,448 55,200 Convergys Corp.* 2,069,448 Chemicals 3.10% 20,570,802 119,300 Air Products & Chemicals, Inc. 5,596,363 276,300 Dow Chemical Co. 9,333,414 102,100 Praxair, Inc. 5,641,025 Computers 14.62% 96,868,871 115,000 Cadence Design Systems, Inc.* 2,520,800 547,500 Cisco Systems, Inc.* 9,915,225 38,600 Computer Sciences Corp.* 1,890,628 373,200 Dell Computer Corp.* 10,143,576 81,800 Electronic Data Systems Corp. 5,607,390 129,500 First Data Corp. 10,159,275 114,500 International Business Machines Corp. 13,849,920 122,700 Intuit, Inc.* 5,249,106 331,400 Microsoft Corp.* 21,955,250 107,100 Network Associates, Inc.* 2,768,535 368,200 Oracle Corp.* 5,084,842 65,600 PeopleSoft, Inc.* 2,637,120 257,600 Sun Microsystems, Inc.* 3,168,480 42,800 VERITAS Software Corp.* 1,918,724 Cosmetics & Personal Care 0.77% 5,138,250 110,500 Avon Products, Inc. 5,138,250 Diversified Operations 2.64% 17,496,796 93,800 Honeywell International, Inc. 3,172,316 243,200 Tyco International Ltd. 14,324,480 Electronics 7.96% 52,780,826 50,300 Analog Devices, Inc.* 2,232,817 60,300 Applied Materials, Inc.* 2,418,030 478,300 General Electric Co. 19,170,264 518,200 Intel Corp. 16,297,390 49,500 Linear Technology Corp. 1,932,480 69,900 Micron Technology, Inc.* 2,166,900 300,000 Motorola, Inc. 4,506,000 50,000 QLogic Corp.* 2,225,500 46,900 Xilinx, Inc.* 1,831,445 Finance 5.53% 36,619,418 444,400 Citigroup, Inc. 22,433,312 62,000 Concord EFS, Inc.* 2,032,360 106,900 Morgan Stanley Dean Witter & Co. 5,979,986 188,800 Washington Mutual, Inc. 6,173,760 Food 1.30% 8,587,904 57,000 Kraft Foods, Inc. (Class A)* 1,939,710 115,400 Unilever NV, American Depositary Receipts (ADR) (Netherlands) 6,648,194 Insurance 5.52% 36,584,029 153,400 American International Group, Inc. 12,179,960 147,400 Hartford Financial Services Group, Inc. (The) 9,261,142 34,900 Lincoln National Corp. 1,695,093 18,500 Marsh & McLennan Cos., Inc. 1,987,825 48,400 PMI Group, Inc. (The) 3,243,284 72,600 Radian Group, Inc. 3,118,170 85,500 Torchmark Corp. 3,362,715 19,000 XL Capital Ltd. (Class A) 1,735,840 Manufacturing 0.64% 4,221,700 70,000 Danaher Corp. 4,221,700 Media 2.15% 14,256,765 197,300 AOL Time Warner, Inc.* 6,333,330 191,000 Liberty Media Corp. (Class A)* 2,674,000 118,900 Viacom, Inc. (Class B)* 5,249,435 Medical 15.59% 103,306,675 146,800 Abbott Laboratories 8,184,100 112,400 Allergan, Inc. 8,435,620 240,400 American Home Products Corp. 14,750,944 80,000 CV Therapeutics, Inc.* 4,161,600 174,500 Johnson & Johnson 10,312,950 20,800 Laboratory Corp. of America Holdings* 1,681,680 100,000 Lilly (Eli) & Co. 7,854,000 572,700 Pfizer, Inc. 22,822,095 132,900 Pharmacia Corp. 5,668,185 62,200 Schering-Plough Corp. 2,227,382 202,700 Tenet Healthcare Corp.* 11,902,544 49,900 Trigon Healthcare, Inc.* 3,465,555 26,000 UnitedHealth Group, Inc. 1,840,020 Mortgage Banking 1.95% 12,958,500 163,000 Fannie Mae 12,958,500 Office 0.60% 3,957,100 70,000 Avery Dennison Corp. 3,957,100 Oil & Gas 7.03% 46,564,395 90,000 Baker Hughes, Inc. 3,282,300 80,000 ChevronTexaco Corp. 7,168,800 79,100 El Paso Corp. 3,528,651 496,200 Exxon Mobil Corp. 19,500,660 209,200 Royal Dutch Petroleum Co. (ADR) (Netherlands) 10,254,984 94,300 USX -- Marathon Group 2,829,000 Retail 8.83% 58,517,398 138,100 Bed Bath & Beyond, Inc.* 4,681,590 38,700 CDW Computer Centers, Inc.* 2,078,577 58,900 Family Dollar Stores, Inc. 1,765,822 229,000 Home Depot, Inc. (The) 11,681,290 105,600 Kohl's Corp.* 7,438,464 206,800 Lowe's Cos., Inc. 9,597,588 70,000 Penney (J. C.) Co., Inc. 1,883,000 153,200 Target Corp. 6,288,860 91,200 TJX Cos., Inc. 3,635,232 164,500 Wal-Mart Stores, Inc. 9,466,975 Soap & Cleaning Preparations 1.32% 8,728,039 110,300 Procter & Gamble Co. (The) 8,728,039 Telecommunications 4.22% 27,986,247 196,800 Nokia Corp. (ADR) (Finland) 4,827,504 103,400 QUALCOMM, Inc.* 5,221,700 176,100 Sprint Corp. 4,298,601 257,700 Verizon Communications, Inc. 12,230,442 100,000 WorldCom, Inc. -- WorldCom Group* 1,408,000 Tobacco 1.97% 13,058,080 284,800 Philip Morris Cos., Inc. 13,058,080 Transport 0.31% 2,057,485 78,500 Continental Airlines, Inc. (Class B)* 2,057,485 Utilities 5.08% 33,649,015 70,000 Allegheny Energy, Inc. 2,535,400 115,800 Dominion Resources, Inc. 6,959,580 100,000 Duke Energy Corp. 3,926,000 116,200 Entergy Corp. 4,544,582 160,600 NiSource, Inc. 3,703,436 206,700 SBC Communications, Inc. 8,096,439 85,500 Sempra Energy 2,099,025 70,900 UtiliCorp United, Inc. 1,784,553 INTEREST PAR VALUE ISSUER, DESCRIPTION, MATURITY DATE RATE (000S OMITTED) VALUE SHORT-TERM INVESTMENTS 0.50% $3,344,000 (Cost $3,344,000) Joint Repurchase Agreement 0.50% 3,344,000 Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 12-31-01, due 01-02-02 (Secured by U.S. Treasury Bonds 9.875% due 11-15-15 and 8.750% due 05-15-17, U.S. Treasury Notes 5.625% due 12-31-02 and 6.250% due 02-15-03, U.S. Treasury Inflation Index Bond 3.375% due 04-15-32, U.S. Treasury Inflation Index Note 3.375% due 01-15-07) 1.70% $3,344 3,344,000 TOTAL INVESTMENTS 100.11% $663,497,603 OTHER ASSETS AND LIABILITIES, NET (0.11%) ($732,708) TOTAL NET ASSETS 100.00% $662,764,895 * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of 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.
ASSETS AND LIABILITIES December 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 $564,015,244) $663,497,603 Receivable for shares sold 49,861 Dividends and interest receivable 628,345 Other assets 21,094 Total assets 664,196,903 LIABILITIES Due to custodian 2,067 Payable for shares repurchased 499,235 Payable to affiliates 807,623 Other payables and accrued expenses 123,083 Total liabilities 1,432,008 NET ASSETS Capital paid-in 672,596,829 Accumulated net realized loss on investments (109,305,536) Net unrealized appreciation of investments 99,482,359 Accumulated net investment loss (8,757) Net assets $662,764,895 NET ASSET VALUE PER SHARE Based on net asset values and shares outstanding Class A ($255,219,486 [DIV] 9,589,956 shares) $26.61 Class B ($377,065,745 [DIV] 14,666,844 shares) $25.71 Class C ($30,479,664 [DIV] 1,186,056 shares) $25.70 MAXIMUM OFFERING PRICE PER SHARE Class A 1 ($26.61 [DIV] 95%) $28.01 Class C ($25.70 [DIV] 99%) $25.96 1 On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the offering price is reduced. See notes to financial statements. OPERATIONS For the year ended December 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 Dividends (net of foreign withholding taxes of $61,013) $9,849,346 Interest 319,962 Securities lending income 44,982 Total investment income 10,214,290 EXPENSES Investment management fee 5,665,542 Class A distribution and service fee 901,850 Class B distribution and service fee 4,247,235 Class C distribution and service fee 304,516 Transfer agent fee 2,733,460 Custodian fee 155,413 Accounting and legal services fee 153,343 Trustees' fee 48,238 Printing 40,939 Miscellaneous 25,302 Auditing fee 20,500 Registration and filing fee 11,130 Legal fee 8,147 Interest expense 3,131 Total expenses 14,318,746 Net investment loss (4,104,456) REALIZED AND UNREALIZED GAIN (LOSS) Net realized loss from investments (95,427,871) Change in net unrealized appreciation (depreciation) of investments 3,840,862 Net realized and unrealized loss (91,587,009) Decrease in net assets from operations ($95,691,465) 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 YEAR ENDED ENDED 12-31-00 12-31-01 INCREASE (DECREASE) IN NET ASSETS From operations Net investment loss ($5,883,128) ($4,104,456) Net realized gain (loss) 8,405,087 (95,427,871) Change in net unrealized appreciation (depreciation) (87,527,991) 3,840,862 Decrease in net assets resulting from operations (85,006,032) (95,691,465) Distributions to shareholders From net realized gain Class A (5,106,990) (116,099) Class B (7,058,921) (177,732) Class C (442,207) (14,036) In excess of net realized gain Class A (4,538,046) -- Class B (6,272,523) -- Class C (392,944) -- (23,811,631) (307,867) From fund share transactions (75,310,466) (144,863,026) NET ASSETS Beginning of period 1,087,755,382 903,627,253 End of period 1 $903,627,253 $662,764,895 1 Includes accumulated net investment loss of $7,356 and $8,757, 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 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $19.42 $23.93 $30.14 $33.21 $29.87 Net investment income (loss) 1 0.10 0.05 (0.02) (0.06) (0.03) Net realized and unrealized gain (loss) on investments 5.55 6.81 3.72 (2.49) (3.22) Total from investment operations 5.65 6.86 3.70 (2.55) (3.25) Less distributions From net investment income (0.04) -- -- -- -- From net realized gain (1.10) (0.65) (0.63) (0.42) (0.01) In excess of net realized gain -- -- -- (0.37) -- (1.14) (0.65) (0.63) (0.79) (0.01) Net asset value, end of period $23.93 $30.14 $33.21 $29.87 $26.61 Total return 2 (%) 29.19 3 28.84 12.37 (7.75) (10.87) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $92 $201 $394 $373 $255 Ratio of expenses to average net assets (%) 1.42 1.39 1.37 1.41 1.47 Ratio of adjusted expenses to average net assets 4 (%) 1.44 -- -- -- -- Ratio of net investment income (loss) to average net assets (%) 0.45 0.17 (0.06) (0.19) (0.12) Portfolio turnover (%) 62 50 98 82 76 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS B SHARES PERIOD ENDED 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $19.41 $23.80 $29.75 $32.54 $29.06 Net investment loss 1 (0.06) (0.14) (0.24) (0.27) (0.22) Net realized and unrealized gain (loss) on investments 5.56 6.74 3.66 (2.42) (3.12) Total from investment operations 5.50 6.60 3.42 (2.69) (3.34) Less distributions From net investment income (0.01) -- -- -- -- From net realized gain (1.10) (0.65) (0.63) (0.42) (0.01) In excess of net realized gain -- -- -- (0.37) -- (1.11) (0.65) (0.63) (0.79) (0.01) Net asset value, end of period $23.80 $29.75 $32.54 $29.06 $25.71 Total return 2 (%) 28.39 3 27.90 11.59 (8.35) (11.49) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $135 $347 $664 $499 $377 Ratio of expenses to average net assets (%) 2.12 2.09 2.07 2.07 2.17 Ratio of adjusted expenses to average net assets 4 (%) 2.14 -- -- -- -- Ratio of net investment income (loss) to average net assets (%) (0.25) (0.53) (0.77) (0.86) (0.82) Portfolio turnover (%) 62 50 98 82 76 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS C SHARES PERIOD ENDED 12-31-98 7 12-31-99 12-31-00 12-31-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $27.81 $29.75 $32.54 $29.05 Net investment loss 1 (0.09) (0.25) (0.28) (0.22) Net realized and unrealized gain (loss) on investments 2.68 3.67 (2.42) (3.12) Total from investment operations 2.59 3.42 (2.70) (3.34) Less distributions From net realized gain (0.65) (0.63) (0.42) (0.01) In excess of net realized gain -- -- (0.37) -- (0.65) (0.63) (0.79) (0.01) Net asset value, end of period $29.75 $32.54 $29.05 $25.70 Total return 2 (%) 9.46 5 11.59 (8.38) (11.49) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $7 $30 $32 $30 Ratio of expenses to average net assets (%) 2.12 6 2.08 2.11 2.17 Ratio of net investment loss to average net assets (%) (0.53) 6 (0.80) (0.89) (0.82) Portfolio turnover (%) 50 98 82 76 1 Based on the average of the shares outstanding at the end of each month. 2 Assumes dividend reinvestment and does not reflect the effect of sales charges. 3 Total return would have been lower had certain expenses not been reduced during the period shown. 4 Does not take into consideration expense reductions during the period shown. 5 Not annualized. 6 Annualized. 7 Class C shares began operations on 5-1-98. See notes to financial statements.
NOTES TO STATEMENTS NOTE A Accounting policies John Hancock Core Equity Fund (the "Fund") is a diversified series of John Hancock Capital Series, an open-end investment management company registered under the Investment Company Act of 1940. The investment objective of the Fund is to seek above-average total return, consisting of capital appreciation plus current income. The Trustees have authorized the issuance of multiple classes of shares of the Fund, designated as Class A, Class B and Class C. The Trustees authorized the issuance of Class I shares effective March 1, 2002. 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, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, LLC, 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. 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 average daily loan balance during the period for which loans were outstanding amounted to $2,147,857, and the weighted average interest rate was 5.75%. Interest expense includes $2,352 paid under the line of credit. There was no outstanding borrowing under the line of credit on December 31, 2001. Securities lending The Fund may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. 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 December 31, 2001, the Fund loaned securities having a market value of $13,420,678 collateralized by securities in the amount of $13,761,358. 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, at December 31, 2001, the fund has $98,763,630 of capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. If such carryforward is used by the Fund, no capital gain distribution will be made. The Fund's carryforward expires December 31, 2009. Additionally, net capital losses of $9,493,846 are attributable to security transactions incurred after October 31, 2001 and are treated as arising on the first day (January 1, 2002) of the Fund's next taxable year. 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 Fund identifies 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 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) 0.75% of the first $750,000,000 of the Fund's average daily net asset value and (b) 0.70% of the Fund's average daily net asset value in excess of $750,000,000. The Fund and the Adviser have a subadvisory contract with Independence Investment LLC, a wholly owned indirect subsidiary of John Hancock Life Insurance Company ("JHLICo"). The Fund is not responsible for payment of subadviser's fees. The Fund has Distribution Plans with John Hancock Funds, LLC ("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 year ended December 31, 2001, JH Funds received net up-front sales charges of $557,600 with regard to sales of Class A shares. Of this amount, $30,951 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $362,270 was paid as sales commissions to unrelated broker-dealers and $164,379 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. The Adviser's indirect parent, JHLICo, is the indirect sole shareholder of Signator Investors. During the year ended December 31, 2001, JH Funds received net up-front sales charges of $85,743 with regard to sales of Class C shares. Of this amount, $76,595 was paid as sales commissions to unrelated broker-dealers and $9,148 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 December 31, 2001, CDSCs received by JH Funds amounted to $1,004,588 for Class B shares and $7,131 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 a monthly transfer agent fee based on the number of shareholder accounts, 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 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/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 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 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 12-31-00 YEAR ENDED 12-31-01 SHARES AMOUNT SHARES AMOUNT CLASS A SHARES Sold 7,472,136 $242,645,384 3,184,828 $89,249,931 Distributions reinvested 294,124 9,132,732 3,567 102,700 Repurchased (7,137,691) (231,147,253) (6,083,979) (170,783,705) Net increase (decrease) 628,569 $20,630,863 (2,895,584) ($81,431,074) CLASS B SHARES Sold 3,722,423 $117,774,617 1,932,483 $51,837,146 Distributions reinvested 364,052 11,003,383 5,758 146,614 Repurchased (7,324,747) (230,240,864) (4,439,490) (117,896,331) Net decrease (3,238,272) ($101,462,864) (2,501,249) ($65,912,571) CLASS C SHARES Sold 484,442 $15,325,133 435,126 $11,609,714 Distributions reinvested 22,172 669,881 441 11,242 Repurchased (332,373) (10,473,479) (341,238) (9,140,337) Net increase 174,241 $5,521,535 94,329 $2,480,619 NET DECREASE (2,435,462) ($75,310,466) (5,302,504) ($144,863,026)
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 year ended December 31, 2001, aggregated $566,384,550 and $700,742,154, respectively. The cost of investments owned at December 31, 2001, including short-term investments, for federal income tax purposes was $565,063,303. Gross unrealized appreciation and depreciation of investments aggregated $120,550,626 and $22,116,326, respectively, resulting in net unrealized appreciation of $98,434,300. The difference between book basis and tax basis net unrealized appreciation of investments is attributable primarily to the tax deferral of losses on wash sales. NOTE E Reclassification of accounts During the year ended December 31, 2001, the Fund has reclassified amounts to reflect a decrease in accumulated net realized loss on investments of $2,997, a decrease in undistributed accumulated net investment loss of $4,103,055 and a decrease in capital paid-in of $4,106,052. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary differences, as of December 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 the treatment of net operating losses in the computation of distributed income and capital gains 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. AUDITOR'S REPORT Report of Pricewaterhouse- Coopers LLP, Independent Auditors To the Shareholders and Board of Trustees of John Hancock Core Equity Fund In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the John Hancock Core Equity Fund (the "Fund") at December 31, 2001 and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities owned at December 31, 2001 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 11, 2002 TAX INFORMATION Unaudited For federal income tax purposes, the following information is furnished with respect to the distributions of the Fund for its fiscal year ended December 31, 2001. The Fund designated a distribution to shareholders of $307,867 as a long-term capital gain dividend. This amount was reported on the 2001 U.S. Treasury Department Form 1099-DIV. TRUSTEES & OFFICERS This chart provides information about the Trustees and Officers who oversee your John Hancock fund. Officers elected by the Trustees manage the day-to-day operations of the Fund and execute policies formulated by the Trustees. INDEPENDENT TRUSTEES
NUMBER OF NAME, AGE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE Dennis S. Aronowitz 1, Born: 1931 1991 30 Professor of Law, Emeritus, Boston University School of Law (as of 1996); Director, Brookline Bancorp. Richard P. Chapman, Jr., Born: 1935 1991 30 Chairman, President, and Chief Executive Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). William J. Cosgrove 1, Born: 1933 1991 30 Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). Richard A. Farrell 1, Born: 1932 1996 30 President, Farrell, Healer & Co., Inc. (venture capital management firm) (since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); prior to 1980, headed the venture capital group at Bank of Boston Corporation. Gail D. Fosler, Born: 1947 1994 30 Senior Vice President and Chief Economist, The Conference Board (non-profit economic and business research) (since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services) (since 1999); Director, National Bureau of Economic Research (academic) (since 1989); Director, Baxter International (medical health care) (since 2001). William F. Glavin, Born: 1932 1996 30 President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. John A. Moore, Born: 1939 1996 36 President and Chief Executive Officer, Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research) (since 1998); Principal, Hollyhouse (consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). Patti McGill Peterson, Born: 1943 1996 36 Executive Director, Council for International Exchange of Scholars (since 1998), Vice President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John W. Pratt 1, Born: 1931 1996 30 Professor of Business Administration Emeritus, Harvard University Graduate School of Business Administration (as of 1998). INTERESTED TRUSTEES 3 NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE John M. DeCiccio, Born: 1948 2001 66 Trustee Executive Vice President and Chief Investment Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). Maureen R. Ford, Born: 1955 2000 66 Trustee, Chairman, President and Chief Executive Officer Executive Vice President, John Hancock Financial Services, Inc., John Hancock Life Insurance Company; Chairman, Director, President and Chief Executive Officer, the Advisers and The Berkeley Group; Chairman, Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES NAME, AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) AND OTHER OFFICER DIRECTORSHIPS DURING PAST 5 YEARS SINCE William L. Braman, Born: 1953 2000 Executive Vice President and Chief Investment Officer Executive Vice President and Chief Investment Officer, the Adviser and each of the John Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment Officer, Barring Asset Management, London UK (until 2000). Richard A. Brown, Born: 1949 2000 Senior Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). Thomas H. Connors, Born: 1959 1992 Vice President and Compliance Officer Vice President and Compliance Officer, the Adviser and each of the John Hancock funds; Vice President, John Hancock Funds. William H. King, Born: 1952 1992 Vice President and Treasurer Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer of each of the John Hancock funds; Assistant Treasurer of each of the John Hancock funds (until 2001). Susan S. Newton, Born: 1950 1991 Senior Vice President, Secretary and Chief Legal Officer Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the Adviser and each of the John Hancock funds, John Hancock Funds and The Berkeley Group; Vice President, Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital. The business address for all Trustees and Officers is 101 Huntington Avenue, Boston, Massachusetts 02199. The Statement of Additional Information of the Fund includes additional information about members of the board of Trustees of the Fund and is available, without charge, upon request, by calling 1-800-426-5523. 1 Member of Audit Committee. 2 Each Trustee serves until resignation, retirement age or until his or her successor is elected. 3 Interested Trustee holds positions with the Fund's investment adviser, underwriter and certain other affiliates.
OUR FAMILY OF FUNDS - ------------------------------------------------------- Equity Balanced Fund Core Equity Fund Core Growth Fund Core Value Fund Focused Equity Fund Growth Trends Fund Large Cap Equity Fund Large Cap Growth Fund Mid Cap Growth Fund Multi Cap Growth Fund Small Cap Growth Fund Small Cap Equity Fund Sovereign Investors Fund - ------------------------------------------------------- Sector Biotechnology Fund Financial Industries Fund Health Sciences Fund Real Estate Fund Regional Bank Fund Technology Fund - ------------------------------------------------------- Income Bond Fund Government Income Fund High Yield Bond Fund Investment Grade Bond Fund Strategic Income Fund - ------------------------------------------------------- International European Equity Fund Global Fund International Fund Pacific Basin Equities Fund - ------------------------------------------------------- Tax-Free Income California Tax-Free Income Fund High Yield Municipal Bond Fund Massachusetts Tax-Free Income Fund New York Tax-Free Income Fund Tax-Free Bond Fund - ------------------------------------------------------- Money Market Money Market Fund U.S. Government Cash Reserve FOR YOUR INFORMATION INVESTMENT ADVISER John Hancock Advisers, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 PRINCIPAL DISTRIBUTOR John Hancock Funds, LLC 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 INDEPENDENT AUDITORS PricewaterhouseCoopers LLP 160 Federal Street Boston, Massachusetts 02110 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 Core Equity Fund. 2500A 12/01 2/02 VOTE THIS PROXY CARD TODAY! YOUR PROMPT RESPONSE WILL SAVE YOUR FUND THE EXPENSE OF ADDITIONAL MAILINGS JOHN HANCOCK CORE GROWTH 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 Core Growth Fund ("Core Growth Fund") which the undersigned is (are) entitled to vote at the Special Meeting of Shareholders (the "Meeting") of Core Growth 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 Core Growth Fund ("Core Growth Fund") and John Hancock Core Equity Fund ("Core Equity Fund"). Under this Agreement, Core Growth Fund would transfer all of its assets to Core Equity Fund in exchange for shares of Core Equity Fund. These shares will be distributed proportionately to you and the other shareholders of Core Growth Fund. Core Equity Fund will also assume Core Growth 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 Core Growth 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 Core Growth Fund ("Core Growth Fund") and John Hancock Core Equity Fund ("Core Equity Fund"). Under this Agreement, your fund would transfer all of its assets to Core Equity Fund in exchange for shares of Core Equity Fund. These shares would be distributed proportionately to you and the other shareholders of Core Growth Fund. Core Equity would also assume Core Growth 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 Core Growth 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 - -------------------------------------------------------------------------------- VOTE THIS PROXY CARD TODAY! YOUR PROMPT RESPONSE WILL SAVE YOUR FUND THE EXPENSE OF ADDITIONAL MAILINGS JOHN HANCOCK CORE VALUE 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 Core Value Fund ("Core Value Fund") which the undersigned is (are) entitled to vote at the Special Meeting of Shareholders (the "Meeting") of Core Value 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 Core Value Fund ("Core Value Fund") and John Hancock Core Equity Fund ("Core Equity Fund"). Under this Agreement, Core Value Fund would transfer all of its assets to Core Equity Fund in exchange for shares of Core Equity Fund. These shares will be distributed proportionately to you and the other shareholders of Core Value Fund. Core Equity Fund will also assume Core Value 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 Core Growth 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 Core Value Fund ("Core Value Fund") and John Hancock Core Equity Fund ("Core Equity Fund"). Under this Agreement, your fund would transfer all of its assets to Core Equity Fund in exchange for shares of Core Equity Fund. These shares would be distributed proportionately to you and the other shareholders of Core Value Fund. Core Equity would also assume Core Value 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 Core Value 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 CORE EQUITY FUND (the "Acquiring Fund" and a series of John Hancock Capital Series) JOHN HANCOCK CORE GROWTH FUND JOHN HANCOCK CORE VALUE FUND (Each an "Acquired Fund", and each 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 Core Equity Fund and the Funds that it is acquiring, John Hancock Core Growth Fund and John Hancock Core Value 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 Funds 4 General Information and History 4 Investment Objective and Policies 4 Management of the Acquired Funds 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 March 1, 2002, of the Acquiring Fund including audited financial statements as of December 31, 2001. B - Statement of Additional Information, dated July 1, 2001, of the Acquired Funds including unaudited financial statements as of August 30, 2001 and audited financial statements as of February 28, 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 Funds in connection with the solicitation by the Trustees of the Acquired Funds of proxies to be voted at the Special Meeting of Shareholders of the Acquired Funds 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 March 1, 2002, and the Statements of Additional Information of the Acquired Funds, each dated July 1, 2001. The SAI for the Acquiring Fund and the SAIs for the Acquired Funds 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 reorganizations of the Acquired Funds into the Acquiring Fund, since the net asset value of each 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 Funds 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, sub-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 Fund's 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 Funds, 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 December 31, 2001 are attached to the Acquiring Fund SAI, which is attached hereto as Exhibit A. Additional Information About the Acquired Funds General Information and History For additional information about the Acquired Funds generally and their history, see "Organization of the Fund" in each Acquired Fund's SAI attached hereto as Exhibit B. Investment Objective and Policies For additional information about the Acquired Funds' investment objectives, policies and restrictions, see "Investment Objective and Policies" and "Investment Restrictions" in each Acquired Fund's SAI attached hereto as Exhibit B. Management of Acquired Funds For additional information about the Acquired Funds' Board of Trustees, officers and management personnel, see "Those Responsible for Management" in each Acquired Fund's SAI attached hereto as Exhibit B. Investment Advisory and Other Services For additional information about the Acquired Funds' investment adviser, subadviser, custodian, transfer agent and independent accountants, see "Investment Advisory and Other Services", "Distribution Contracts", "Transfer Agent Services", "Custody of Portfolio" and "Independent Auditors" in each Acquired Fund's SAI attached hereto as Exhibit B. Brokerage Allocation and Other Practices For additional information about the Acquired Funds' brokerage allocation practices, see "Brokerage Allocation" in each Acquired Fund's SAI attached hereto as Exhibit B. Capital Stock and Other Securities For additional information about the voting rights and other characteristics of the Acquired Funds' shares of beneficial interest, see "Description of the Fund's Shares" in each Acquired Fund's 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 each Acquired Fund's SAI attached hereto as Exhibit B. Tax Status For additional information about the tax status of the Acquired Funds, see "Tax Status" in each Acquired Fund's SAI attached hereto as Exhibit B. Underwriters For additional information about the Acquired Funds' principal underwriter and the distribution contract between the principal underwriter and the Acquired Funds, see "Distribution Contracts" in each Acquired Fund's SAI attached hereto as Exhibit B. Calculation of Performance Data For additional information about the investment performance of the Acquired Funds, see "Calculation of Performance" in each Acquired Fund's SAI attached hereto as Exhibit B. Financial Statements Audited annual financial statements of the Acquired Funds at February 28, 2001 and unaudited semi-annual financial statements as of August 31, 2001 are attached to each Acquired Fund's SAI, which are attached hereto as Exhibit B. 5 JOHN HANCOCK CORE EQUITY FUND Class I Shares Statement of Additional Information March 1, 2002 This Statement of Additional Information provides information about John Hancock Core Equity Fund (the "Fund"), in addition to the information that is contained in the combined Equity Funds' current Prospectus (the "Prospectus"). The Fund is a diversified series of John Hancock Capital Series (the "Trust"). This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1001 Boston, MA 02217-1001 1-(888)-972-8696 TABLE OF CONTENTS Page Organization of the Fund............................................... 2 Investment Objective and Policies...................................... 2 Investment Restrictions................................................ 10 Those Responsible for Management....................................... 13 Investment Advisory and Other Services................................. 19 Distribution Contracts................................................. 22 Sales Compensation..................................................... 22 Net Asset Value........................................................ 23 Special Redemptions.................................................... 24 Additional Services and Programs....................................... 24 Purchase and Recemptions Through Third Parties......................... 24 Description of the Fund's Shares....................................... 24 Tax Status............................................................. 26 Calculation of Performance ............................................ 30 Brokerage Allocation................................................... 32 Transfer Agent Services................................................ 34 Custody of Portfolio................................................... 35 Independent Auditors................................................... 35 Appendix A -More about Risk............................................ A-1 Appendix B - Description of Bond Ratings............................... B-1 Financial Statements................................................... F-1 1 ORGANIZATION OF THE FUND The Fund is a series of the Trust, an open-end investment management company organized as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts. John Hancock Advisers, LLC (prior to February 1, 2002, John Hancock Advisers, Inc.) (the "Adviser") is the Fund's investment adviser. The Adviser is an indirect, wholly-owned subsidiary of John Hancock Life Insurance Company (formerly John Hancock Mutual Life Insurance Company) (the "Life Company"), a Massachusetts life insurance company chartered in 1862 with national headquarters at John Hancock Place, Boston, Massachusetts. The Life Company is wholly owned by John Hancock Financial Services, Inc., a Delaware corporation organized in February, 2000. On June 3, 1996, the Fund changed its name from John Hancock Independence Diversified Core Equity Fund to John Hancock Independence Equity Fund. Prior to May 1, 1999, the Fund was called John Hancock Independence Equity Fund. The Fund has one sub-adviser: Independence Investment LLC ("Independence" or "Sub-Adviser") (formerly Independence Investment Associates, Inc.) which is a subsidiary of the Life Company. 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 risk. The investment objective of the Fund is fundamental and may only be changed by the Trustees with shareholder approval. There is no assurance that the Fund will achieve its investment objective. The investment objective of the Fund is to seek above-average total return, consisting of capital appreciation and income. The Fund will diversify its investments to create a portfolio with a risk profile and characteristics similar to the Standard & Poor's 500 Index. Consequently, the Fund will invest in a number of industry groups without concentration in any particular industry. The Fund's investments will be subject to the market fluctuation and risks inherent in all securities. Under normal circumstances, the Fund invests at least 80% of its Assets in equity securities. Equity securities include common and preferred stocks and their equivalents (including warrants to purchase and securities convertible into such stocks). In abnormal circumstances, such as situations where the Fund experiences unusually large cash inflows or anticipates unusually large redemptions, and in adverse market, economic, political, or other conditions, the Fund may temporarily invest more than 20% of its Asses in investment-grade short-term securities, cash, and cash equivalents. With respect to the Fund's investment policy of investing at least 80% of its Assets in equity securities, "Assets" is defined as net assets plus the amount of any borrowings for investment purposes. In addition, the Fund will notify shareholders at least 60 days prior to any change in this policy. Ratings as Investment Criteria. In general, the ratings of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") represent the opinions of these agencies as to the quality of the securities which they rate. It should be emphasized, however, 2 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 debt securities. Among the factors which will be considered are the long-term ability of the issuer to pay principal and interest and general economic trends. Appendix B contains further information concerning the 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. Fixed Income Securities. Under normal market conditions, the Fund may invest in fixed income securities (including debt securities and preferred stocks) that are rated Baa or better by Moody's or BBB or better by S&P or, if unrated, determined to be of comparable quality by the Adviser and the Sub-Adviser ("investment grade debt securities"). The value of fixed income securities varies inversely with changes in the prevailing levels of interest rates. In addition, debt securities rated BBB or Baa and unrated debt securities of comparable quality are considered medium grade obligations and have speculative characteristics. Adverse changes in economic conditions or other circumstances are more likely to lead to weakened capacity to make principal and interest payment than in the case of higher grade obligations. For temporary defensive purposes, the Fund may invest up to 100% of its assets in investment grade debt securities of any type or maturity. Investment in Foreign Securities. The Fund may invest in the securities of foreign issuers in the form of sponsored and unsponsored American Depository Receipts ("ADRs") and U.S. dollar-denominated securities of foreign issuers traded on U.S. exchanges. ADRs (sponsored and unsponsored) are receipts, typically issued by U.S. banks, which evidence ownership of underlying securities issued by a foreign corporation. ADRs are publicly traded on a U.S. stock exchange or in the over-the-counter market. An investment in foreign securities including ADRs may be affected by changes in currency rates and in exchange control regulations. Issuers of unsponsored ADRs are not contractually obligated to disclose material information including financial information, in the United States and, therefore, there may not be a correlation between such information and the market value of the unsponsored ADR. Foreign companies may not be subject to accounting standards or government supervision comparable to U.S. companies, and there is often less publicly available information about their operations. Foreign companies may also be affected by political or financial inability abroad. These risk considerations may be intensified in the case of investments in ADRs of foreign companies that are located in emerging market countries. ADRs of companies located in these countries may have limited marketability and may be subject to more abrupt or erratic price movements. 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 3 default by a seller of a repurchase agreement, the Fund could experience delays in liquidating the underlying securities and during the period in which the Fund seeks to enforce its rights thereto, possible subnormal levels of income, lack of access to income during this period, and the expense of enforcing its rights. Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase agreements which involve the sale of U.S. Government securities held in its portfolio to a bank with an agreement that the Fund will buy back the securities at a fixed future date at a fixed price plus an agreed amount of "interest" which may be reflected in the repurchase price. Reverse repurchase agreements are considered to be borrowings by the Fund. Reverse repurchase agreements involve the risk that the market value of securities purchased by the Fund with proceeds of the transaction may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase. The Fund will also continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will require 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 value of the Fund's total assets (including the amount borrowed) taken at market value. The Fund will not 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 or savings and loan associations which are approved in advance as being creditworthy by the Trustees. Under procedures established by the 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 1933 ("1933 Act"), including commercial paper issued in reliance on Section 4(2) of the 1933 Act and securities offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not invest more than 15% of its net assets in illiquid investments. If the Trustees determine, based upon a continuing review of the trading markets for specific Section 4(2) paper or Rule 144A securities, that they are liquid, they will not be subject to the 15% limit on illiquid investments. The Trustees have adopted guidelines and delegated to the Adviser the daily function of determining the monitoring and liquidity of restricted securities. The Trustees, however, will retain sufficient oversight and be ultimately responsible for the determinations. The Trustees will carefully monitor the Fund's investments in these securities, focusing on such important factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in the Fund if qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Options on Securities and Securities Indices. The Fund may purchase and write (sell) call and put options on 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. 4 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 the 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 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 Fund 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. 5 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 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 various kinds of 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, securities indices and any other financial instruments and indices. All futures contracts entered into by the 6 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. 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. 7 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. 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. 8 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 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. 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 warrant 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. Short Sales. The Fund may engage in short sales "against the box". In a short sale against the box, the Fund agrees to sell at a future date a security that it either contemporaneously owns or has the right to acquire at no extra cost. If the price of the security has declined at the time the Fund is required to deliver the security, the Fund will benefit from the difference in the price. If the price of the security has increased, the Fund will be required to pay the difference. Forward Commitment and When-Issued Securities. The Fund may purchase securities on a when-issued or forward commitment basis. "When-issued" refers to securities whose terms are available and for which a market exists, but which have not been issued. The Fund will engage in when-issued transactions with respect to securities purchased for its portfolio in order to obtain what is considered to be an advantageous price and yield at the time of the transaction. For 9 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. 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. INVESTMENT RESTRICTIONS Fundamental Investment Restrictions. The following investment restrictions will not be changed without the approval of a majority of the Fund's outstanding voting securities which, as used in the Prospectus and this Statement of Additional Information, means the approval by the lesser of (1) the holders of 67% or more of the Fund's shares represented at a meeting if more than 50% of the Fund's outstanding shares are present in person or by proxy at that meeting or (2) more than 50% of the Fund's outstanding shares. The Fund may not: (1) Issue senior securities, except as permitted by 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, forward commitments and repurchase agreements entered into in accordance with the Fund's investment policies, 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. (2) Borrow money, except from banks as a temporary measure for extraordinary emergency purposes 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. The Fund will not leverage to 10 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 securities 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 in commodity contracts or in puts, calls, or combinations of both, except 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. (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 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 paragraph (6) above, such loans must at all times be fully collateralized and the Fund's custodian must take possession of the collateral either physically or in book entry form. Securities used as collateral must be marked to market daily. 11 Non-Fundamental Investment Restrictions. The following 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 or Sub-Adviser to save commissions or to average prices among them is not deemed to result in a joint securities trading account. (b) Purchase securities on margin or make short sales, except in connection with 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. (c) 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 Independence Trustees/ Directors, purchase securities of other investment companies within the John Hancock Group of Funds. (d) Invests more than 15% of its net assets in illiquid securities. 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. 12 THOSE RESPONSIBLE FOR MANAGEMENT The business of the Fund is managed by its Trustees, who elect officers who are responsible for the day-to-day operations of the Fund and who execute policies formulated by the Trustees. Several of the officers and Trustees of the Fund are also officers or Directors of the Adviser, or officers and Directors of the Fund's principal distributor, John Hancock Funds, LLC (prior to February 1, 2002, John Hancock Funds, Inc.) ("John Hancock Funds").
- -------------------------------------------------------------------------------------------------------------------- Number of John Hancock Position(s) Trustee/ Principal Occupation(s) and other Funds Name, Address (1) Held with Officer Directorships Overseen by And Age Fund since(2) During Past 5 Years Trustee - --------------------------------------------------------------------------------------------------------------------- Independent Trustees - --------------------------------------------------------------------------------------------------------------------- Dennis S. Aronowitz Trustee 1998 Professor of Law, Emeritus, Boston 30 Born: 1931 University School of Law (as of 1996); Director, Brookline Bancorp. - --------------------------------------------------------------------------------------------------------------------- Richard P. Chapman, Jr. Trustee 1996 Chairman, President and Chief Executive 30 Born: 1935 Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). - --------------------------------------------------------------------------------------------------------------------- William J. Cosgrove Trustee 1991 Vice President, Senior Banker and Senior 30 Born: 1933 Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). - --------------------------------------------------------------------------------------------------------------------- Richard A. Farrell Trustee 1996 President, Farrell, Healer & Co., Inc., 30 Born: 1932 (venture capital management firm)(since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); Prior to 1980, headed the venture capital group at Bank of Boston Corporation. - ---------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 13
- -------------------------------------------------------------------------------------------------------------------- Number of John Hancock Position(s) Trustee/ Principal Occupation(s) and other Funds Name, Address (1) Held with Officer Directorships Overseen by And Age Fund since(2) During Past 5 Years Trustee - --------------------------------------------------------------------------------------------------------------------- Gail D. Fosler Trustee 1994 Senior Vice President and Chief Economist, 30 Born: 1947 The Conference Board (non-profit economic and business research)(since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services)(since 1999); Director, National Bureau of Economic Research (academic)(since 1989); Director, Baxter International (medical health care) (since 2001). - --------------------------------------------------------------------------------------------------------------------- William F. Glavin Trustee 1996 President Emeritus, Babson College (as 30 Born: 1932 of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. - --------------------------------------------------------------------------------------------------------------------- John A. Moore Trustee 1996 President and Chief Executive Officer, 36 Born: 1939 Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research)(since 1998); Principal, Hollyhouse (consulting)(since 2000); Director, CIIT(nonprofit research) (since 2002). - --------------------------------------------------------------------------------------------------------------------- Patti McGill Peterson Trustee 1995 Executive Director, Council for 36 Born: 1943 International Exchange of Scholars (since 1998); Vice President, Institute of International Education (since 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). - --------------------------------------------------------------------------------------------------------------------- John W. Pratt Trustee 1996 Professor of Business Administration Emeritus, 30 Born: 1931 Harvard University Graduate School of Business Administration (as of 1998). - ---------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 14
- -------------------------------------------------------------------------------------------------------------------- Number of John Hancock Position(s) Trustee/ Principal Occupation(s) and other Funds Name, Address (1) Held with Officer Directorships Overseen by And Age Fund since(2) During Past 5 Years Trustee - --------------------------------------------------------------------------------------------------------------------- Interested Trustees - --------------------------------------------------------------------------------------------------------------------- John M. DeCiccio (3) Trustee 2001 Executive Vice President and Chief Investment 66 Born: 1948 Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). - --------------------------------------------------------------------------------------------------------------------- Maureen R. Ford (3) Trustee, 2000 Executive Vice President, John Hancock 66 Born: 1955 Chairman, Financial Services, Inc., John Hancock Life President Insurance Company; Chairman, Director, and Chief President and Chief Executive Officer, the Executive Advisers and The Berkeley Group; Chairman, Officer Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). - ---------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 15
- -------------------------------------------------------------------------------------------------------------------- Number of John Hancock Position(s) Trustee/ Principal Occupation(s) and other Funds Name, Address (1) Held with Officer Directorships Overseen by And Age Fund since(2) During Past 5 Years Trustee - --------------------------------------------------------------------------------------------------------------------- Principal Officers who are not Trustees - --------------------------------------------------------------------------------------------------------------------- William L. Braman Executive 2000 Executive Vice President and Chief Born: 1953 Vice Investment Officer, the Adviser and each President of the John Hancock funds; Director, and Chief SAMCorp., Executive Vice President and Investment Chief Investment Officer, Baring Asset Officer Management, London U.K. (until 2000). - --------------------------------------------------------------------------------------------------------------------- Richard A. Brown Senior Vice 2000 Senior Vice President, Chief Financial Born: 1949 President Officer and Treasurer, the Adviser, John and Chief Hancock Funds, and The Berkeley Group; Financial Second Vice President and Senior Associate Officer Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). - --------------------------------------------------------------------------------------------------------------------- Thomas H. Connors Vice 1992 Vice President and Compliance Officer, the Born: 1959 President Adviser and each of the John Hancock and funds; Vice President, John Hancock Funds. Compliance Officer - --------------------------------------------------------------------------------------------------------------------- William H. King Vice 1992 Vice President and Assistant Treasurer, Born: 1952 President the Adviser; Vice President and and Treasurer of each of the John Hancock Treasurer funds; Assistant Treasurer of each of the John Hancock funds (until 2001). - --------------------------------------------------------------------------------------------------------------------- Susan S. Newton Senior Vice 1986 Senior Vice President, Secretary and Chief Born: 1950 President, Legal Officer, SAMCorp., the Adviser and Secretary each of the John Hancock funds, John and Chief Hancock Funds and The Berkeley Group; Vice Legal Officer President, Signature Services (until 2000), Director, Senior Vice President and Secretary, NM Capital. - ---------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 16 The Fund's Board of Trustees currently has five standing Committees: the Audit Committee, the Administration Committee, the Contracts/Operations Committee, the Investment Performance Committee and the Coordinating Committee. Each Committee is comprised of Independent Trustees who are not "interested persons". The Audit Committee members are Messrs. Moore, Farrell and Ms. Fosler. The Audit Committee recommends to the full board auditors for the Fund, monitors and oversees the audits of the Fund, communicates with both independent auditors and internal auditors on a regular basis and provides a forum for the auditors to report and discuss any matters they deem appropriate at any time. The Audit Committee held four meetings during the fiscal year ended December 31, 2001. The Administration Committee's members are all of the Independent Trustees of the Fund. The Administration Committee reviews the activities of the other four standing committees and makes the final selection and nomination of candidates to serve as Independent Trustees. The Administration Committee will consider nominees recommended by shareholders to serve as Independent Trustees, provided that shareholders submit recommendations in compliance with all of the pertinent provisions of Rule 14a-8 under the Securities Exchange Act of 1934. The Administration Committee also works with all Trustees on the selection and election of officers of the Fund. The Administration Committee held four meetings during the fiscal year ended December 31, 2001. The Contracts/Operations Committee members are Messrs. Chapman, Cosgrove and Pratt. The Contracts/Operations Committee oversees the initiation, operation, and renewal of contracts between the Fund and other entities. These contracts include advisory and subadvisory agreements, custodial and transfer agency agreements and arrangements with other service providers. The Contracts/Operations Committee held five meetings during the fiscal year ended December 31, 2001. The Investment Performance Committee consists of Messrs. Aronowitz, Glavin and Ms. Peterson. The Investment Performance Committee monitors and analyzes the performance of the Fund generally, consults with the adviser as necessary if the Fund requires special attention, and reviews peer groups and other comparative standards as necessary. The Investment Performance Committee held four meetings during the fiscal year ended October 31, 2001. The Coordinating Committee members are the chairpersons of the other four standing committees. The Coordinating Committee assures consistency of action among committees, reviews Trustee compensation, evaluates Trustee performance and considers committee membership rotations as well as relevant corporate governance issues. The following table provides a dollar range indicating each Trustee's ownership of equity securities of the Fund, as well as aggregate holdings of shares of equity securities of all John Hancock Funds overseen by the Trustee, as of December 31, 2001. 17
- ------------------------------------------------------------------------------------------------- Aggregate Dollar Range of Dollar Range of Fund Shares holdings in John Hancock funds Name of Trustee Owned by Trustee overseen by Trustee - ------------------------------------------------------------------------------------------------- Independent Trustees - ------------------------------------------------------------------------------------------------- Dennis S. Aronowitz $1-$10,000 $50,001-$100,000 - ------------------------------------------------------------------------------------------------- Richard P. Chapman, Jr. $1-$10,000 Over $100,000 - ------------------------------------------------------------------------------------------------- William J. Cosgrove $1-$10,000 Over $100,000 - ------------------------------------------------------------------------------------------------- Richard A. Farrell $1-$10,000 Over $100,000 - ------------------------------------------------------------------------------------------------- Gail D. Fosler $1-$10,000 $10,001-$50,000 - ------------------------------------------------------------------------------------------------- William F. Glavin None $10,001-$50,000 - ------------------------------------------------------------------------------------------------- Dr. John A. Moore $10,001-$50,000 Over $100,000 - ------------------------------------------------------------------------------------------------- Patti McGill Peterson $10,001-$50,000 Over $100,000 - ------------------------------------------------------------------------------------------------- John W. Pratt $10,000-$50,000 Over $100,000 - ------------------------------------------------------------------------------------------------- Interested Trustees - ------------------------------------------------------------------------------------------------- John M. DeCiccio $50,000-$100,000 Over $100,000 - ------------------------------------------------------------------------------------------------- Maureen R. Ford $1-$10,000 Over $100,000 - -------------------------------------------------------------------------------------------------
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. Mr. DeCiccio and Ms. Ford, each a non-Independent Trustee, and each of the officers of the Fund who are interested persons of the Adviser, are compensated by the Adviser and/or 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 $ 5,198 $ 75,000 Richard P. Chapman, Jr+ 5,394 78,100 William J. Cosgrove+ 5,009 72,000 Leland O. Erdahl* 1,275 18,000 Richard A. Farrell 5,009 72,000 Gail D. Fosler 5,198 75,000 William F. Glavin+ 5,010 72,000 Dr. John A. Moore+ 5,205 75,100 Patti McGill Peterson 5,009 72,000 John W. Pratt 5,009 72,000 ------- -------- Total $47,316 $681,200 ------- (1) Compensation is for the current fiscal year ending October 31, 2001. (2) Total compensation paid by the John Hancock Funds Complex to the Independent Trustees is as of December 31, 2001. As of this date, there were sixty-six funds in the John Hancock Fund Complex, with Mr. Moore and Ms. Peterson serving on thirty-six funds and each other Independent Trustees serving on thirty funds. 18 (+) As of December 31, 2001, the value of the aggregate accrued deferred compensation amount from all funds in the John Hancock Funds Complex for Mr. Chapman was $71,309, Mr. Cosgrove was $207,842, Mr. Glavin was $280,472 and for Dr. Moore was $238,982 under the John Hancock Group of Funds Deferred Compensation Plan for Independent Trustees (the "Plan"). + As of February 28, 2001, Mr. Erdahl resigned as Trustee of the Complex. All of the officers listed are officers or employees of the Adviser or Affiliated Companies. Some of the Trustees and officers may also be officers or Trustees of one or more of the other funds for which the Adviser serves as investment adviser. The officers and Trustees of the Fund as a group beneficially owned less than 1% of the outstanding shares of the Fund and no shareholders of record beneficially owned 5% or more of the outstanding Class I shares of the Fund. 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 Sub-Adviser, Independence (formerly Independence Investment Associates, Inc.), located at 53 State Street, Boston, Massachusetts 02109, was organized in 1982 and currently manages over $38 billion in assets for primarily institutional clients. The Sub-Adviser is a wholly-owned indirect subsidiary of the Life Company. The Fund has entered into an investment management contract with the Adviser (the "Advisory Agreement") which was approved by the Fund's shareholders. Pursuant to the Advisory Agreement, the Adviser, in conjunction with the Sub-Adviser will: (a) furnish continuously an investment program for the Fund and determine, subject to the overall supervision and review of the Trustees, which investments should be purchased, held, sold or exchanged and (b) provide supervision over all aspects of the Fund's operations except those which are delegated to a custodian, transfer agent or other agent. The Adviser has entered into a Sub-Advisory Agreement with the Sub-Adviser under which the Sub-Adviser, subject to the review of the Trustees and the overall supervision of the Adviser, is responsible for managing the investment operations of the Fund and the composition of the Fund's portfolio and furnishing the Fund with advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. 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 19 their account statements; taxes; expenses of redeeming shares; brokerage and other expenses connected with the execution of portfolio securities transactions; expenses pursuant to the Fund's plan of distribution; fees and expenses of custodians including those for keeping books and accounts maintaining a committed line of credit and calculating the net asset value of shares; fees and expenses of transfer agents and dividend disbursing agents; legal, accounting, financial, management, tax and auditing fees and expenses of the Fund (including an allocable portion of the cost of the Adviser's employees rendering such services to the Fund; the compensation and expenses of Trustees who are not otherwise affiliated with the Trust, the Adviser or any of their affiliates; expenses of Trustees' and shareholders' meetings; trade association memberships; insurance premiums; and any extraordinary expenses. As compensation for its services under the Advisory Agreement, the Fund pays the Adviser 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 $750,000,000 0.75% Amount over $750,000,000 0.70% From time to time, the Adviser may reduce its fee or make other arrangements to limit the Fund's expenses to a specified percentage of average daily net assets. The Adviser retains the right to reimpose a fee and recover any other payments to the extent that, at the end of any fiscal year, the Fund's annual expenses fall below this limit. Securities held by the Fund may also be held by other funds or investment advisory clients for which the Adviser, the Sub-Adviser or their respective affiliates provide investment advice. Because of different investment objectives or other factors, a particular security may be bought for one or more funds or clients when one or more are selling the same security. If opportunities for purchase or sale of securities by the Adviser or Sub-Adviser for the Fund or for other funds or clients for which the Adviser or Sub-Adviser renders investment advice arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds or clients in a manner deemed equitable to all of them. To the extent that transactions on behalf of more than one client of the Adviser, the Sub-Adviser or their respective affiliates may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Pursuant to the Advisory Agreement and 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 Fund in connection with the matters to which their respective Agreements relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser or Sub-Adviser in the performance of their duties or from their reckless disregard of the obligations and duties under the applicable Agreements. 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 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 20 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, the Fund may use the name "Independence" or any name derived from or similar to it only for so long as the Sub-Advisory Agreement or any extension, renewal or amendment thereof remains in effect. If the Sub-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 Sub-Adviser. In addition, the Sub-Adviser or the Life Company may grant the nonexclusive 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 the Sub-Adviser or any subsidiary or affiliate thereof or any successor to the business of any subsidiary or affiliate thereof shall be the investment adviser. The Fund's Board of Trustees is responsible for overseeing the performance of the Fund's investment Adviser and Sub-adviser and determining whether to approve and renew the Fund's Advisory Agreement and Sub-Advisory Agreement. The Board has a standing request that the Adviser provide the Board with certain information the Board has deemed important to evaluating the short- and long-term performance of the Adviser and Sub-Adviser. This information includes periodic performance analysis and status reports from the Adviser and quarterly Portfolio and Investment Performance Reports. The Fund's portfolio managers meet with the Board from time to time to discuss the management and performance of the Fund and respond to the Board's questions concerning the performance of the Adviser. When the Board considers whether to renew an investment advisory contract, the Board takes into account numerous factors, including: (1) the nature, extent and quality of the services provided by the Adviser and Sub-adviser; (2) the investment performance of the Fund; (3) the fair market value of the services provided by the Adviser and Sub-Adviser; (4) a comparative analysis of expense ratios of, and advisory fees paid by, similar funds; (5) the extent to which the Adviser has realized or will realize economies of scale as the Fund grows; (6) other sources of revenue to the Adviser or its affiliates from its relationship with the Fund and intangible or "fall-out" benefits that accrue to the adviser and its affiliates, if relevant; and (7) the Adviser's control of the operating expenses of the fund, such as transaction costs, including ways in which portfolio transactions for the fund are conducted and brokers are selected. The primary factors underlying the Board's decision to renew the Fund's Advisory Agreement and Sub-Advisory Agreement were as follows: o The Board determined that the performance results of the Fund and the Adviser and Sub-Adviser's responsive actions were reasonable, as compared with relevant performance standards, including the performance results of comparable large-cap core funds derived from data provided by Lipper Inc. and appropriate market indexes. o The Board decided that the advisory fee paid by the Fund was reasonable based on the average advisory fee for comparable funds. The Board also took into account the nature of the fee arrangements which include breakpoints that will adjust the fee downward as the size of the Fund's portfolio increases. o The Board evaluated the Adviser and Sub-Adviser's investment staff and portfolio management process, and reviewed the composition and overall performance of the Fund's portfolio on both a short-term and long-term basis. The Board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of 21 action in the best interest of the Fund's shareholders was to renew the agreements with the Adviser and Sub-Adviser. The continuation of the Advisory Agreement was approved by all Trustees. The Advisory Agreement and Sub-Advisory Agreement discussed below, will continue in effect from year to year, provided that its continuance is approved annually both by (i) by the holders of a majority of the outstanding voting securities of the Trust or by the Trustees, and (ii) by a majority of the Trustees who are not parties to the Agreement or "interested persons" of any such parties. Both agreements may be terminated on 60 days written notice by any party or by a vote of a majority of the outstanding voting securities of the Fund and will terminate automatically if it is assigned. The Sub-Advisory Agreement terminates automatically upon the termination of the Advisory Agreement. As provided in the Sub-Advisory Agreement, the Adviser (not the Fund) pays the Sub-Adviser a quarterly subadvisory fee at the annual rate of 55% of the management fee paid by the Fund to the Adviser for the preceding three months. For the fiscal years ended December 31, 1999, 2000 and 2001, the Adviser received fees of $6,706,432, $7,228,394 and $5,665,542, respectively. 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 December 31, 1999, 2000 and 2001, the Fund paid the Adviser $163,633, $183,911 and $153,343 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 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 Funds which are continually offered at net asset value next determined. SALES COMPENSATION As part of their business strategies, John Hancock Funds, may pay compensation to financial services firms that sell the Fund's shares. These firms pass along a portion of this compensation to your broker or 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. 22 In addition, from time to time, John Hancock Funds, at its expense, may provide significant additional compensation to financial services firms in connection with their promotion of the Fund and sale of shares of the Fund. Such compensation provided by John Hancock Funds may include, for example, financial assistance to financial services firms in connection with their marketing and sales development programs for their registered representatives and other employees, as well as payment for travel expenses, including lodging, incurred by registered representatives and other employees for such marketing and sales development programs, as well as assistance for seminars for the public, advertising and sales campaigns regarding one or more Funds, and other financial services firms-sponsored events or activities. From time to time, John Hancock Funds may provide expense reimbursements for special training of a financial services firm's registered representatives and other employees in group meetings. Other compensation, such as asset retention fees, finder's fees and reimbursement for wire transfer fees, 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 the Fund's shares, the following procedures are utilized wherever applicable. Debt investment securities are valued on the basis of valuations furnished by a principal market maker or a pricing service, both of which generally utilize electronic data processing techniques to determine valuations for normal institutional size trading units of debt securities without exclusive reliance upon quoted prices. Equity securities traded on a principal exchange or NASDAQ National Market Issues are generally valued at last sale price on the day of valuation. Securities in the aforementioned category for which no sales are reported and other securities traded over-the-counter are generally valued at the last available bid price. Short-term debt investments which have a remaining maturity of 60 days or less are generally valued at amortized cost which approximates market value. If market quotations are not readily available or if in the opinion of the Adviser any quotation or price is not representative of true market value, the fair value of the security may be determined in good faith in accordance with procedures approved by the Trustees. Foreign securities are valued on the basis of quotations from the primary market in which they are traded. Any assets or liabilities expressed in terms of foreign currencies are translated into U.S. dollars by the custodian bank based on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on the date of any determination of the Fund's NAV. If quotations are not readily available, or the value has been materially affected by the events occurring after the closing of a foreign market, assets are valued by a method that the Trustees believe accurately reflects fair value. The NAV of each Fund and class is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by dividing the a class's net assets by the number of it 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. 23 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 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. 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 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 and classes without further action by shareholders. As of the date of this Statement of Additional Information, the Trustees have authorized shares of the Fund. Additional series may be added in 24 the future. The Trustees have also authorized the issuance of four classes of shares of the Fund, designated as Class A, Class B, Class C and Class I. Class A, class B and Class C shares are discussed in a separate Statement of Additional Information. The shares of each class of the Fund represent an equal proportionate interest in the aggregate net assets attributable to that class of the Fund. Holders of each Class of shares have certain exclusive voting rights on matters relating to their respective distribution plans. The different classes of the Fund may bear different expenses relating to the cost of holding shareholder meetings necessitated by the exclusive voting rights of any class of shares. Dividends paid by the Fund, if any, with respect to each class of shares will be calculated in the same manner, at the same time and on the same day and will be in the same amount, except for differences resulting from the facts that (i) the distribution and service fees relating to each class will be borne exclusively by that class, (ii) Class B and Class C shares will pay higher distribution and service fees than Class A shares and (iii) each class of shares will bear any class expenses properly allocable to that class of shares, subject to the conditions the Internal Revenue Service imposes with respect to the multiple-class structures. Similarly, the net asset value per share may vary depending on which class of shares are purchased. No interest will be paid on uncashed dividend or redemption checks. In the event of liquidation, shareholders of each class are entitled to share pro rata in the net assets of the Fund available for distribution to these shareholders. Shares entitle their holders to one vote per share, are freely transferable and have no preemptive, subscription or conversion rights. When issued, shares are fully paid and non-assessable, except as set forth below. Unless otherwise required by the Investment Company Act or the Declaration of Trust, the Fund has no intention of holding annual meetings of shareholders. Fund shareholders may remove a Trustee by the affirmative vote of at least two-thirds of the Trust's outstanding shares and the Trustees shall promptly 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 25 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 loss that may occur to any account due to an unauthorized telephone call. Also for your protection telephone transactions are not permitted on accounts whose names or addresses have changed within the past 30 days. Proceeds from telephone transactions can only be mailed to the address of record. Selling activities for the Fund may not take place outside the U.S. except with U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on Non-U.S. investors' accounts with foreign mailing addresses are required to certify that all sales activities have occurred, and in the future will occur, only in the U.S. A foreign corporation may purchase shares of the Fund only if it has a U.S. mailing address. TAX STATUS The Fund is treated as a separate entity for accounting and tax purposes, has qualified and elected to be treated as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and intends to continue to qualify for each taxable year. As such and by complying with the applicable provisions of the Code regarding the sources of its income, the timing of its distributions and the diversification of its assets, the Fund will not be subject to Federal income tax on its taxable income (including net realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. The Fund will be subject to a 4% nondeductible Federal excise tax on certain amounts not distributed (and not treated as having been distributed) on a timely basis in accordance with annual minimum distribution requirements. The Fund intends under normal circumstances to seek to avoid or minimize liability for this 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 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. 26 If the Fund invests in stock (including an option to acquire stock such as is inherent in a convertible bond) of certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties or capital gain) or hold at least 50% of their 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 such companies or gain from the sale of stock in such companies, even if all income or gain actually received by the Fund is timely distributed to its shareholders. The Fund would not be able to pass through to its shareholders any credit or deduction for such a tax. An election may be available to ameliorate these adverse tax consequences, but could require the Fund to recognize taxable income or gain without the concurrent receipt of cash. These investments could also result in the treatment of associated capital gains as ordinary income. The Fund may limit and/or manage its holdings in passive foreign investment companies to minimize its tax liability or maximize its return from these investments. The Fund 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. The Fund does not expect to qualify to pass such taxes through to its shareholders, who consequently will not take such taxes into account on their own tax returns. However, the Fund will deduct such taxes in determining the amount it has available for distribution to shareholders. The amount of the Fund's net realized capital gains, if any, in any given year will vary depending upon the Adviser's current investment strategy and whether the Adviser believes it to be in the best interest of the Fund to dispose of portfolio securities and /or engage in options, futures or forward transactions will generate capital gains. At the time of an investor's purchase of shares of the Fund, a portion of the purchase price is often attributed to realized or unrealized appreciation in the Fund's portfolio or undistributed taxable income of the Fund. Consequently, subsequent distributions 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 (or portions thereof) in reality represent a return of a portion of the purchase price. Upon a redemption or other disposition of shares (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 and will be long-term or short-term, depending upon the shareholder's tax holding period for the shares and subject to the special rules described below. A sales charge paid in purchasing shares of the Fund cannot be taken into account for purposes of determining gain or loss on the redemption or exchange of such shares within 90 days after their purchase to the extent shares of the Fund or another John Hancock fund are subsequently acquired without payment of a sales charge pursuant to the reinvestment or exchange privilege. This disregarded charge will result in an increase in the shareholder's tax basis in the shares subsequently acquired. Also, any loss realized on a redemption or exchange may be disallowed to the extent the shares disposed of are replaced with other shares of the Fund within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of, such as pursuant to an election to reinvest dividends in additional shares. 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 27 with respect to such shares. Shareholders should consult their own tax advisers regarding their particular circumstances to determine whether a disposition of Fund shares is properly treated as a sale for tax purposes, as is assumed in the foregoing discussion. Although its present intention is to distribute, at least annually, all net capital gain, if any, the Fund reserves the right to retain and reinvest all or any portion of the excess, as computed for Federal income tax purposes, of net long-term capital gain over net short-term capital loss in any year. The Fund will not in any event distribute net long-term capital gains realized in any year to the extent that a capital loss is carried forward from prior years against such gain. To the extent such excess was retained and not exhausted by the carryforward of prior years' capital losses, it would be subject to Federal income tax in the hands of the Fund. Upon proper designation of this amount by the Fund, each shareholder would be treated for Federal income tax purposes as if the Fund had distributed to him on the last day of its taxable year his pro rata share of such excess, and he had paid his pro rata share of the taxes paid by the Fund and reinvested the remainder in the Fund. Accordingly, each shareholder would (a) include his pro rata share of such excess as long-term capital gain income in his tax return for his taxable year in which the last day of the Fund's taxable year falls, (b) be entitled either to a tax credit on his return for, or to a refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his shares in the Fund by the difference between his pro rata share of such excess and his pro rata share of such taxes. For Federal income tax purposes, the Fund is permitted to carry forward a net capital loss in any year to offset net capital gains, if any, during the eight years following the year of the loss. To the extent subsequent net capital gains are offset by such losses, they would not result in Federal income tax liability to the Fund and, as noted above, would not be distributed as such to shareholders. The Fund has a $98,885,432 capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. The entire Fund's carryforward expires on December 31, 2009. For purposes of the dividends-received deduction available to corporations, dividends received by the Fund, if any, from U.S. domestic corporations in respect of the stock of such corporations held by the Fund, for U.S. Federal income tax purposes, for at least 46 days (91 days in the case of certain preferred stock) during a prescribed period extending before and after each dividend and distributed and properly designated by the Fund may be treated as qualifying dividends. Corporate shareholders must meet the holding period requirements stated above with respect to their shares of the Fund for each dividend in order to qualify for the deduction and, if they have any debt that is deemed under the Code directly attributable to Fund shares, may be denied a portion of the dividends received deduction. The entire qualifying dividend, including the otherwise-deductible amount, will be included in determining the excess (if any) of a corporate shareholder's adjusted current earnings over its alternative minimum taxable income, which may increase its alternative minimum tax liability. Additionally, any corporate shareholder should consult its tax adviser regarding the possibility that its basis in its shares may be reduced, for Federal income tax purposes, by reason of "extraordinary dividends" received with respect to the shares and, to the extent such basis would be reduced below zero, that current recognition of income would be required. The Fund is required to accrue income on any debt securities that have more than a de minimis amount of original issue discount (or debt securities acquired at a market discount, if the Fund elects to include market discount in income currently) prior to the receipt of the corresponding cash payment. The mark to market or constructive sale rules applicable to certain options, futures, forwards, short sales or other transactions and forward contracts may also require the 28 Fund to recognize income or gain without a concurrent receipt of cash. Additionally, some countries restrict repatriation which may make it difficult or impossible for the Fund to obtain cash corresponding to its earnings or assets in those countries. However, the Fund must distribute to shareholders for each taxable year substantially all of its net income and net capital gains, including such income or gain, to qualify as a regulated investment company and avoid liability for any federal income or excise tax. Therefore, the Fund may have to dispose of its portfolio securities under disadvantageous circumstances to generate cash, or may have to leverage itself by borrowing the cash, to satisfy these distribution requirements. A state income (and possibly local income and/or intangible property) tax exemption is generally available to the extent (if any) the Fund's distributions are derived from interest on (or, in the case of intangible property taxes, the value of its assets is attributable to) certain U.S. Government obligations, provided in some states that certain thresholds for holdings of such obligations and/or reporting requirements are satisfied. The Fund will not seek to satisfy any threshold or reporting requirements that may apply in particular taxing jurisdictions, although 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. A 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. Different tax treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement distributions and certain prohibited transactions, is accorded to accounts maintained as qualified retirement plans. Shareholders should consult their tax advisers for more information. The foregoing discussion relates solely to 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 is effectively connected will be subject to U.S. Federal income tax treatment that is different from 29 that described above. These investors may be subject to non- resident alien withholding tax at the rate of 30% (or a lower rate under an applicable tax treaty) on amounts treated as ordinary dividends from the Fund and, unless an effective IRS Form W-8, Form W-8BEN or authorized withholding certificate is on file and to backup withholding on certain other payments from the Fund. Non-U.S. investors should consult their tax advisers regarding such treatment and the application of foreign taxes to an investment in the Fund. The Fund is not subject to Massachusetts corporate excise or franchise taxes. The Fund anticipates that provided that the Fund qualifies as a regulated investment company under the Code, it will also not be required to pay any Massachusetts income tax. CALCULATION OF PERFORMANCE Because Class I shares are new, there is no performance to report. Class A performance is currently disclosed in the Fund's prospectus for Class I shares. As of December 31, 2001, the average annual total returns before taxes for Class A shares of the Fund for the one, five year and ten year periods were -15.32%, 7.88% and 11.65%. The average annual total return before taxes is computed by finding the average annual compounded rate of return over the 1-year, 5-year and 10-year periods, or the period since the commencement of operations, that would equate the initial amount invested to the ending redeemable value according to the following formula: P(1+T)^n = ERV Where: P= a hypothetical initial payment of $1,000. T= average annual total return. n= number of years. ERV= ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-year, 5-year or 10-year periods (or fractional portion). The Fund discloses average annual total returns after taxes for Class A shares for the one, fiveand 10 year periods ended December 31, 2001 in the prospectus. After tax returns are computed using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. The average annual total return (after taxes on distributions) is computed by finding the average annual compounded rate of return over the 1-year, 5-year and 10-year periods, or the period since the commencement of operations, that would equate the initial amount invested to the ending redeemable value according to the following formula: P(1+T)^n = ATV(D) Where: P= a hypothetical initial payment of $1,000. T= average annual total return (after tax distributions). 30 n= number of years. ATV(D)= ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-year, 5-year or 10-year periods (or fractional portion) after taxes on fund distributions but not after taxes on redemption. The average annual total return (after taxes on distributions and redemption) is computed by finding the average annual compounded rate of return over the 1-year, 5-year, and 10-year periods, or the period since the commencement of operations, that would equate the initial amount invested to the ending redeemable value according to the following formula: P(1+T)^n = ATV(DR) Where: P= a hypothetical initial payment of $1,000. T= average annual total return (after taxes distributions and redemption). n= number of years. ATV(DR)= ending value of a hypothetical $1,000 payment made at the beginning of the 1-year, 5-year or 10-year periods (or fractional portion), after taxes on fund distributions and redemption. Because each class has its own sales charge and fee structure, the classes have different performance results. In the case of each class, these calculations assume the maximum sales charge is included in the initial investment or the CDSC is applied at the end of the period. These calculations assume that all dividends and distributions are reinvested at net asset value on the reinvestment dates during the period. The "distribution rate" is determined by annualizing the result of dividing the declared dividends of the Fund during the period stated by the maximum offering price or net asset value at the end of the period. Excluding the Fund's sales charge from the distribution rate produces a higher rate. In addition to average annual total returns, the Fund may quote unaveraged or cumulative total returns reflecting the simple change in value of an investment over a stated period. Cumulative total returns may be quoted as a percentage or as a dollar amount, and may be calculated for a single investment, a series of investments, and/or a series of redemptions, over any time period. Total returns may be quoted with or without taking the Fund's sales charge on Class A shares into account. Excluding the Fund's sales charge on Class A shares from a total return calculation produces a higher total return figure. The Fund may advertise yield, where appropriate. The Fund's yield is computed by dividing net investment income per share determined for a 30-day period by the maximum offering price per share (which includes the full sales charge, if applicable) on the last day of the period, according to the following standard formula: Yield = 2 ( [ ( a-b/cd ) + 1 ] ^6 - 1) Where: a = dividends and interest earned during the period. b = net expenses accrued during the period. 31 c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends. d = the maximum offering price per share on the last day of the period (NAV where applicable). From time to time, in reports and promotional literature, the Fund's total return and/or yield will be compared to indices of mutual funds such as Lipper Analytical Services, Inc.'s "Lipper-Mutual Performance Analysis," a monthly publication which tracks net assets, total return, and yield on mutual funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used for comparison purposes, as well as the Russell and Wilshire Indices. Performance rankings and ratings reported periodically in, and excerpts from, national financial publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S may also be utilized. The Fund's promotional and sales literature may make reference to the Fund's "beta". Beta is a reflection of the market related risk of the Fund by showing how responsive the Fund is to the market. The performance of the Fund is not fixed or guaranteed. Performance quotations should not be considered to be representations of performance of the Fund for any period in the future. The performance of the Fund is a function of many factors including its earnings, expenses and number of outstanding shares. Fluctuating market conditions; purchases, sales and maturities of portfolio securities; sales and redemptions of shares of beneficial interest; and changes in operating expenses are all examples of items that can increase or decrease the Fund's performance. BROKERAGE ALLOCATION Decisions concerning the purchase and sale of portfolio securities and the allocation of brokerage commissions are made by the Sub-Adviser, or the Adviser pursuant to recommendations made by an investment committee, which consists of officers and directors of the Adviser and officers and Trustees of the Trust 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 officers of the Fund, 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 maker 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. 32 The Fund's primary policy is to execute all purchases and sales of portfolio instruments at the most favorable prices consistent with best execution, considering all of the costs of the transaction including brokerage commissions. The policy governs the selection of brokers and dealers and the market in which a transaction is executed. Consistent with the foregoing primary policy, the Conduct Rules of the National Association of Securities Dealers, Inc. and such other policies as the Trustees may determine, the Adviser and Sub-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 and Sub-Adviser 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 and Sub-Adviser. The receipt of research information is not expected to reduce significantly the expenses of the Adviser and Sub-Adviser. 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 Fund. Similarly, research information and assistance provided to the Sub-Adviser by brokers and dealers may benefit other advisory clients or affiliates of the Sub-Adviser, and, conversely, brokerage commissions and spreads paid by other advisory clients of the Sub-Adviser may result in research information and statistical assistance beneficial to the Fund. The Fund will make no commitment to allocate portfolio transactions upon any prescribed basis. While the Adviser, in conjunction with the Sub-Adviser, will be primarily responsible for the allocation of the Fund's 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 years ended December 31, 1999, 2000 and 2001, the Fund paid negotiated brokerage commission in the amount of $1,685,370, $1,249,160 and $1,116,725, 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 ended December 31, 2001, the Fund directed no commissions to compensate brokers for research services such as industry and company reviews and evaluations of the securities The Adviser's indirect parent, the Life Company, is the indirect sole shareholder of shareholder Signator Investors, Inc., a broker-dealer (until January 1, 1999, the 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 transaction with or through Affiliated Broker. During the year ended December 31, 1999, 2000 and 2001, the Fund did not execute any portfolio transactions with Affiliated Broker. 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 33 in connection with comparable transactions involving similar securities being purchased or sold. A transaction would not be placed with an Affiliated Broker if the Fund would have to pay a commission rate less favorable than the Affiliated Broker's contemporaneous charges for comparable transactions for its other most favored, but unaffiliated, customers except for accounts for which the Affiliated Broker acts as clearing broker for another brokerage firm, and any customers of the Affiliated Broker not comparable to the Fund as determined by a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) of the Fund, the Adviser, the Sub-Adviser or the Affiliated Broker. Because the Adviser, which is affiliated with the Affiliated Broker, and the Sub-Adviser have, as investment advisers to the Fund, the obligation to provide investment management services, which includes elements of research and related investment skills, such research and related skills will not be used by the Affiliated Broker as a basis for negotiating commissions at a rate higher than that determined in accordance with the above criteria. 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. 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 1001, Boston, Massachusetts 02217-1001, a wholly-owned indirect subsidiary of the Life Company, is the transfer and dividend paying agent for the Fund. The Fund pays Signature Services a fee of 0.05% of its average daily net assets attributable to Class I shares plus certain out-of-pocket expenses. 34 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 The independent auditors of the Fund are PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110. PricewaterhouseCoopers LLP audits and renders an opinion on the Fund's annual financial statements and reviews the Fund's annual Federal income tax return. 35 APPENDIX-A 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). (e.g. short sales, financial futures and options; securities and index options, currency contracts). Credit risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation. (e.g. Borrowing; reverse repurchase agreements, repurchase agreements, securities lending, non-investment-grade debt securities, financial futures and options; securities and index options). Currency risk The risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. (e.g. Foreign securities, financial futures and options; securities and index options, currency contracts). 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. Information risk The risk that key information about a security or market is inaccurate or unavailable. (e.g. non-investment-grade debt securities, foreign 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, financial futures and options; securities and index options). Leverage risk Associated with securities or practices (such as borrowing) that multiply small index or market movements into large changes in value. (e.g. Borrowing; reverse repurchase agreements, short- A-1 sales, when-issued securities and forward commitments; financial futures and options; securities and index options, currency contracts). 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. (e.g. short sales, non-investment-grade debt securities; restricted and illiquid securities, financial futures and options; securities and index options, currency contracts). Management risk The risk that a strategy used by a fund's management may fail to produce the intended result. Common to all mutual funds. Market risk The risk that the market value of a security may move up and down, sometimes rapidly and unpredictably. Common to all stocks and bonds and the mutual funds that invest in them. (e.g. Short sales, short-term trading, when-issued securities and forward commitments, non-investment-grade securities, foreign securities, financial futures and options; securities and index options, restricted and illiquid securities). Natural event risk The risk of losses attributable to natural disasters, crop failures and similar events. (e.g. Foreign securities). Opportunity risk The risk of missing out on an investment opportunity because the assets necessary to take advantage of it are tied up in less advantageous investments. (e.g. Short sales, when-issued securities and forward commitments, financial futures and options; securities and index options, currency contracts). Political risk The risk of losses directly attributable to government or political actions of any sort. (e.g. Foreign securities) Prepayment risk The risk that unanticipated prepayments may occur during periods of falling interest rates, reducing the value of 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, restricted and illiquid securities). A-2 APPENDIX B - Description of Bond Ratings RATINGS Bonds. Standard & Poor's Bond Ratings AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA--Debt rated AA has a very strong capacity to pay interest and repay principal, and differs from the highest rated issues only in small degree. A--Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. To provide more detailed indications of credit quality, the ratings AA to BBB may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. A provisional rating, indicated by "p" following a rating, is sometimes used by Standard & Poor's. It assumes the successful completion of the project being financed by the issuance of the bonds 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, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. Moody's Bond Ratings 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. Generally speaking, the safety of obligations of this class is so absolute that with the occasional exception of oversupply in a few specific instances, characteristically, their market value is affected solely by money market fluctuations. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. The market value of Aa bonds is virtually immune to all but money market influences, with the occasional exception of oversupply in a few specific instances. B-1 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. Rating symbols may include numerical modifiers 1, 2 or 3. The numerical modifier 1 indicates that the security ranks at the high end, 2 in the mid-range, and 3 nearer the low end, of the generic category. These modifiers of rating symbols Aa, A and Baa are to give investors a more precise indication of relative debt quality in each of the historically defined categories. Conditional ratings, indicated by "Con", are sometimes given when the security for the bond depends upon the completion of some act or the fulfillment of some condition. Such bonds, are given a conditional rating that denotes their probably credit statute upon completion of that act or fulfillment of that condition. Rating symbols may include numerical modifiers 1, 2 or 3. The numerical modifier 1 indicates that the security ranks at the high end, 2 in the mid-range, and 3 nearer the low end, of the generic category. These modifiers are to give investors a more precise indication of relative debt quality in each of the historically defined categories. B-2 FINANCIAL STATEMENTS The financial statements listed below are included in the Fund's 2001 Annual Report to Shareholders for the year ended December 31, 2001; (filed electronically on February 28, 2002, accession number 0000928816-0x-000xxx) and are included in and incorporated by reference into Part B of the Registration Statement for John Hancock Core Equity Fund (file nos. 811-1677 and 2-29502). John Hancock Capital Series John Hancock Core Equity Fund Statement of Assets and Liabilities as of December 31, 2001 Statement of Operations for the year ended of December 31, 2001. Statement of Changes in Net Asset for the period ended December 31, 2001. Financial Highlights for the period ended December 31, 2001. Schedule of Investments as of December 31, 2001 Notes to Financial Statements. Report of Independent Auditors. F-1 JOHN HANCOCK CORE EQUITY FUND Class A, Class B and Class C Shares Statement of Additional Information March 1, 2002 This Statement of Additional Information provides information about John Hancock Core Equity Fund (the "Fund"), in addition to the information that is contained in the combined Equity Funds' current Prospectus (the "Prospectus"). The Fund is a diversified series of John Hancock Capital Series (the "Trust"). This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 1-(800)-225-5291 TABLE OF CONTENTS Page ---- Organization of the Fund.............................................. 2 Investment Objective and Policies..................................... 2 Investment Restrictions............................................... 10 Those Responsible for Management...................................... 13 Investment Advisory and Other Services................................ 19 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 Purchase and Recemptions Through Third Parties.............. ......... 36 Description of the Fund's Shares...................................... 36 Tax Status............................................................ 38 Calculation of Performance ........................................... 42 Brokerage Allocation.................................................. 44 Transfer Agent Services............................................... 46 Custody of Portfolio.................................................. 47 Independent Auditors.................................................. 47 Appendix A -More about Risk........................................... A-1 Appendix B - Description of Bond Ratings.............................. B-1 Financial Statements.................................................. F-1 1 ORGANIZATION OF THE FUND The Fund is a series of the Trust, an open-end investment management company organized as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts. John Hancock Advisers, LLC (prior to February 1, 2002, John Hancock Advisers, Inc.) (the "Adviser") is the Fund's investment adviser. The Adviser is an indirect, wholly-owned subsidiary of John Hancock Life Insurance Company (formerly John Hancock Mutual Life Insurance Company) (the "Life Company"), a Massachusetts life insurance company chartered in 1862 with national headquarters at John Hancock Place, Boston, Massachusetts. The Life Company is wholly owned by John Hancock Financial Services, Inc., a Delaware corporation organized in February, 2000. On June 3, 1996, the Fund changed its name from John Hancock Independence Diversified Core Equity Fund to John Hancock Independence Equity Fund. Prior to May 1, 1999, the Fund was called John Hancock Independence Equity Fund. The Fund has one sub-adviser: Independence Investment LLC ("Independence" or "Sub-Adviser") (formerly Independence Investment Associates, Inc.) which is a subsidiary of the Life Company. 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 risk. The investment objective of the Fund is fundamental and may only be changed by the Trustees with shareholder approval. There is no assurance that the Fund will achieve its investment objective. The investment objective of the Fund is to seek above-average total return, consisting of capital appreciation and income. The Fund will diversify its investments to create a portfolio with a risk profile and characteristics similar to the Standard & Poor's 500 Index. Consequently, the Fund will invest in a number of industry groups without concentration in any particular industry. The Fund's investments will be subject to the market fluctuation and risks inherent in all securities. Under normal circumstances, the Fund invests at least 80% of its Assets in equity securities. Equity securities include common and preferred stocks and their equivalents (including warrants to purchase and securities convertible into such stocks). In abnormal circumstances, such as situations where the Fund experiences unusually large cash inflows or anticipates unusually large redemptions, and in adverse market, economic, political, or other conditions, the Fund may temporarily invest more than 20% of its Assets in investment-grade short-term securities, cash and cash equivlents. With respect to the Fund's investment policy of investing at least 80% of its Assets in equity securities, "Assets" is defined as net assets plus the amount of any borrowings for investment purposes. In addition, the Fund will notify shareholders at least 60 days prior to any change in this policy. Ratings as Investment Criteria. In general, the ratings of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") represent the opinions of these agencies as to the quality of the securities which they rate. It should be emphasized, however, 2 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 debt securities. Among the factors which will be considered are the long-term ability of the issuer to pay principal and interest and general economic trends. Appendix B contains further information concerning the 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. Fixed Income Securities. Under normal market conditions, the Fund may invest in fixed income securities (including debt securities and preferred stocks) that are rated Baa or better by Moody's or BBB or better by S&P or, if unrated, determined to be of comparable quality by the Adviser and the Sub-Adviser ("investment grade debt securities"). The value of fixed income securities varies inversely with changes in the prevailing levels of interest rates. In addition, debt securities rated BBB or Baa and unrated debt securities of comparable quality are considered medium grade obligations and have speculative characteristics. Adverse changes in economic conditions or other circumstances are more likely to lead to weakened capacity to make principal and interest payment than in the case of higher grade obligations. For temporary defensive purposes, the Fund may invest up to 100% of its assets in investment grade debt securities of any type or maturity. Investment in Foreign Securities. The Fund may invest in the securities of foreign issuers in the form of sponsored and unsponsored American Depository Receipts ("ADRs") and U.S. dollar-denominated securities of foreign issuers traded on U.S. exchanges. ADRs (sponsored and unsponsored) are receipts, typically issued by U.S. banks, which evidence ownership of underlying securities issued by a foreign corporation. ADRs are publicly traded on a U.S. stock exchange or in the over-the-counter market. An investment in foreign securities including ADRs may be affected by changes in currency rates and in exchange control regulations. Issuers of unsponsored ADRs are not contractually obligated to disclose material information including financial information, in the United States and, therefore, there may not be a correlation between such information and the market value of the unsponsored ADR. Foreign companies may not be subject to accounting standards or government supervision comparable to U.S. companies, and there is often less publicly available information about their operations. Foreign companies may also be affected by political or financial inability abroad. These risk considerations may be intensified in the case of investments in ADRs of foreign companies that are located in emerging market countries. ADRs of companies located in these countries may have limited marketability and may be subject to more abrupt or erratic price movements. 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 3 default by a seller of a repurchase agreement, the Fund could experience delays in liquidating the underlying securities and during the period in which the Fund seeks to enforce its rights thereto, possible subnormal levels of income, lack of access to income during this period, and the expense of enforcing its rights. Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase agreements which involve the sale of U.S. Government securities held in its portfolio to a bank with an agreement that the Fund will buy back the securities at a fixed future date at a fixed price plus an agreed amount of "interest" which may be reflected in the repurchase price. Reverse repurchase agreements are considered to be borrowings by the Fund. Reverse repurchase agreements involve the risk that the market value of securities purchased by the Fund with proceeds of the transaction may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase. The Fund will also continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will require 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 value of the Fund's total assets (including the amount borrowed) taken at market value. The Fund will not 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 or savings and loan associations which are approved in advance as being creditworthy by the Trustees. Under procedures established by the 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 1933 ("1933 Act"), including commercial paper issued in reliance on Section 4(2) of the 1933 Act and securities offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not invest more than 15% of its net assets in illiquid investments. If the Trustees determine, based upon a continuing review of the trading markets for specific Section 4(2) paper or Rule 144A securities, that they are liquid, they will not be subject to the 15% limit on illiquid investments. The Trustees have adopted guidelines and delegated to the Adviser the daily function of determining the monitoring and liquidity of restricted securities. The Trustees, however, will retain sufficient oversight and be ultimately responsible for the determinations. The Trustees will carefully monitor the Fund's investments in these securities, focusing on such important factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in the Fund if qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Options on Securities and Securities Indices. The Fund may purchase and write (sell) call and put options on 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. 4 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 the 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 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 Fund 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. 5 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 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 various kinds of 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, 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"). 6 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. 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. 7 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. 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. 8 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 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. 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 warrant 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. Short Sales. The Fund may engage in short sales "against the box". In a short sale against the box, the Fund agrees to sell at a future date a security that it either contemporaneously owns or has the right to acquire at no extra cost. If the price of the security has declined at the time the Fund is required to deliver the security, the Fund will benefit from the difference in the price. If the price of the security has increased, the Fund will be required to pay the difference. Forward Commitment and When-Issued Securities. The Fund may purchase securities on a when-issued or forward commitment basis. "When-issued" refers to securities whose terms are available and for which a market exists, but which have not been issued. The Fund will engage in when-issued transactions with respect to securities purchased for its portfolio in order to obtain what is considered to be an advantageous price and yield at the time of the transaction. For 9 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. 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. INVESTMENT RESTRICTIONS Fundamental Investment Restrictions. The following investment restrictions will not be changed without the approval of a majority of the Fund's outstanding voting securities which, as used in the Prospectus and this Statement of Additional Information, means the approval by the lesser of (1) the holders of 67% or more of the Fund's shares represented at a meeting if more than 50% of the Fund's outstanding shares are present in person or by proxy at that meeting or (2) more than 50% of the Fund's outstanding shares. The Fund may not: (1) Issue senior securities, except as permitted by 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, forward commitments and repurchase agreements entered into in accordance with the Fund's investment policies, 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. (2) Borrow money, except from banks as a temporary measure for extraordinary emergency purposes 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. The Fund will not leverage 10 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 securities 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 in commodity contracts or in puts, calls, or combinations of both, except 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. (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 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 paragraph (6) above, such loans must at all times be fully collateralized and the Fund's custodian must take possession of the collateral either physically or in book entry form. Securities used as collateral must be marked to market daily. 11 Non-Fundamental Investment Restrictions. The following 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 or Sub-Adviser to save commissions or to average prices among them is not deemed to result in a joint securities trading account. (b) Purchase securities on margin or make short sales, except in connection with 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. (c) 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 Independence Trustees/ Directors, purchase securities of other investment companies within the John Hancock Group of Funds. (d) Invests more than 15% of its net assets in illiquid securities. 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. 12 THOSE RESPONSIBLE FOR MANAGEMENT The business of the Fund is managed by its Trustees, who elect officers who are responsible for the day-to-day operations of the Fund and who execute policies formulated by the Trustees. Several of the officers and Trustees of the Fund are also officers or Directors of the Adviser, or officers and Directors of the Fund's principal distributor, John Hancock Funds, LLC (prior to February 1, 2002, John Hancock Funds, Inc.) ("John Hancock Funds").
- ------------------------------------------------------------------------------------------------------------------- Number of John Hancock Position(s) Trustee/ Principal Occupation(s) Funds Name, Address (1) Held with Officer and other Directorships Overseen by And Age Fund since(2) During Past 5 Years Trustee - ------------------------------------------------------------------------------------------------------------------- Independent Trustees - ------------------------------------------------------------------------------------------------------------------- Dennis S. Aronowitz Trustee 1998 Professor of Law, Emeritus, Boston 30 Born: 1931 University School of Law (as of 1996); Director, Brookline Bancorp. - ------------------------------------------------------------------------------------------------------------------- Richard P. Chapman, Jr. Trustee 1996 Chairman, President and Chief Executive 30 Born: 1935 Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). - ------------------------------------------------------------------------------------------------------------------- William J. Cosgrove Trustee 1991 Vice President, Senior Banker and Senior 30 Born: 1933 Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). - ------------------------------------------------------------------------------------------------------------------- Richard A. Farrell Trustee 1996 President, Farrell, Healer & Co., Inc., 30 Born: 1932 (venture capital management firm)(since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); Prior to 1980, headed the venture capital group at Bank of Boston Corporation. - -------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 13
- -------------------------------------------------------------------------------------------------------------------- Number of John Position(s) Trustee/ Hancock Funds Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by And Age Fund since(2) Directorships During Past 5 Years Trustee - -------------------------------------------------------------------------------------------------------------------- Gail D. Fosler Trustee 1994 Senior Vice President and Chief Economist, 30 Born: 1947 The Conference Board (non-profit economic and business research)(since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services)(since 1999); Director, National Bureau of Economic Research (academic)(since 1989); Director, Baxter International (medical health care) (since 2001). - -------------------------------------------------------------------------------------------------------------------- William F. Glavin Trustee 1996 President Emeritus, Babson College (as of 30 Born: 1932 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. - -------------------------------------------------------------------------------------------------------------------- John A. Moore Trustee 1996 President and Chief Executive Officer, 36 Born: 1939 Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research)(since 1998); Principal, Hollyhouse (consulting)(since 2000); Director, CIIT(nonprofit research) (since 2002). - -------------------------------------------------------------------------------------------------------------------- Patti McGill Peterson Trustee 1995 Executive Director, Council for 36 Born: 1943 International Exchange of Scholars (since 1998); Vice President, Institute of International Education (since 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). - -------------------------------------------------------------------------------------------------------------------- John W. Pratt Trustee 1996 Professor of Business Administration 30 Born: 1931 Emeritus, Harvard University Graduate School of Business Administration (as of 1998). - --------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 14
- --------------------------------------------------------------------------------------------------------------------- Number of John Position(s) Trustee/ Principal Occupation(s) and other Hancock Funds Name, Address (1) Held with Officer Directorships Overseen by And Age Fund since(2) During Past 5 Years Trustee - --------------------------------------------------------------------------------------------------------------------- Interested Trustees - --------------------------------------------------------------------------------------------------------------------- John M. DeCiccio (3) Trustee 2001 Executive Vice President and Chief Investment 66 Born: 1948 Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). - --------------------------------------------------------------------------------------------------------------------- Maureen R. Ford (3) Trustee, 2000 Executive Vice President, John Hancock 66 Born: 1955 Chairman, Financial Services, Inc., John Hancock Life President Insurance Company; Chairman, Director, and Chief President and Chief Executive Officer, the Executive Advisers and The Berkeley Group; Chairman, Officer Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). - ----------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 15
- --------------------------------------------------------------------------------------------------------------------- Number of John Hancock Position(s) Trustee/ Funds Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by And Age Fund since(2) Directorships During Past 5 Years Trustee - --------------------------------------------------------------------------------------------------------------------- Principal Officers who are not Trustees - --------------------------------------------------------------------------------------------------------------------- William L. Braman Executive 2000 Executive Vice President and Chief Born: 1953 Vice Investment Officer, the Adviser and each President of the John Hancock funds; Director, and Chief SAMCorp., Executive Vice President and Investment Chief Investment Officer, Baring Asset Officer Management, London U.K. (until 2000). - --------------------------------------------------------------------------------------------------------------------- Richard A. Brown Senior Vice 2000 Senior Vice President, Chief Financial Born: 1949 President Officer and Treasurer, the Adviser, John and Chief Hancock Funds, and The Berkeley Group; Financial Second Vice President and Senior Associate Officer Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). - --------------------------------------------------------------------------------------------------------------------- Thomas H. Connors Vice 1992 Vice President and Compliance Officer, the Born: 1959 President Adviser and each of the John Hancock and funds; Vice President, John Hancock Funds. Compliance Officer - --------------------------------------------------------------------------------------------------------------------- William H. King Vice 1992 Vice President and Assistant Treasurer, the Born: 1952 President Adviser; Vice President and Treasurer and of each of the John Hancock funds; Assistant Treasurer Treasurer of each of the John Hancock funds (until 2001). - ------------------------------------------------------------------------------------------------------------------- Susan S. Newton Senior Vice 1986 Senior Vice President, Secretary and Chief Born: 1950 President, Legal Officer, SAMCorp., the Adviser and Secretary each of the John Hancock funds, John and Chief Hancock Funds and The Berkeley Group; Vice Legal President, Signature Services (until Officer 2000), Director, Senior Vice President and Secretary, NM Capital. - -------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 16 The Fund's Board of Trustees currently has five standing Committees: the Audit Committee, the Administration Committee, the Contracts/Operations Committee, the Investment Performance Committee and the Coordinating Committee. Each Committee is comprised of Independent Trustees who are not "interested persons". The Audit Committee members are Messrs. Moore, Farrell and Ms. Fosler. The Audit Committee recommends to the full board auditors for the Fund, monitors and oversees the audits of the Fund, communicates with both independent auditors and internal auditors on a regular basis and provides a forum for the auditors to report and discuss any matters they deem appropriate at any time. The Audit Committee held four meetings during the fiscal year ended December 31, 2001. The Administration Committee's members are all of the Independent Trustees of the Fund. The Administration Committee reviews the activities of the other four standing committees and makes the final selection and nomination of candidates to serve as Independent Trustees. The Administration Committee will consider nominees recommended by shareholders to serve as Independent Trustees, provided that shareholders submit recommendations in compliance with all of the pertinent provisions of Rule 14a-8 under the Securities Exchange Act of 1934. The Administration Committee also works with all Trustees on the selection and election of officers of the Fund. The Administration Committee held four meetings during the fiscal year ended December 31, 2001. The Contracts/Operations Committee members are Messrs. Chapman, Cosgrove and Pratt. The Contracts/Operations Committee oversees the initiation, operation, and renewal of contracts between the Fund and other entities. These contracts include advisory and subadvisory agreements, custodial and transfer agency agreements and arrangements with other service providers. The Contracts/Operations Committee held five meetings during the fiscal year ended December 31, 2001. The Investment Performance Committee consists of Messrs. Aronowitz, Glavin and Ms. Peterson. The Investment Performance Committee monitors and analyzes the performance of the Fund generally, consults with the adviser as necessary if the Fund requires special attention, and reviews peer groups and other comparative standards as necessary. The Investment Performance Committee held four meetings during the fiscal year ended December 31, 2001. The Coordinating Committee members are the chairpersons of the other four standing committees. The Coordinating Committee assures consistency of action among committees, reviews Trustee compensation, evaluates Trustee performance and considers committee membership rotations as well as relevant corporate governance issues. The following table provides a dollar range indicating each Trustee's ownership of equity securities of the Fund, as well as aggregate holdings of shares of equity securities of all John Hancock Funds overseen by the Trustee, as of December 31, 2001. 17
- ------------------------------------------------------------------------------------------------------------- Aggregate Dollar Range of holdings Dollar Range of Fund Shares in John Hancock funds overseen by Name of Trustee Owned by Trustee Trustee - ------------------------------------------------------------------------------------------------------------- Independent Trustees - ------------------------------------------------------------------------------------------------------------- Dennis S. Aronowitz $1-$10,000 $50,001-$100,000 - ------------------------------------------------------------------------------------------------------------- Richard P. Chapman, Jr. $1-$10,000 Over $100,000 - ------------------------------------------------------------------------------------------------------------- William J. Cosgrove $1-$10,000 Over $100,000 - ------------------------------------------------------------------------------------------------------------- Richard A. Farrell $1-$10,000 Over $100,000 - ------------------------------------------------------------------------------------------------------------- Gail D. Fosler $1-$10,000 $10,001-$50,000 - ------------------------------------------------------------------------------------------------------------- William F. Glavin None $10,001-$50,000 - ------------------------------------------------------------------------------------------------------------- Dr. John A. Moore $10,001-$50,000 Over $100,000 - ------------------------------------------------------------------------------------------------------------- Patti McGill Peterson $10,001-$50,000 Over $100,000 - ------------------------------------------------------------------------------------------------------------- John W. Pratt $10,000-$50,000 Over $100,000 - ------------------------------------------------------------------------------------------------------------- Interested Trustees - ------------------------------------------------------------------------------------------------------------- John M. DeCiccio $50,000-$100,000 Over $100,000 - ------------------------------------------------------------------------------------------------------------- Maureen R. Ford $1-$10,000 Over $100,000 - -------------------------------------------------------------------------------------------------------------
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. Mr. DeCiccio and Ms. Ford, each a non-Independent Trustee, and each of the officers of the Fund who are interested persons of the Adviser, are compensated by the Adviser and/or affiliates and receive no compensation from the Fund for their services. The following table provides information regarding the compensation paid by the Fund and the other investment companies in the John Hancock Fund Complex to the Independent Trustees for their services. Ms. Ford and Mr. DeCicco, each a non-Independent Trustee, and each of the officers of the Fund are interested persons of the Adviser, and/or affiliates are compensated by the Adviser and receive no compensation from the Fund for their services. Total Compensation Aggregate From the Fund and Compensation John Hancock Fund Independent Trustees From the Fund(1) Complex to Trustees(2) - -------------------- ---------------- ---------------------- Dennis S. Aronowitz $ 5,198 $ 75,000 Richard P. Chapman, Jr+ 5,394 78,100 William J. Cosgrove+ 5,009 72,000 Leland O. Erdahl* 1,275 18,000 Richard A. Farrell 5,009 72,000 Gail D. Fosler 5,198 75,000 William F. Glavin+ 5,010 72,000 Dr. John A. Moore+ 5,205 75,100 Patti McGill Peterson 5,009 72,000 John W. Pratt 5,009 72,000 ------- --------- Total $47,316 $681,200 (1) Compensation is for the current fiscal year ending October 31, 2001. (2) Total compensation paid by the John Hancock Funds Complex to the Independent Trustees is as of December 31, 2001. As of this date, there were sixty-six funds in the John Hancock 18 Fund Complex, with Mr. Moore and Ms. Peterson serving on thirty-six funds and each other Independent Trustees serving on thirty funds. (+) As of December 31, 2001, the value of the aggregate accrued deferred compensation amount from all funds in the John Hancock Funds Complex for Mr. Chapman was $71,309, Mr. Cosgrove was $207,842, Mr. Glavin was $280,472 and for Dr. Moore was $238,982 under the John Hancock Group of Funds Deferred Compensation Plan for Independent Trustees (the "Plan"). + As of February 28, 2001, Mr. Erdahl resigned as Trustee of the Complex. All of the officers listed are officers or employees of the Adviser or Affiliated Companies. Some of the Trustees and officers may also be officers or Trustees of one or more of the other funds for which the Adviser serves as investment adviser. As of February 4, 2002, 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% or more of outstanding shares of the Fund. Percentage of Total Class Outstanding Shares of Name and Address of Shareholders of Shares the Class of the Fund - -------------------------------- --------- --------------------- MLPF&S For The B 12.56% Sole Benefit of its Customers Attn Fund Administration 97HP2 4800 Deer Lake Drive East 2nd Floor Jacksonville FL 32246-6484 C 14.77% MLPF&S For The Sole Benefit of its Customers Attn Fund Administration 4800 Deer Lake Drive East 2nd Floor 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. 19 The Sub-Adviser, Independence (formerly Independence Investment Associates, Inc.), located at 53 State Street, Boston, Massachusetts 02109, was organized in 1982 and currently manages over $38 billion in assets for primarily institutional clients. The Sub-Adviser is a wholly-owned indirect subsidiary of the Life Company. The Fund has entered into an investment management contract with the Adviser (the "Advisory Agreement") which was approved by the Fund's shareholders. Pursuant to the Advisory Agreement, the Adviser, in conjunction with the Sub-Adviser will: (a) furnish continuously an investment program for the Fund and determine, subject to the overall supervision and review of the Trustees, which investments should be purchased, held, sold or exchanged and (b) provide supervision over all aspects of the Fund's operations except those which are delegated to a custodian, transfer agent or other agent. The Adviser has entered into a Sub-Advisory Agreement with the Sub-Adviser under which the Sub-Adviser, subject to the review of the Trustees and the overall supervision of the Adviser, is responsible for managing the investment operations of the Fund and the composition of the Fund's portfolio and furnishing the Fund with advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. The Fund bears all costs of its organization and operation, including but not limited to expenses of preparing, printing and mailing all shareholders' reports, notices, prospectuses, proxy statements and reports to regulatory agencies; expenses relating to the issuance, registration and qualification of shares; government fees; interest charges; expenses of furnishing to shareholders their account statements; taxes; expenses of redeeming shares; brokerage and other expenses connected with the execution of portfolio securities transactions; expenses pursuant to the Fund's plan of distribution; fees and expenses of custodians including those for keeping books and accounts maintaining a committed line of credit and calculating the net asset value of shares; fees and expenses of transfer agents and dividend disbursing agents; legal, accounting, financial, management, tax and auditing fees and expenses of the Fund (including an allocable portion of the cost of the Adviser's employees rendering such services to the Fund; the compensation and expenses of Trustees who are not otherwise affiliated with the Trust, the Adviser or any of their affiliates; expenses of Trustees' and shareholders' meetings; trade association memberships; insurance premiums; and any extraordinary expenses. As compensation for its services under the Advisory Agreement, the Fund pays the Adviser 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 $750,000,000 0.75% Amount over $750,000,000 0.70% From time to time, the Adviser may reduce its fee or make other arrangements to limit the Fund's expenses to a specified percentage of average daily net assets. The Adviser retains the right to reimpose a fee and recover any other payments to the extent that, at the end of any fiscal year, the Fund's annual expenses fall below this limit. Securities held by the Fund may also be held by other funds or investment advisory clients for which the Adviser, the Sub-Adviser or their respective affiliates provide investment advice. Because of different investment objectives or other factors, a particular security may be bought 20 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 the Fund or for other funds or clients for which the Adviser or Sub-Adviser renders investment advice arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds or clients in a manner deemed equitable to all of them. To the extent that transactions on behalf of more than one client of the Adviser, the Sub-Adviser or their respective affiliates may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Pursuant to the Advisory Agreement and 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 Fund in connection with the matters to which their respective Agreements relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser or Sub-Adviser in the performance of their duties or from their reckless disregard of the obligations and duties under the applicable Agreements. 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 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. Under the Sub-Advisory Agreement, the Fund may use the name "Independence" or any name derived from or similar to it only for so long as the Sub-Advisory Agreement or any extension, renewal or amendment thereof remains in effect. If the Sub-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 Sub-Adviser. In addition, the Sub-Adviser or the Life Company may grant the nonexclusive 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 the Sub-Adviser or any subsidiary or affiliate thereof or any successor to the business of any subsidiary or affiliate thereof shall be the investment adviser. The Fund's Board of Trustees is responsible for overseeing the performance of the Fund's investment Adviser and Sub-adviser and determining whether to approve and renew the Fund's Advisory Agreement and Sub-Advisory Agreement. The Board has a standing request that the Adviser provide the Board with certain information the Board has deemed important to evaluating the short- and long-term performance of the Adviser and Sub-Adviser. This information includes periodic performance analysis and status reports from the Adviser and quarterly Portfolio and Investment Performance Reports. The Fund's portfolio managers meet with the Board from time to time to discuss the management and performance of the Fund and respond to the Board's questions concerning the performance of the Adviser. When the Board considers whether to renew an investment advisory contract, the Board takes into account numerous factors, including: (1) the nature, extent and quality of the services provided by the Adviser and Sub-adviser; (2) the investment performance of the Fund; (3) the fair market value of the services provided by the Adviser and Sub-Adviser; (4) a comparative analysis of expense ratios of, and advisory fees paid by, similar funds; (5) the extent to which the Adviser has realized or will realize economies of scale as the Fund grows; (6) other sources of revenue to the 21 Adviser or its affiliates from its relationship with the Fund and intangible or "fall-out" benefits that accrue to the adviser and its affiliates, if relevant; and (7) the Adviser's control of the operating expenses of the fund, such as transaction costs, including ways in which portfolio transactions for the fund are conducted and brokers are selected. The primary factors underlying the Board's decision to renew the Fund's Advisory Agreement and Sub-Advisory Agreement were as follows: o The Board determined that the performance results of the Fund and the Adviser and Sub-Adviser's responsive actions were reasonable, as compared with relevant performance standards, including the performance results of comparable large-cap core funds derived from data provided by Lipper Inc. and appropriate market indexes. o The Board decided that the advisory fee paid by the Fund was reasonable based on the average advisory fee for comparable funds. The Board also took into account the nature of the fee arrangements which include breakpoints that will adjust the fee downward as the size of the Fund's portfolio increases. o The Board evaluated the Adviser and Sub-Adviser's investment staff and portfolio management process, and reviewed the composition and overall performance of the Fund's portfolio on both a short-term and long-term basis. The Board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interest of the Fund's shareholders was to renew the agreements with the Adviser and Sub-Adviser. The continuation of the Advisory Agreement was approved by all Trustees. The Advisory Agreement and Sub-Advisory Agreement discussed below, will continue in effect from year to year, provided that its continuance is approved annually both by (i) by the holders of a majority of the outstanding voting securities of the Trust or by the Trustees, and (ii) by a majority of the Trustees who are not parties to the Agreement or "interested persons" of any such parties. Both agreements may be terminated on 60 days written notice by any party or by a vote of a majority of the outstanding voting securities of the Fund and will terminate automatically if it is assigned. The Sub-Advisory Agreement terminates automatically upon the termination of the Advisory Agreement. As provided in the Sub-Advisory Agreement, the Adviser (not the Fund) pays the Sub-Adviser a quarterly subadvisory fee at the annual rate of 55% of the management fee paid by the Fund to the Adviser for the preceding three months. For the fiscal years ended December 31, 1999, 2000 and 2001, the Adviser received fees of $6,706,432, $7,228,394 and $5,665,542, respectively. 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 December 31, 1999, 2000 and 2001, the Fund paid the Adviser $163,633, $183,911 and $153,343 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 22 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 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 December 31, 1999, 2000 and 2001 were $2,540,595, $1,710,397 and $557,600, respectively. Of such amounts $229,219, $254,649 and $30,951, respectively, were retained by John Hancock Funds. The underwriting commissions for sales of the Fund's Class C shares for the fiscal year ended December 31, 2001 was $85,743. The remainder of the underwriting commissions were reallowed to Selling Brokers. The Fund's Trustees adopted Distribution Plans with respect to each class of shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Plans, the Fund will pay distribution and service fees at an aggregate annual rate of up to 0.30% for Class A shares and 1.00% for Class B and Class C shares of the Fund's average daily net assets attributable to shares of that class. However, the service fees will not exceed 0.25% of the Fund's average daily net assets attributable to each class of shares. The distribution fees will be used to reimburse John Hancock Funds for its distribution expenses, including but not limited to: (i) initial and ongoing sales compensation to Selling Brokers and others (including affiliates of John Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional and overhead expenses incurred in connection with the distribution of Fund shares; and (iii) with respect to Class B and Class C shares only, interest expenses on unreimbursed distribution expenses. The service fees will be used to compensate Selling Brokers and others for providing personal and account maintenance services to shareholders. In the event that John Hancock Funds is not fully reimbursed for payments or expenses it incurs under the Class A Plan, these expenses will not be carried beyond twelve months from the date they were incurred. Unreimbursed expenses under the Class B and Class C Plans will be carried forward together with interest on the balance of these unreimbursed expenses. The Fund does not treat unreimbursed expenses under the Class B and Class C Plans as a liability of the Fund because the Trustees may terminate the Class B and /or Class C Plans at any time with no additional liability for these expenses to the shareholders of the Fund. For the fiscal year ended December 31, 2001 an aggregate of $202,270 of distribution expenses or .05% of the average net assets of the Fund's Class B shares 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 December 31, 2001, an aggregate of $0 of distribution expenses or 0% of the average net assets of the Fund's Class C shares was not reimbursed or recovered by John Hancock Funds through the receipt of deferred sales charges or Rule 12b-1 fees in prior periods. 23 The Plans and all amendments were approved by the Trustees, including a majority of the Trustees who are not interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Plans (the "Independent Trustees"), by votes cast in person at meetings called for the purpose of voting on these Plans. Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund with a written report of the amounts expended under the Plan and the purpose for which these expenditures were made. The Trustees review these reports on a quarterly basis to determine their continued appropriateness. The Plans provide that they will continue in effect only so long as their continuance is approved at least annually by a majority of both the Trustees and the Independent Trustees. The Plans provide that they may be terminated without penalty (a) by a vote of a majority of the Independent Trustees, (b) by a vote of a majority of the Fund's outstanding shares of the applicable class in each case upon 60 days' written notice to John Hancock Funds, and (c) automatically in the event of assignment. The Plans further provide that they may not be amended to increase the maximum amount of the fees for the services described therein without the approval of a majority of the outstanding shares of the class of the Fund which has voting rights with respect to the Plan. Each Plan provides that no material amendment to the Plan will be effective unless it is approved by a majority vote of the Trustees and the Independent Trustees of the Fund. The holders of Class A, Class B and Class C shares have exclusive voting rights with respect to the Plan applicable to their respective class of shares. In adopting the Plans, the Trustees concluded that, in their judgment, there is a reasonable likelihood that the Plans will benefit the holders of the applicable class of shares of the Fund. Amounts paid to the John Hancock Funds by any class of shares of the Fund will not be used to pay the expenses incurred with respect to any other class of shares of the Fund; provided, however, that expenses attributable to the Fund as a whole will be allocated, to the extent permitted by law, according to the formula based upon gross sales dollars and/or average daily net assets of each such class, as may be approved from time to time by vote of a majority of the Trustees. From time to time, the Fund may participate in joint distribution activities with other Funds and the costs of those activities will be borne by each Fund in proportion to the relative net asset value of the participating Funds. During the fiscal year ended December 31, 2001, the Funds paid John Hancock Funds the following amounts of expenses in connection with their services for the Fund.
Expense Items ------------- Printing and Mailing of Expenses of Interest Carrying Prospectus to Compensation to John Hancock or Other Finance Advertising New Shareholders Selling Brokers Funds Charges ----------- ---------------- --------------- ----- ------- Class A $133,457 $ 4,846 $ 416,802 $ 346,745 $ 0 Class B $419,648 $16,539 $2,722,313 $1,083,484 $5,252 Class C $ 27,948 $ 1,784 $ 198,078 $ 76,706 $ 0
24 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 financial representative. The two primary sources of broker compensation payments are: (1) the 12b-1 fees that are paid out of the Fund's assets and (2) sales charges paid by investors. The sales charges and 12b-1 fees are detailed in the prospectus and under the "Distribution Contracts" in this Statement of Additional Information. The portions of these expenses that are paid to financial services firms are shown on the next page. Whenever you make an investment in the Fund, the financial services firm receives a reallowance/payment, as described below. The firm also receives the first year's 12b-1 service fee at this time. Beginning with the second year after an investment is made, the financial services firm receives an annual 12b-1 service fee of 0.25% of its total eligible fund net assets. This fee is paid quarterly in arrears by the Fund. In addition, from time to time, John Hancock Funds, at its expense, may provide significant additional compensation to financial services firms in connection with their promotion of the Fund and sale of shares of the Fund. Such compensation provided by John Hancock Funds may include, for example, financial assistance to financial services firms in connection with their marketing and sales development programs for their registered representatives and other employees, as well as payment for travel expenses, including lodging, incurred by registered representatives and other employees for such marketing and sales development programs, as well as assistance for seminars for the public, advertising and sales campaigns regarding one or more Funds, and other financial services firms-sponsored events or activities. From time to time, John Hancock Funds may provide expense reimbursements for special training of a financial services firm's registered representatives and other employees in group meetings. Other compensation, such as asset retention fees, finder's fees and reimbursement for wire transfer fees, 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-1 Service 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 $49,999 5.00% 4.01% 0.25% 4.25% $50,000 - $99,999 4.50% 3.51% 0.25% 3.75% $100,000 - $249,999 3.50% 2.61% 0.25% 2.85% $250,000 - $499,999 2.50% 1.86% 0.25% 2.10% $500,000 - $999,999 2.00% 1.36% 0.25% 1.60% Investments of Class A shares of $1 million or more (4) - ---------------------- First $1M - $4,999,999 -- 0.75% 0.25% 1.00% Next $1 - $5M above that -- 0.25% 0.25% 0.50% (2) Next $1 or more above that -- 0.00% 0.25% 0.25% (2) Broker Receives Broker Receives Maximum 12b-1Service fee Total Broker Reallowance (% of net Compensation (1) Class B investments (% of offering price) investment) (3) (% of offering price) - ------------------- --------------------- --------------- --------------------- All amounts -- 3.75% 0.25% 4.00% Broker Receives Broker Receives Maximum 12b-1Service fee Total Broker Reallowance (% of net Compensation (1) Class C investments (% of offering price) investment) (3) (% of offering price) - ------------------- --------------------- --------------- --------------------- Over $1,00,000 or amounts purchased -- 0.75% 0.25% 1.00% At NAV All other amounts 1.00% 1.75% 0.25% 2.00%
(1) Broker percentages and 12b-1 service fee percentages are calculated from different amounts, and therefore may not equal total boker compensation percentages if combined using simple addition. (2) For Group Investment Programs sales, the maximum totalbroker 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 ggregate investments by the amount of recent redemptions. CDSC revenues collected by John Hancock Funds may be used to pay broker commissions when there is no initial sales charge. 26 NET ASSET VALUE For purposes of calculating the net asset value ("NAV") of the Fund's shares, the following procedures are utilized wherever applicable. Debt investment securities are valued on the basis of valuations furnished by a principal market maker or a pricing service, both of which generally utilize electronic data processing techniques to determine valuations for normal institutional size trading units of debt securities without exclusive reliance upon quoted prices. Equity securities traded on a principal exchange or NASDAQ National Market Issues are generally valued at last sale price on the day of valuation. Securities in the aforementioned category for which no sales are reported and other securities traded over-the-counter are generally valued at the last available bid price. Short-term debt investments which have a remaining maturity of 60 days or less are generally valued at amortized cost which approximates market value. If market quotations are not readily available or if in the opinion of the Adviser any quotation or price is not representative of true market value, the fair value of the security may be determined in good faith in accordance with procedures approved by the Trustees. Foreign securities are valued on the basis of quotations from the primary market in which they are traded. Any assets or liabilities expressed in terms of foreign currencies are translated into U.S. dollars by the custodian bank based on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on the date of any determination of the Fund's NAV. If quotations are not readily available, or the value has been materially affected by the events occurring after the closing of a foreign market, assets are valued by a method that the Trustees believe accurately reflects fair value. The NAV of each Fund and class is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by dividing the a class's net assets by the number of it shares outstanding. On any day an international market is closed and the New York Stock Exchange is open, any foreign securities will be valued at the prior day's close with the current day's exchange rate. Trading of foreign securities may take place on Saturdays and U.S. business holidays on which the Fund's NAV is not calculated. Consequently, the Fund's portfolio securities may trade and the NAV of the Fund's redeemable securities may be significantly affected on days when a shareholder has no access to the Fund. INITIAL SALES CHARGE ON CLASS A AND CLASS C SHARES Shares of the Fund are offered at a price equal to their net asset value plus a sales charge which, at the option of the purchaser, may be imposed either at the time of purchase (the "initial sales charge alternative") or on a contingent deferred basis (the "deferred sales charge alternative"). The Fund no longer issues share certificates, all 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 27 purchases of Class A shares of the Fund, the investor is entitled to cumulate current purchases with the greater of the current value (at offering price) of the Class A shares of the Fund, 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 Charge. Class A shares may be offered without a front-end sales charge or contingent deferred sales charges ("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, grandparents, grandchildren, mother, father, sister, brother, mother-in-law, father-in-law, daughter-in-law, son-in-law, niece, nephew and same sex domestic partner) of any of the foregoing; or any fund, pension, profit sharing or other benefit plan for the individuals described above. o A broker, dealer, financial planner, consultant or registered investment advisor that has entered into a signed agreement with John Hancock Funds providing specifically for the use of fund shares in fee-based investment products or services made available to their clients. o A former participant in an employee benefit plan with John Hancock funds, when he or she withdraws from his or her plan and transfers any or all of his or her plan distributions directly to the Fund. o A member of a class action lawsuit against insurance companies who is investing settlement proceeds. o Retirement plans participating in Merrill Lynch servicing programs, if the Plan has more than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information. o Retirement plans investing through the PruArray Program sponsored by Prudential Securities. o Pension plans transferring assets from a John Hancock variable annuity contract to the Fund pursuant to an exemptive application approved by the Securities and Exchange Commission. o Participant directed retirement plans with at least 100 eligible employees at the inception of the Fund account. Each of these investors may purchase Class A shares with no initial sales charge. However, for each Fund, 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% 28 Class C shares may be offered without a front-end sales charge to: o Investments of redemption proceeds from a non-John Hancock mutual fund. o Group Retirement plan products for which John Hancock Signature Services performs recordkeeping and administrative services. (These plans include 403(b), Simple IRA, SEP and SARSEP plans.) 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 Merrill Lynch omnibus account. However, a CDSC may apply if the shares are sold within 12 months of purchase. Class A and Class C shares may also be purchased without an initial sales charge in connection with certain liquidation, merger or acquisition transactions involving other investment companies or personal holding companies. Combination Privilege. In calculating the sales charge applicable to purchases of Class A shares made at one time, the purchases will be combined to reduce sales charges if made by (a) an individual, his or her spouse and their children under the age of 21, purchasing securities for his or their own account, (b) a trustee or other fiduciary purchasing for a single trust, estate or fiduciary account and (c) groups which qualify for the Group Investment Program (see below). A company's (not an individual's) qualified and non-qualified retirement plan investments can be combined to take advantage of this privilege. Further information about combined purchases, including certain restrictions on combined group purchases, is available from Signature Services or a Selling Broker's representative. Accumulation Privilege. Investors (including investors combining purchases) who are already Class A shareholders may also obtain the benefit of the reduced sales charge by taking into account not only the amount being invested but also the investor's purchase price or current value of the Class A shares of all John Hancock funds which carry a sales charge already held by such person. Class A shares of John Hancock money market funds will only be eligible for the accumulation privilege if the investor has previously paid a sales charge on the amount of those shares. Retirement plan investors may include the value of Class B shares if Class B shares held are greater than $1 million. Retirement plans must notify Signature Services to utilize. A company's (not an individual's) qualified and non-qualified retirement plan investments can be combined to take advantage of this privilege. Group Investment Program. Under the Combination and Accumulation Privileges, all members of a group may combine their individual purchases of Class A shares to potentially qualify for breakpoints in the sales charge schedule. This feature is provided to any group which (1) has been in existence for more than six months, (2) has a legitimate purpose other than the purchase of mutual fund shares at a discount for its members, (3) utilizes salary deduction or similar group methods of payment, and (4) agrees to allow sales materials of the fund in its mailings to members at a reduced or no cost to John Hancock Funds. 29 Letter of Intention. Reduced sales charges are also applicable to investments made pursuant to a Letter of Intention (the "LOI"), which should be read carefully prior to its execution by an investor. The Fund offers two options regarding the specified period for making investments under the LOI. All investors have the option of making their investments over a specified period of thirteen (13) months. Investors who are using the Fund as a funding medium for a retirement plan, however, may opt to make the necessary investments called for by the LOI over a forty-eight (48) month period. These retirement plans include 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 retirement plan 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 $50,000 or more during the specified period from the date of the LOI or from a date within ninety (90) days prior thereto, upon written request to Signature Services. The sales charge applicable to all amounts invested under the LOI is computed as if the aggregate amount intended to be invested had been invested immediately. If such aggregate amount is not actually invested, the difference in the sales charge actually paid and the sales charge payable had the LOI not been in effect is due from the investor. However, for the purchases actually made within the specified period (either 13 or 48 months) the sales charge applicable will not be higher than that which would have applied (including accumulations and combinations) had the LOI been for the amount actually invested. The LOI authorizes Signature Services to hold in escrow sufficient Class A shares (approximately 5% of the aggregate) to make up any difference in sales charges on the amount intended to be invested and the amount actually invested, until such investment is completed within the specified period, at which time the escrow shares will be released. If the total investment specified in the LOI is not completed, the Class A shares held in escrow may be redeemed and the proceeds used as required to pay such sales charge as may be due. By signing the LOI, the investor authorizes Signature Services to act as his attorney-in-fact to redeem any escrowed Class A shares and adjust the sales charge, if necessary. A LOI does not constitute a binding commitment by an investor to purchase, or by the Fund to sell, any additional Class A shares and may be terminated at any time. DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES Investments in Class B 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 price or on shares derived from reinvestment of dividends or capital gains distributions. Class B shares are not available to retirement plans that had more than 100 eligible employees at the inception of the Fund account. The amount of the CDSC, if any, will vary depending on the number of years from the time of payment for the purchase of Class B shares until the time of redemption of such shares. Solely for purposes of determining the number of years from the time of any payment for the purchase 30 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 capital gain reinvestment, and next from the shares you have held the longest during the six-year period for Class B shares. For this purpose, the amount of any increase in a share's value above its initial purchase price is not subject to a CDSC. Thus, when a share that has appreciated in value is redeemed during the CDSC period, a CDSC is assessed only on its initial purchase price. When requesting a redemption for a specific dollar amount please indicate if you require the proceeds to equal the dollar amount requested. If not indicated, only the specified dollar amount will be redeemed from your account and the proceeds will be less any applicable CDSC. Example: You have purchased 100 Class B shares at $10 per share. The second year after your purchase, your investment's net asset value per share has increased by $2 to $12, and you have gained 10 additional shares through dividend reinvestment. If you redeem 50 shares at this time your CDSC will be calculated as follows: o Proceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00 o *Minus Appreciation ($12 - $10) x 100 shares (200.00) o Minus proceeds of 10 shares not subject to CDSC (dividend reinvestment) (120.00) -------- o Amount subject to CDSC $280.00 *The appreciation is based on all 100 shares in the account not just the shares being redeemed. Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or in part by John Hancock Funds to defray its expenses related to providing distribution-related services to the Fund in connection with the sale of the Class B and Class C shares, such as the payment of compensation to select Selling Brokers for selling Class B and Class C shares. The combination of the CDSC and the distribution and service fees facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of the purchase. Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on redemptions of Class B and Class C shares and of Class A shares that are subject to a CDSC, unless indicated otherwise, in the circumstances defined below: For all account types: * Redemptions made pursuant to the Fund's right to liquidate your account if you own shares worth less than $1,000. * Redemptions made under certain liquidation, merger or acquisition transactions involving other investment companies or personal holding companies. 31 * 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 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 that this waiver does not apply to periodic withdrawal plan redemptions of Class A shares that are subject to a CDSC). * Redemptions by Retirement plans participating in Merrill Lynch servicing programs, if the Plan has less than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information. * Redemptions of Class A shares 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 sections 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 accounts 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* payments or 12% of account value annually in periodic payments. - --------------------------------------------------------------------------------------------------------------- Between 59 1/2 Waived Waived Waived Waived for Life 12% of account and 70 1/2 Expectancy or value annually 12% of account in periodic value annually payments in periodic payments. - --------------------------------------------------------------------------------------------------------------- Under 59 1/2 Waived for Waived for Waived for Waived for 12% of account (Class B and annuity annuity annuity annuity value annually Class C only) payments (72t) payments (72t) payments (72t) payments (72t) in periodic or 12% of or 12% of or 12% of or 12% of payments account value account value account value account value annually in annually in annually in annually in periodic periodic periodic periodic payments. payments. payments. payments. - --------------------------------------------------------------------------------------------------------------- Loans Waived Waived N/A N/A N/A - --------------------------------------------------------------------------------------------------------------- Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A - --------------------------------------------------------------------------------------------------------------- Hardships Waived Waived Waived N/A N/A - --------------------------------------------------------------------------------------------------------------- Qualified Domestic Waived Waived Waived N/A N/A Relations Orders - --------------------------------------------------------------------------------------------------------------- Termination of Waived Waived Waived N/A N/A Employment Before Normal Retirement Age - --------------------------------------------------------------------------------------------------------------- Return of Excess Waived Waived Waived Waived N/A - ---------------------------------------------------------------------------------------------------------------
*Required minimum distributions based on John Hancock Mutual Fund IRA assets only. 33 If you qualify for a CDSC waiver under one of these situations, you must notify Signature Services at the time you make your redemption. The waiver will be granted once Signature Services has confirmed that you are entitled to the waiver. SPECIAL REDEMPTIONS Although it would not normally do so, the Fund has the right to pay the redemption price of shares of the Fund in whole or in part in portfolio securities as prescribed by the Trustees. When the shareholder sells portfolio securities received in this fashion, the 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 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 the Fund shares. Since the redemption price of the Fund shares may be more or less than the shareholder's 34 cost, depending upon the market value of the securities owned by the Fund at the time of redemption, the distribution of cash pursuant to this plan may result in realization of gain or loss for purposes of Federal, state and local income taxes. The maintenance of a Systematic Withdrawal Plan concurrently with purchases of additional shares of the Fund could be disadvantageous to a shareholder because of the initial sales charge payable on such purchases of Class A shares and the CDSC imposed on redemptions of Class B and Class C shares and because redemptions are taxable events. Therefore, a shareholder should not purchase shares at the same time that 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 nonpayment 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 due 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 35 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. 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 and classes without further action by shareholders. As of the date of this Statement of Additional Information, the Trustees have authorized shares of the Fund. Additional series may be added in the future. The Trustees have also authorized the issuance of four classes of shares of the Fund, designated as Class A, Class B, Class C and Class I. Class I shares are discussed in a separate Statement of Additional Information. The shares of each class of the Fund represent an equal proportionate interest in the aggregate net assets attributable to that class of the Fund. Holders of each Class of shares have certain exclusive voting rights on matters relating to their respective distribution plans. The different classes of the Fund may bear different expenses relating to the cost of holding shareholder meetings necessitated by the exclusive voting rights of any class of shares. Dividends paid by the Fund, if any, with respect to each class of shares will be calculated in the same manner, at the same time and on the same day and will be in the same amount, except for differences resulting from the facts that (i) the distribution and service fees relating to each class will be borne exclusively by that class, (ii) Class B and Class C shares will pay higher distribution and service fees than Class A shares and (iii) each class of shares will bear any class 36 expenses properly allocable to that class of shares, subject to the conditions the Internal Revenue Service imposes with respect to the multiple-class structures. Similarly, the net asset value per share may vary depending on which class of shares are purchased. No interest will be paid on uncashed dividend or redemption checks. In the event of liquidation, shareholders of each class are entitled to share pro rata in the net assets of the Fund available for distribution to these shareholders. Shares entitle their holders to one vote per share, are freely transferable and have no preemptive, subscription or conversion rights. When issued, shares are fully paid and non-assessable, except as set forth below. Unless otherwise required by the Investment Company Act or the Declaration of Trust, the Fund has no intention of holding annual meetings of shareholders. Fund shareholders may remove a Trustee by the affirmative vote of at least two-thirds of the Trust's outstanding shares and the Trustees shall promptly 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 loss 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 37 in the future will occur, only in the U.S. A foreign corporation may purchase shares of the Fund only if it has a U.S. mailing address. TAX STATUS The Fund is treated as a separate entity for accounting and tax purposes, has qualified and elected to be treated as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and intends to continue to qualify for each taxable year. As such and by complying with the applicable provisions of the Code regarding the sources of its income, the timing of its distributions and the diversification of its assets, the Fund will not be subject to Federal income tax on its taxable income (including net realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. The Fund will be subject to a 4% nondeductible Federal excise tax on certain amounts not distributed (and not treated as having been distributed) on a timely basis in accordance with annual minimum distribution requirements. The Fund intends under normal circumstances to seek to avoid or minimize liability for this 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 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. If the Fund invests in stock (including an option to acquire stock such as is inherent in a convertible bond) of certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties or capital gain) or hold at least 50% of their 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 such companies or gain from the sale of stock in such companies, even if all income or gain actually received by the Fund is timely distributed to its shareholders. The Fund would not be able to pass through to its shareholders any credit or deduction for such a tax. An election may be available to ameliorate these adverse tax consequences, but could require the Fund to recognize taxable income or gain without the concurrent receipt of cash. These investments could also result in the treatment of associated capital gains as ordinary income. The Fund may limit and/or manage its holdings in passive foreign investment companies to minimize its tax liability or maximize its return from these investments. 38 The Fund 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. The Fund does not expect to qualify to pass such taxes through to its shareholders, who consequently will not take such taxes into account on their own tax returns. However, the Fund will deduct such taxes in determining the amount it has available for distribution to shareholders. The amount of the Fund's net realized capital gains, if any, in any given year will vary depending upon the Adviser's current investment strategy and whether the Adviser believes it to be in the best interest of the Fund to dispose of portfolio securities and/or engage in options, futures or forward transactions will generate capital gains. At the time of an investor's purchase of shares of the Fund, a portion of the purchase price is often attributed to realized or unrealized appreciation in the Fund's portfolio or undistributed taxable income of the Fund. Consequently, subsequent distributions 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 (or portions thereof) in reality represent a return of a portion of the purchase price. Upon a redemption or other disposition of shares (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 and will be long-term or short-term, depending upon the shareholder's tax holding period for the shares and subject to the special rules described below. A sales charge paid in purchasing shares of the Fund cannot be taken into account for purposes of determining gain or loss on the redemption or exchange of such shares within 90 days after their purchase to the extent shares of the Fund or another John Hancock fund are subsequently acquired without payment of a sales charge pursuant to the reinvestment or exchange privilege. This disregarded charge will result in an increase in the shareholder's tax basis in the shares subsequently acquired. Also, any loss realized on a redemption or exchange may be disallowed to the extent the shares disposed of are replaced with other shares of the Fund within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of, such as pursuant to an election to reinvest dividends in additional shares. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized upon the redemption of shares with a tax holding period of six months or less will be treated as a long-term capital loss to the extent of any amounts treated as distributions of long-term capital gain with respect to such shares. Shareholders should consult their own tax advisers regarding their particular circumstances to determine whether a disposition of Fund shares is properly treated as a sale for tax purposes, as is assumed in the foregoing discussion. Although its present intention is to distribute, at least annually, all net capital gain, if any, the Fund reserves the right to retain and reinvest all or any portion of the excess, as computed for Federal income tax purposes, of net long-term capital gain over net short-term capital loss in any year. The Fund will not in any event distribute net long-term capital gains realized in any year to the extent that a capital loss is carried forward from prior years against such gain. To the extent such excess was retained and not exhausted by the carryforward of prior years' capital losses, it would be subject to Federal income tax in the hands of the Fund. 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 39 remainder in the Fund. Accordingly, each shareholder would (a) include his pro rata share of such excess as long-term capital gain income in his tax return for his taxable year in which the last day of the Fund's taxable year falls, (b) be entitled either to a tax credit on his return for, or to a refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his shares in the Fund by the difference between his pro rata share of such excess and his pro rata share of such taxes. For Federal income tax purposes, the Fund is permitted to carry forward a net capital loss in any year to offset net capital gains, if any, during the eight years following the year of the loss. To the extent subsequent net capital gains are offset by such losses, they would not result in Federal income tax liability to the Fund and, as noted above, would not be distributed as such to shareholders. The Fund has $98,885,432 capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. The entire Fund's carryforward expires on December 31, 2009. For purposes of the dividends-received deduction available to corporations, dividends received by the Fund, if any, from U.S. domestic corporations in respect of the stock of such corporations held by the Fund, for U.S. Federal income tax purposes, for at least 46 days (91 days in the case of certain preferred stock) during a prescribed period extending before and after each dividend and distributed and properly designated by the Fund may be treated as qualifying dividends. Corporate shareholders must meet the holding period requirements stated above with respect to their shares of the Fund for each dividend in order to qualify for the deduction and, if they have any debt that is deemed under the Code directly attributable to Fund shares, may be denied a portion of the dividends received deduction. The entire qualifying dividend, including the otherwise-deductible amount, will be included in determining the excess (if any) of a corporate shareholder's adjusted current earnings over its alternative minimum taxable income, which may increase its alternative minimum tax liability. Additionally, any corporate shareholder should consult its tax adviser regarding the possibility that its basis in its shares may be reduced, for Federal income tax purposes, by reason of "extraordinary dividends" received with respect to the shares and, to the extent such basis would be reduced below zero, that current recognition of income would be required. The Fund is required to accrue income on any debt securities that have more than a de minimis amount of original issue discount (or debt securities acquired at a market discount, if the Fund elects to include market discount in income currently) prior to the receipt of the corresponding cash payment. The mark to market or constructive sale rules applicable to certain options, futures, forwards, short sales or other transactions and forward contracts may also require the Fund to recognize income or gain without a concurrent receipt of cash. Additionally, some countries restrict repatriation which may make it difficult or impossible for the Fund to obtain cash corresponding to its earnings or assets in those countries. However, the Fund must distribute to shareholders for each taxable year substantially all of its net income and net capital gains, including such income or gain, to qualify as a regulated investment company and avoid liability for any federal income or excise tax. Therefore, the Fund may have to dispose of its portfolio securities under disadvantageous circumstances to generate cash, or may have to leverage itself by borrowing the cash, to satisfy these distribution requirements. A state income (and possibly local income and/or intangible property) tax exemption is generally available to the extent (if any) the Fund's distributions are derived from interest on (or, in the case of intangible property taxes, the value of its assets is attributable to) certain U.S. Government obligations, provided in some states that certain thresholds for holdings of such obligations and/or reporting requirements are satisfied. The Fund will not seek to satisfy any 40 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. A 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. Different tax treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement distributions and certain prohibited transactions, is accorded to accounts maintained as qualified retirement plans. Shareholders should consult their tax advisers for more information. The foregoing discussion relates solely to 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 is effectively connected will be subject to U.S. Federal income tax treatment that is different from that described above. These investors may be subject to non-resident alien withholding tax at the rate of 30% (or a lower rate under an applicable tax treaty) on amounts treated as ordinary dividends from the Fund and, unless an effective IRS Form W-8, Form W-8BEN or authorized withholding certificate is on file and to backup withholding on certain other payments from the Fund. Non-U.S. investors should consult their tax advisers regarding such treatment and the application of foreign taxes to an investment in the Fund. The Fund is not subject to Massachusetts corporate excise or franchise taxes. The Fund anticipates that provided that the Fund qualifies as a regulated investment company under the Code, it will also not be required to pay any Massachusetts income tax. 41 CALCULATION OF PERFORMANCE As of December 31, 2001, the average annual total returns before taxes for Class A shares of the Fund for the one, five and ten year periods were -15.32%, 7.88% and 11.65%. As of December 31, 2001, the average annual returns before taxes for Class B shares of the Fund for the one and five year periods and since the commencement of operations on September 7, 1995 were -15.91% , 7.96% and 11.01%, respectively. As of December 31, 2001, the average annual returns before taxes for Class C shares of the Fund for the one year period and since the commencement of operations on May 1, 1998 were -13.24% and -0.53%, respectively. The average annual total return before taxes is computed by finding the average annual compounded rate of return over the 1-year, 5-year, and 10-year periods, or period since the commencement of operations, that would equate the initial amount invested to the ending redeemable value according to the following formula: P(1+T)^n = ERV Where: P = a hypothetical payment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1 year, 5 year or 10-year periods (or fractional portion). The Fund discloses average annual total returns after taxes for Class A shares for the one, fiveand 10 year periods ended December 31, 2001 in the prospectus. After tax returns are computed using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. The average annual total return (after taxes on distributions) is computed by finding the average annual compounded rate of return over the 1-year, 5-year and 10-year periods, or the period since the commencement of operations, that would equate the initial amount invested to the ending redeemable value according to the following formula: P(1+T)^n = ATV(D) Where: P = a hypothetical initial payment of $1,000. T = average annual total return (after tax distributions). n = number of years. ATV(D) = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-year, 5-year or 10-year periods (or fractional portion) after taxes on fund distributions but not after taxes on redemption. 42 The average annual total return (after taxes on distributions and redemption) is computed by finding the average annual compounded rate of return over the 1-year, 5-year and 10-year periods, or the period since the commencement of operations, that would equate the initial amount invested to the ending redeemable value according to the following formula: P(1+T)^n = ATV(DR) Where: P = a hypothetical initial payment of $1,000. T = average annual total return (after taxes distributions and . redemption) n = number of years. ATV(DR) = ending value of a hypothetical $1,000 payment made at the beginning of the 1-year, 5-year or 10-year periods (or fractional portion), after taxes on fund distributions and redemption. Because each class has its own sales charge and fee structure, the classes have different performance results. In the case of each class, these calculations assume the maximum sales charge is included in the initial investment or the CDSC is applied at the end of the period. These calculations also assume that all dividends and distributions are reinvested at net asset value on the reinvestment dates during the period. The "distribution rate" is determined by annualizing the result of dividing the declared dividends of the Fund during the period stated by the maximum offering price or net asset value at the end of the period. Excluding the Fund's sales charge from the distribution rate produces a higher rate. In addition to average annual total returns, the Fund may quote unaveraged or cumulative total returns reflecting the simple change in value of an investment over a stated period. Cumulative total returns may be quoted as a percentage or as a dollar amount, and may be calculated for a single investment, a series of investments, and/or a series of redemptions, over any time period. Total returns may be quoted with or without taking the Fund's sales charge on Class A 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. 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, if applicable) on the last day of the period, according to the following standard formula: Yield = 2 ( [ ( a-b/cd ) + 1 ] ^6 - 1) Where: a = dividends and interest earned during the period. b = net expenses accrued during the period. c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends. d = the maximum offering price per share on the last day of the period (NAV where applicable). 43 From time to time, in reports and promotional literature, the Fund's total return and/or yield will be compared to indices of mutual funds such as Lipper Analytical Services, Inc.'s "Lipper-Mutual Performance Analysis," a monthly publication which tracks net assets, total return, and yield on mutual funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used for comparison purposes, as well as the Russell and Wilshire Indices. Performance rankings and ratings reported periodically in, and excerpts from, national financial publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S may also be utilized. The Fund's promotional and sales literature may make reference to the Fund's "beta". Beta is a reflection of the market related risk of the Fund by showing how responsive the Fund is to the market. The performance of the Fund is not fixed or guaranteed. Performance quotations should not be considered to be representations of performance of the Fund for any period in the future. The performance of the Fund is a function of many factors including its earnings, expenses and number of outstanding shares. Fluctuating market conditions; purchases, sales and maturities of portfolio securities; sales and redemptions of shares of beneficial interest; and changes in operating expenses are all examples of items that can increase or decrease the Fund's performance. BROKERAGE ALLOCATION Decisions concerning the purchase and sale of portfolio securities and the allocation of brokerage commissions are made by the Sub-Adviser, or the Adviser pursuant to recommendations made by an investment committee, which consists of officers and directors of the Adviser and officers and Trustees of the Trust 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 officers of the Fund, 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 maker 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. The policy governs the selection of brokers and dealers and the market in which a transaction is executed. Consistent with the foregoing primary policy, the Conduct Rules of the National Association of Securities Dealers, Inc. and such other 44 policies as the Trustees may determine, the Adviser and Sub-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 and Sub-Adviser 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 and Sub-Adviser. The receipt of research information is not expected to reduce significantly the expenses of the Adviser and Sub-Adviser. 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 Fund. Similarly, research information and assistance provided to the Sub-Adviser by brokers and dealers may benefit other advisory clients or affiliates of the Sub-Adviser, and, conversely, brokerage commissions and spreads paid by other advisory clients of the Sub-Adviser may result in research information and statistical assistance beneficial to the Fund. The Fund will make no commitment to allocate portfolio transactions upon any prescribed basis. While the Adviser, in conjunction with the Sub-Adviser, will be primarily responsible for the allocation of the Fund's 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 years ended December 31, 1999, 2000 and 2001, the Fund paid negotiated brokerage commission in the amount of $1,685,370, $1,249,160 and $1,116,725, 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 ended December 31, 2001, the Fund directed no commissions to compensate brokers for research services such as industry and company reviews and evaluations of the securities The Adviser's indirect parent, the Life Company, is the indirect sole shareholder of shareholder Signator Investors, Inc., a broker-dealer (until January 1, 1999, the 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 transaction with or through Affiliated Broker. During the year ended December 31, 1999, 2000 and 2001, the Fund did not execute any portfolio transactions with Affiliated Broker. 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 clearing broker for another brokerage firm, and 45 any customers of the Affiliated Broker not comparable to the Fund as determined by a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) of the Fund, the Adviser, the Sub-Adviser or the Affiliated Broker. Because the Adviser, which is affiliated with the Affiliated Broker, and the Sub-Adviser have, as investment advisers to the Fund, the obligation to provide investment management services, which includes elements of research and related investment skills, such research and related skills will not be used by the Affiliated Broker as a basis for negotiating commissions at a rate higher than that determined in accordance with the above criteria. 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. 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 $20.00 for each Class A shareholder account and $22.50 for each Class B shareholder account and $21.50 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, aggregatged and allocated to each class on the basis of their relative net asset values. 46 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 The independent auditors of the Fund are PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110. PricewaterhouseCoopers LLP audits and renders an opinion on the Fund's annual financial statements and reviews the Fund's annual Federal income tax return. 47 APPENDIX-A 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). (e.g. short sales, financial futures and options; securities and index options, currency contracts). Credit risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation. (e.g. Borrowing; reverse repurchase agreements, repurchase agreements, securities lending, non-investment-grade debt securities, financial futures and options; securities and index options). Currency risk The risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. (e.g. Foreign securities, financial futures and options; securities and index options, currency contracts). 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. Information risk The risk that key information about a security or market is inaccurate or unavailable. (e.g. non-investment-grade debt securities, foreign 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, financial futures and options; securities and index options). Leverage risk Associated with securities or practices (such as borrowing) that multiply small index or market movements into large changes in value. (e.g. Borrowing; reverse repurchase agreements, short- A-1 sales, when-issued securities and forward commitments; financial futures and options; securities and index options, currency contracts). 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. (e.g. short sales, non-investment-grade debt securities; restricted and illiquid securities, financial futures and options; securities and index options, currency contracts). Management risk The risk that a strategy used by a fund's management may fail to produce the intended result. Common to all mutual funds. Market risk The risk that the market value of a security may move up and down, sometimes rapidly and unpredictably. Common to all stocks and bonds and the mutual funds that invest in them. (e.g. Short sales, short-term trading, when-issued securities and forward commitments, non-investment-grade securities, foreign securities, financial futures and options; securities and index options, restricted and illiquid securities). Natural event risk The risk of losses attributable to natural disasters, crop failures and similar events. (e.g. Foreign securities). Opportunity risk The risk of missing out on an investment opportunity because the assets necessary to take advantage of it are tied up in less advantageous investments. (e.g. Short sales, when-issued securities and forward commitments, financial futures and options; securities and index options, currency contracts). Political risk The risk of losses directly attributable to government or political actions of any sort. (e.g. Foreign securities) Prepayment risk The risk that unanticipated prepayments may occur during periods of falling interest rates, reducing the value of 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, restricted and illiquid securities). A-2 APPENDIX B - Description of Bond Ratings RATINGS Bonds. Standard & Poor's Bond Ratings AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA--Debt rated AA has a very strong capacity to pay interest and repay principal, and differs from the highest rated issues only in small degree. A--Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. To provide more detailed indications of credit quality, the ratings AA to BBB may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. A provisional rating, indicated by "p" following a rating, is sometimes used by Standard & Poor's. It assumes the successful completion of the project being financed by the issuance of the bonds 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, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. Moody's Bond Ratings 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. Generally speaking, the safety of obligations of this class is so absolute that with the occasional exception of oversupply in a few specific instances, characteristically, their market value is affected solely by money market fluctuations. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. The market value of Aa bonds is virtually immune to all but money market influences, with the occasional exception of oversupply in a few specific instances. B-1 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. Rating symbols may include numerical modifiers 1, 2 or 3. The numerical modifier 1 indicates that the security ranks at the high end, 2 in the mid-range, and 3 nearer the low end, of the generic category. These modifiers of rating symbols Aa, A and Baa are to give investors a more precise indication of relative debt quality in each of the historically defined categories. Conditional ratings, indicated by "Con", are sometimes given when the security for the bond depends upon the completion of some act or the fulfillment of some condition. Such bonds, are given a conditional rating that denotes their probably credit statute upon completion of that act or fulfillment of that condition. Rating symbols may include numerical modifiers 1, 2 or 3. The numerical modifier 1 indicates that the security ranks at the high end, 2 in the mid-range, and 3 nearer the low end, of the generic category. These modifiers are to give investors a more precise indication of relative debt quality in each of the historically defined categories. B-2 FINANCIAL STATEMENTS The financial statements listed below are included in the Fund's 2001 Annual Report to Shareholders for the year ended December 31, 2001; (filed electronically on February 28, 2002, accession number 0000928816-xx-0000xx) and are included in and incorporated by reference into Part B of the Registration Statement for John Hancock Core Equity Fund (file nos. 811-1677 and 2-29502). John Hancock Capital Series John Hancock Core Equity Fund Statement of Assets and Liabilities as of December 31, 2001 Statement of Operations for the year ended of December 31, 2001. Statement of Changes in Net Asset for the period ended December 31, 2001. Financial Highlights for the period ended December 31, 2001. Schedule of Investments as of December 31, 2001 Notes to Financial Statements. Report of Independent Auditors. F-1 JOHN HANCOCK - -------------------------------------------------------------------------------- Prospectus 3.1.02 Equity funds Core Growth Fund Core Value Fund [LOGO](R) As with all mutual funds, the Securities and Exchange - ------------------ Commission has not approved or disapproved these funds JOHN HANCOCK FUNDS or determined whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. Contents - -------------------------------------------------------------------------------- A fund-by-fund summary Core Growth Fund 4 of goals, strategies, risks, performance and expenses. Core Value Fund 6 Policies and instructions for Your account opening, maintaining and closing an account in any Choosing a share class 8 equity fund. How sales charges are calculated 8 Sales charge reductions and waivers 9 Opening an account 10 Buying shares 11 Selling shares 12 Transaction policies 14 Dividends and account policies 14 Additional investor services 15 Further information on the Fund details equity funds. Business structure 16 Financial highlights 17 For more information back cover Overview - -------------------------------------------------------------------------------- JOHN HANCOCK EQUITY FUNDS These funds seek long-term growth by investing primarily in common stocks. Each fund has its own strategy and its own risk profile. WHO MAY WANT TO INVEST These funds may be appropriate for investors who: o have longer time horizons o want to diversify their portfolios o are seeking funds for the equity portion of an asset allocation portfolio o are investing for retirement or other goals that are many years in the future Equity funds may NOT be appropriate if you: o are investing with a shorter time horizon in mind o are uncomfortable with an investment that may go up and down in value 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 equity funds are managed by John Hancock Advisers, LLC. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial Services, Inc. and manages approximately $30 billion in assets. 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 sales charges and annual expenses. 3 Core Growth Fund GOAL AND STRATEGY [Clip Art] The fund seeks capital appreciation. To pursue this goal, the fund invests in a diversified portfolio of primarily large-capitalization stocks and emphasizes stocks of companies with relatively high potential long-term earnings growth. The portfolio's risk profile is substantially similar to that of the Russell 1000 Growth Index. The managers select from a menu of stocks of approximately 600 companies that evolves over time. Approximately 40% to 50% of these companies also are included in the Russell 1000 Growth Index. The subadviser's investment research team is organized by industry and tracks these companies to develop earnings estimates and five-year projections for growth. A series of proprietary computer models use this in-house research to rank the stocks according to their combination of: o value, meaning they appear to be underpriced o improving fundamentals, meaning they show potential for strong growth This process, together with a risk/return analysis against the Russell 1000 Growth Index, results in a portfolio of approximately 90 to 130 of the stocks from the top 60% of the menu. The fund generally sells stocks that fall into the bottom 20% of the menu. In normal market conditions, the fund is almost entirely invested in stocks. The fund may, however, invest in certain other types of equity securities, including dollar-denominated foreign securities. In abnormal market conditions, the fund may temporarily invest more than 35% 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 Independence Investment LLC - ------------------------------------- Team responsible for day-to-day investment management A subsidiary of John Hancock Financial Services, Inc. Founded in 1982 Supervised by the adviser 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. 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 - -------------------------------------------------------------------------------- 2000 2001 -17.48% -18.93% Best quarter: Q4 '99, 18.24% Worst quarter: Q1 '01, -21.33% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Life of Life of Life of 1 year Class A Class B Class C Class A - began 7/1/99 -22.96% -13.21% -- -- Class B - began 7/1/99 -23.56% -- -13.06% -- Class C - began 7/1/99 -21.13% -- -- -12.36% Index -20.42% -11.40% -11.40% -11.40% Index: Russell 1000 Growth Index, an unmanaged index of growth stocks in the Russell 1000 Index of the 1,000 largest-capitalization U.S. stocks. 4 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on small- or medium-capitalization stocks. Similarly, growth stocks could underperform value stocks. The fund's management strategy has a significant influence on fund performance. If the investment research team's earnings estimates or projections turn out to be inaccurate, or if the proprietary computer models do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Foreign investments carry additional risks, including potentially inadequate or inaccurate financial information and social or political instability. ================================================================================ YOUR EXPENSES [Clip Art] Transaction expenses are charged directly to your account. Operating expenses are paid from the fund's assets, and therefore are paid by shareholders indirectly. - -------------------------------------------------------------------------------- Shareholder transaction expenses(1) Class A Class B Class C - -------------------------------------------------------------------------------- Maximum sales charge (load) 5.00% 5.00% 2.00% Maximum front-end sales charge (load) on purchases as a % of purchase price 5.00% none 1.00% Maximum deferred sales charge (load) as a % of purchase or sale price, whichever is less none(2) 5.00% 1.00% - -------------------------------------------------------------------------------- Annual operating expenses(3) Class A Class B Class C - -------------------------------------------------------------------------------- Management fee 0.80% 0.80% 0.80% Distribution and service (12b-1) fees 0.30% 1.00% 1.00% Other expenses 0.48% 0.48% 0.48% Total fund operating expenses 1.58% 2.28% 2.28% Expense reimbursement (at least until 6/30/02) 0.09% 0.09% 0.09% Net annual operating expenses 1.49% 2.19% 2.19% 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 and that the average annual return was 5%. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future. - -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10 - -------------------------------------------------------------------------------- Class A $644 $ 965 $1,309 $2,277 Class B - with redemption $722 $1,004 $1,412 $2,433 - without redemption $222 $ 704 $1,212 $2,433 Class C - with redemption $419 $ 797 $1,300 $2,682 - without redemption $320 $ 797 $1,300 $2,682 (1) A $4.00 fee will be charged for wire redemptions. (2) Except for investments of $1 million or more; see "How sales charges are calculated." (3) Expense figures show the expenses for the past year adjusted to reflect any changes. FUND CODES Class A - ------------------------------ Ticker JACGX CUSIP 410132849 Newspaper CoreGrA SEC number 811-8852 JH fund number 79 Class B - ------------------------------ Ticker JBCGX CUSIP 410132831 Newspaper CoreGrB SEC number 811-8852 JH fund number 179 Class C - ------------------------------ Ticker JCCGX CUSIP 410132823 Newspaper -- SEC number 811-8852 JH fund number 579 5 Core Value Fund GOAL AND STRATEGY [Clip Art] The fund seeks above-average total return (capital appreciation plus income). To pursue this goal, the fund invests in a diversified portfolio of primarily large-capitalization stocks and emphasizes relatively undervalued stocks and high dividend yields. The portfolio's risk profile is substantially similar to that of the Russell 1000 Value Index. The managers select from a menu of stocks of approximately 600 companies that evolves over time. Approximately 50% to 60% of these companies also are included in the Russell 1000 Value Index. The subadviser's investment research team is organized by industry and tracks these companies to develop earnings estimates and five-year projections for growth. A series of proprietary computer models use this in-house research to rank the stocks according to their combination of: o value, meaning they appear to be underpriced o improving fundamentals, meaning they show potential for strong growth This process, together with a risk/return analysis against the Russell 1000 Value Index, results in a portfolio of approximately 100 to 130 of the stocks from the top 60% of the menu. The fund generally sells stocks that fall into the bottom 20% of the menu. In normal market conditions, the fund is almost entirely invested in stocks. The fund may, however, invest in certain other types of equity securities, including dollar-denominated foreign securities. In abnormal market conditions, the fund may temporarily invest more than 35% 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 Independence Investment LLC - ------------------------------------------------------ Team responsible for day-to-day investment management A subsidiary of John Hancock Financial Services, Inc. Founded in 1982 Supervised by the adviser 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. Class A average annual figures reflect sales charges. Year-by-year and index figures do not reflect these charges and would be lower if they did. In addition, 12b-1 fees were imposed beginning July 1, 2000 for Class A shares and would result in lower returns if reflected in these figures. All figures assume dividend reinvestment. Past performance does not indicate future results. - -------------------------------------------------------------------------------- Class A year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 20.66% 30.63% 18.79% 4.65% 6.46% -8.10% Best quarter: Q4 '98, 18.79% Worst quarter: Q3 '98, -13.99% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Life of Life of Life of 1 year 5 year Class A Class B Class C Class A - began 10/2/95 -12.67% 8.57% 11.39% -- -- Class B - began 7/1/99 -13.34% -- -- -5.38% -- Class C - began 7/1/99 -10.59% -- -- -- -4.62% Index -5.59% 11.13% 13.52% -1.84% -1.84% Index: Russell 1000 Value Index, an unmanaged index of value stocks in the Russell 1000 Index of the 1,000 largest-capitalization U.S. stocks. 6 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on small- or medium-capitalization stocks. Similarly, value stocks could underperform growth stocks. The fund's management strategy has a significant influence on fund performance. If the investment research team's earnings estimates or projections turn out to be inaccurate, or if the proprietary computer models do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Foreign investments carry additional risks, including potentially inadequate or inaccurate financial information and social or political instability. ================================================================================ YOUR EXPENSES [Clip Art] Transaction expenses are charged directly to your account. Operating expenses are paid from the fund's assets, and therefore are paid by shareholders indirectly. - -------------------------------------------------------------------------------- Shareholder transaction expenses(1) Class A Class B Class C - -------------------------------------------------------------------------------- Maximum sales charge (load) 5.00% 5.00% 2.00% Maximum front-end sales charge (load) on purchases as a % of purchase price 5.00% none 1.00% Maximum deferred sales charge (load) as a % of purchase or sale price, whichever is less none(2) 5.00% 1.00% - -------------------------------------------------------------------------------- Annual operating expenses(3) Class A Class B Class C - -------------------------------------------------------------------------------- Management fee 0.80% 0.80% 0.80% Distribution and service (12b-1) fees 0.30% 1.00% 1.00% Other expenses 0.67% 0.67% 0.67% Total fund operating expenses 1.77% 2.47% 2.47% Expense reimbursement (at least until 6/30/02) 0.32% 0.32% 0.32% Net annual operating expenses 1.45% 2.15% 2.15% 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 and that the average annual return was 5%. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future. - -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10 - -------------------------------------------------------------------------------- Class A $640 $1,000 $1,383 $2,455 Class B - with redemption $718 $1,039 $1,487 $2,609 - without redemption $218 $ 739 $1,287 $2,609 Class C - with redemption $415 $ 832 $1,374 $2,854 - without redemption $316 $ 832 $1,374 $2,854 (1) A $4.00 fee will be charged for wire redemptions. (2) Except for investments of $1 million or more; see "How sales charges are calculated." (3) Expense figures show the expenses for the past year adjusted to reflect any changes. FUND CODES Class A - --------------------------------- Ticker JHIVX CUSIP 410132807 Newspaper -- SEC number 811-8852 JH fund number 88 Class B - --------------------------------- Ticker JHVBX CUSIP 410132815 Newspaper CoreValB SEC number 811-8852 JH fund number 188 Class C - --------------------------------- Ticker JHVCX CUSIP 410132799 Newspaper -- SEC number 811-8852 JH fund number 588 7 Your account - -------------------------------------------------------------------------------- CHOOSING A SHARE CLASS Each share class has its own cost structure, including a Rule 12b-1 plan that allows it to pay fees for the sale, distribution and service of its shares. Your financial representative can help you decide which share class is best for you. - -------------------------------------------------------------------------------- Class A - -------------------------------------------------------------------------------- o A front-end sales charge, as described at right. o Distribution and service (12b-1) fees of 0.30%. - -------------------------------------------------------------------------------- Class B - -------------------------------------------------------------------------------- o No front-end sales charge; all your money goes to work for you right away. o Distribution and service (12b-1) fees of 1.00%. o A deferred sales charge, as described on following page. o Automatic conversion to Class A shares after eight years, thus reducing future annual expenses. - -------------------------------------------------------------------------------- Class C - -------------------------------------------------------------------------------- o A front-end sales charge, as described at right. o Distribution and service (12b-1) fees of 1.00%. o A 1.00% contingent deferred sales charge on shares sold within one year of purchase. o No automatic conversion to Class A shares, so annual expenses continue at the Class C level throughout the life of your investment. For actual past expenses of each share class, see the fund-by-fund information earlier in this prospectus. Because 12b-1 fees are paid on an ongoing basis, they may cost share-holders more than other types of sales charges. Investors purchasing $1 million or more of Class B or Class C shares may want to consider the lower operating expenses of Class A shares. Your broker receives a percentage of these sales charges and fees. In addition, John Hancock Funds may pay significant compensation out of its own resources to your broker. Your broker or agent may charge you a fee to effect transactions in fund shares. - -------------------------------------------------------------------------------- HOW SALES CHARGES ARE CALCULATED Class A and Class C Sales charges are as follows: - -------------------------------------------------------------------------------- Class A sales charges - -------------------------------------------------------------------------------- As a % of As a % of your Your investment offering price investment Up to $49,999 5.00% 5.26% $50,000 - $99,999 4.50% 4.71% $100,000 - $249,999 3.50% 3.63% $250,000 - $499,999 2.50% 2.56% $500,000 - $999,999 2.00% 2.04% $1,000,000 and over See below - -------------------------------------------------------------------------------- Class C sales charges - -------------------------------------------------------------------------------- As a % of As a % of your Your investment offering price investment Up to $1,000,000 1.00% 1.01% $1,000,000 and over none Investments of $1 million or more Class A and Class C shares are available with no front-end sales charge. However, there is a contingent deferred sales charge (CDSC) on any Class A shares sold within one year of purchase, as follows: - -------------------------------------------------------------------------------- CDSC on $1 million+ investments - -------------------------------------------------------------------------------- CDSC on shares Your investment being sold First $1M - $4,999,999 1.00% Next $1 - $5M above that 0.50% Next $1 or more above that 0.25% For purposes of this CDSC, all purchases made during a calendar month are counted as having been made on the first day of that month. The CDSC is based on the lesser of the original purchase cost or the current market value of the shares being sold, and is not charged on shares you acquired by reinvesting your dividends. To keep your CDSC as low as possible, each time you place a request to sell shares we will first sell any shares in your account that are not subject to a CDSC. 8 YOUR ACCOUNT Class B Shares are offered at their net asset value per share, without any initial sales charge. Class B and Class C A CDSC may be charged if you sell Class B or Class C shares within a certain time after you bought them, as described in the tables below. There is no CDSC on shares acquired through reinvestment of dividends. The CDSC is based on the original purchase cost or the current market value of the shares being sold, whichever is less. The CDSCs are as follows: - -------------------------------------------------------------------------------- Class B deferred charges - -------------------------------------------------------------------------------- CDSC on shares Years after purchase being sold 1st year 5.00% 2nd year 4.00% 3rd or 4th year 3.00% 5th year 2.00% 6th year 1.00% After 6th year none - -------------------------------------------------------------------------------- Class C deferred charges - -------------------------------------------------------------------------------- Years after purchase CDSC 1st year 1.00% After 1st year none For purposes of these CDSCs, all purchases made during a calendar month are counted as having been made on the first day of that month. CDSC calculations are based on the number of shares involved, not on the value of your account. To keep your CDSC as low as possible, each time you place a request to sell shares we will first sell any shares in your account that carry no CDSC. If there are not enough of these to meet your request, we will sell those shares that have the lowest CDSC. - -------------------------------------------------------------------------------- SALES CHARGE REDUCTIONS AND WAIVERS Reducing your Class A sales charges There are several ways you can combine multiple purchases of Class A shares of John Hancock funds to take advantage of the breakpoints in the sales charge schedule. The first three ways can be combined in any manner. o Accumulation Privilege -- lets you add the value of any Class A shares you already own to the amount of your next Class A investment for purposes of calculating the sales charge. Retirement plans investing $1 million in Class B shares may add that value to Class A purchases to calculate charges. o Letter of Intention -- lets you purchase Class A shares of a fund over a 13-month period and receive the same sales charge as if all shares had been purchased at once. o Combination Privilege -- lets you combine Class A shares of multiple funds for purposes of calculating the sales charge. To utilize: complete the appropriate section of your application, or contact your financial representative or Signature Services, or consult the SAI (see the back cover of this prospectus). Group Investment Program A group may be treated as a single purchaser under the accumulation and combination privileges. Each investor has an individual account, but the group's investments are lumped together for sales charge purposes, making the investors potentially eligible for reduced sales charges. There is no charge or obligation to invest (although initial investments must total at least $250), and individual investors may close their accounts at any time. To utilize: contact your financial representative or Signature Services to find out how to qualify, or consult the SAI (see the back cover of this prospectus). CDSC waivers As long as Signature Services is notified at the time you sell, the CDSC for each share class will generally be waived in the following cases: o to make payments through certain systematic withdrawal plans o to make certain distributions from a retirement plan o because of shareholder death or disability To utilize: if you think you may be eligible for a CDSC waiver, contact your financial representative or Signature Services, or consult the SAI (see the back cover of this prospectus). YOUR ACCOUNT 9 Reinstatement privilege If you sell shares of a John Hancock fund, you may reinvest some or all of the proceeds in the same share class of any John Hancock fund within 120 days without a sales charge, as long as Signature Services is notified before you reinvest. If you paid a CDSC when you sold your shares, you will be credited with the amount of the CDSC. All accounts involved must have the same registration. To utilize: contact your financial representative or Signature Services. Waivers for certain investors Class A shares may be offered without front-end sales charges or CDSCs to various individuals and institutions, including: o selling brokers and their employees and sales representatives o financial representatives utilizing fund shares in fee-based investment products under signed agreement with John Hancock Funds o fund trustees and other individuals who are affiliated with these or other John Hancock funds o individuals transferring assets from an employee benefit plan into a John Hancock fund o participants in certain retirement plans with at least 100 eligible employees (one-year CDSC applies) Class C shares may be offered without front-end sales charges to various individuals and institutions. To utilize: if you think you may be eligible for a sales charge waiver, contact Signature Services or consult the SAI (see the back cover of this prospectus). - -------------------------------------------------------------------------------- OPENING AN ACCOUNT 1 Read this prospectus carefully. 2 Determine how much you want to invest. The minimum initial investments for the John Hancock funds are as follows: o non-retirement account: $1,000 o retirement account: $250 o group investments: $250 o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest at least $25 a month o fee-based clients of selling brokers who have placed at least $2 billion in John Hancock funds: $250 3 Complete the appropriate parts of the account application, carefully following the instructions. You must submit additional documentation when opening trust, corporate or power of attorney accounts. You must notify your financial representative or Signature Services if this information changes. For more details, please contact your financial representative or call Signature Services at 1-800-225-5291. 4 Complete the appropriate parts of the account privileges application. By applying for privileges now, you can avoid the delay and inconvenience of having to file an additional application if you want to add privileges later. 5 Make your initial investment using the table on the next page. You and your financial representative can initiate any purchase, exchange or sale of shares. 10 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 financial representative, or account statement. If no mail them to Signature slip is available, Services (address below). include a note specifying the fund name, your share class, your account number and the name(s) in which the account is registered. o Deliver the check and your investment slip or note to your financial representative, or mail them to Signature Services (address below). By exchange [Clip Art] o Call your financial o Log on to www.jhfunds.com representative or to process exchanges Signature Services to between funds. request an exchange. o Call EASI-Line for automated service 24 hours a day using your touch-tone phone at 1-800-338-8080. o Call your financial representative or Signature Services to request an exchange. By wire [Clip Art] o Deliver your completed o Instruct your bank to wire application to your financial the amount of your representative, or mail investment to: it to Signature Services. First Signature Bank & Trust Account # 900000260 o Obtain your account number by Routing # 211475000 calling your financial representative or Signature Specify the fund name, your Services. share class, your account number and the name(s) in which the o Instruct your bank to wire account is registered. the amount of your investment Your bank may charge a fee to to: wire funds. First Signature Bank & Trust Account # 900000260 Routing # 211475000 Specify the fund name, your choice of share class, the new account number and the name(s) in which the account is registered. Your bank may charge a fee to wire funds. By Internet [Clip Art] See "By exchange" and "By wire." o Verify that your bank or credit union is a member of the Automated Clearing House (ACH) system. o Complete the "Bank Information" section on your account application. o Log on to www.jhfunds.com to initiate purchases using your authorized bank account. By phone [Clip Art] See "By exchange" and "By wire." o Verify that your bank or credit union is a member of the Automated Clearing House (ACH) system. o Complete the "Bank Information" section on your account application. o Call EASI-Line for automated service 24 hours a day using your touch-tone phone at 1-800-338-8080. o Call your financial representative or Signature Services between 8 A.M. and 4 P.M. Eastern Time on most business days. - --------------------------------------------- Address: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 Phone Number: 1-800-225-5291 Or contact your financial representative for instructions and assistance. - --------------------------------------------- To open or add to an account using the Monthly Automatic Accumulation Program, see "Additional investor services." YOUR ACCOUNT 11 - -------------------------------------------------------------------------------- Selling shares - -------------------------------------------------------------------------------- Designed for To sell some or all of your shares By letter [Clip Art] o Accounts of any type. o Write a letter of instruction or complete a stock power o Sales of any amount. indicating the fund name, your share class, your account number, the name(s) in which the account is registered and the dollar value or number of shares you wish to sell. o Include all signatures and any additional documents that may be required (see next page). o Mail the materials to Signature Services. o A check will be mailed to the name(s) and address in which the account is registered, or otherwise according to your letter of instruction. By Internet [Clip Art] o Most accounts. o Log on to www.jhfunds.com to initiate redemptions from your o Sales of up to $100,000. funds. By phone [Clip Art] o Most accounts. o Call EASI-Line for automated service 24 hours a day using o Sales of up to $100,000. your touch-tone phone at 1-800-338-8080. o Call your financial representative or Signature Services between 8 A.M. and 4 P.M. Eastern Time on most business days. By wire or electronic funds transfer (EFT) [Clip Art] o Requests by letter to o To verify that the Internet sell any amount. or telephone redemption privilege is in place on an o Requests by Internet or account, or to request the phone to sell up to form to add it to an existing $100,000. account, call Signature Services. o Amounts of $1,000 or more will be wired on the next business day. A $4 fee will be deducted from your account. o Amounts of less than $1,000 may be sent by EFT or by check. Funds from EFT transactions are generally available by the second business day. Your bank may charge a fee for this service. By exchange [Clip Art] o Accounts of any type. o Obtain a current prospectus for the fund into which you o Sales of any amount. are exchanging by Internet or by calling your financial representative or Signature Services. o Log on to www.jhfunds.com to process exchanges between your funds. o Call EASI-Line for automated service 24 hours a day using your touch-tone phone at 1-800-338-8080. o Call your financial representative or Signature Services to request an exchange. To sell shares through a systematic withdrawal plan, see "Additional investor services." 12 YOUR ACCOUNT Selling shares in writing In certain circumstances, you will need to make your request to sell shares in writing. You may need to include additional items with your request unless they were previously provided to Signature Services and are still accurate. These items are shown in the table below. You may also need to include a signature guarantee, which protects you against fraudulent orders. You will need a signature guarantee if: o your address of record has changed within the past 30 days o you are selling more than $100,000 worth of shares o you are requesting payment other than by a check mailed to the address of record and payable to the registered owner(s) You will need to obtain your signature guarantee from a member of the Signature Guarantee Medallion Program. Most brokers and securities dealers are members of this program. A notary public CANNOT provide a signature guarantee. - -------------------------------------------------------------------------------- Seller Requirements for written requests - -------------------------------------------------------------------------------- [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 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 Signature guarantee if applicable (see above). Owners or trustees of trust o Letter of instruction. 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 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 Signature guarantee if applicable (see above). Executors of shareholder estates. o Letter of instruction signed by executor. o Copy of order appointing executor, certified within the past 12 months. o Signature guarantee if applicable (see above). Administrators, conservators, o Call 1-800-225-5291 for instructions. guardians and other sellers or account types not listed above. - --------------------------------------------------------- Address: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 Phone Number: 1-800-225-5291 Or contact your financial representative for instructions and assistance. - --------------------------------------------------------- YOUR ACCOUNT 13 - -------------------------------------------------------------------------------- TRANSACTION POLICIES Valuation of shares The net asset value (NAV) per share for each fund and class 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. Foreign stock or other portfolio securities held by the funds may trade 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 plus any applicable sales charges, as described earlier. When you sell shares, you receive the NAV minus any applicable deferred sales charges. Execution of requests 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 using EASI-Line, accessing www.jhfunds.com, or 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 shares of one John Hancock fund for shares of the same class of any other, generally without paying any additional sales charges. The registration for both accounts involved must be identical. Class B and Class C shares will continue to age from the original date and will retain the same CDSC rate. However, if the new fund's CDSC rate is higher, then the rate will increase. A CDSC rate that has increased will drop again with a future exchange into a fund with a lower rate. To protect the interests of other investors in the fund, 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. 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 the fund will not release the proceeds to you until your purchase payment clears. This may take up to ten business days after the purchase. - -------------------------------------------------------------------------------- DIVIDENDS AND ACCOUNT POLICIES Account statements In general, you will receive account statements as follows: o after every transaction (except a dividend reinvestment) that affects your account balance o after any changes of name or address of the registered owner(s) o in all other circumstances, every quarter Every year you should also receive, if applicable, a Form 1099 tax information statement, mailed by January 31. Dividends The funds generally distribute most or all of their net earnings annually in the form of dividends. Any capital gains are distributed annually. The funds declare and pay any income dividends annually. Dividend reinvestments Most investors have their dividends reinvested in additional shares of the same fund and class. If you choose this option, or if you do not indicate any choice, your dividends will be reinvested on the dividend record date. Alternatively, you can choose to have a check for your dividends and capital gains in the amount of more than $10 mailed to you. However, if the check is not deliverable or the combined dividend and capital gains amount is $10 or less, 14 YOUR ACCOUNT 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. Taxability of dividends 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. Depending on the purchase price and the sale price of the shares you sell or exchange, you may have a gain or a loss on the transaction. You are responsible for any tax liabilities generated by your transactions. Small accounts (non-retirement only) If you draw down a non-retirement account so that its total value is less than $1,000, you may be asked to purchase more shares within 30 days. If you do not take action, your fund may close out your account and mail you the proceeds. Alternatively, Signature Services may charge you $10 a year to maintain your account. You will not be charged a CDSC if your account is closed for this reason, and your account will not be closed if its drop in value is due to fund performance or the effects of sales charges. - -------------------------------------------------------------------------------- ADDITIONAL INVESTOR SERVICES Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular investments from your paycheck or bank account to the John Hancock fund(s) of your choice. You determine the frequency and amount of your investments, and you can terminate your program at any time. To establish: o Complete the appropriate parts of your account application. o If you are using MAAP to open an account, make out a check ($25 minimum) for your first investment amount payable to "John Hancock Signature Services, Inc." Deliver your check and application to your financial representative or Signature Services. Systematic withdrawal plan This plan may be used for routine bill payments or periodic withdrawals from your account. To establish: o Make sure you have at least $5,000 worth of shares in your account. o Make sure you are not planning to invest more money in this account (buying shares during a period when you are also selling shares of the same fund is not advantageous to you, because of sales charges). o Specify the payee(s). The payee may be yourself or any other party, and there is no limit to the number of payees you may have, as long as they are all on the same payment schedule. o Determine the schedule: monthly, quarterly, semi-annually, annually or in certain selected months. o Fill out the relevant part of the account application. To add a systematic withdrawal plan to an existing account, contact your financial representative or Signature Services. Retirement plans John Hancock Funds offers a range of retirement plans, including traditional, Roth and Education IRAs, SIMPLE plans and SEPs. Using these plans, you can invest in any John Hancock fund (except tax-free income funds) with a low minimum investment of $250 or, for some group plans, no minimum investment at all. To find out more, call Signature Services at 1-800-225-5291. YOUR ACCOUNT 15 Fund details - -------------------------------------------------------------------------------- BUSINESS STRUCTURE The diagram below shows the basic business structure used by the John Hancock equity funds. Each 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 Core Growth and Core Value funds have the power to change the funds' respective investment goals without shareholderapproval. Management fees The management fees paid to the investment adviser by the John Hancock equity funds last fiscal year are as follows: - -------------------------------------------------------------------------------- Fund % of net assets - -------------------------------------------------------------------------------- Core Growth 0.71% Core Value 0.48% ----------------------- Shareholders ----------------------- Distribution and shareholder services --------------------------------------------------- Financial services firms and their representatives Advise current and prospective share- holders on their fund investments, often in the context of an overall financial plan. --------------------------------------------------- --------------------------------------------------- Principal distributor John Hancock Funds, LLC Markets the funds and distributes shares through selling brokers, financial planners and other financial representatives. --------------------------------------------------- --------------------------------------------------- Transfer agent John Hancock Signature Services, Inc. Handles shareholder services, including record- keeping and statements, distribution of dividends and processing of buy and sell requests. --------------------------------------------------- Asset management --------------------------------------------------- Subadviser Independence Investment LLC 53 State Street Boston, MA 02109 Provides portfolio management to the funds. --------------------------------------------------- --------------------------------------------------- Investment adviser John Hancock Advisers, LLC 101 Huntington Avenue Boston, MA 02199-7603 Manages the funds' business and investment activities. --------------------------------------------------- --------------------------------------------------- Custodian The Bank of New York One Wall Street New York, New York 10286 Holds the funds' assets, settles all portfolio trades and collects most of the valuation data required for calculating each fund's NAV. --------------------------------------------------- --------------------------------------------------- Trustees Oversee the funds' activities. --------------------------------------------------- 16 FUND DETAILS - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS These tables detail the performance of each fund's share classes, including total return information showing how much an investment in the fund has increased or decreased each year. Core Growth Fund Figures audited by Deloitte & Touche LLP.
- ----------------------------------------------------------------------------------------- Class A - period ended: 2/00(1) 2/01 - ----------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $ 18.14 $ 19.80 Net investment income (loss)(2) (0.05) (0.18) Net realized and unrealized gain (loss) on investments 1.73 (4.95) Total from investment operations 1.68 (5.13) Less distributions: From net realized gain (0.02) (0.32) Net asset value, end of period $ 19.80 $ 14.35 Total return(3,4) (%) 9.25(5) Ratios and supplemental data Net assets, end of period (in millions) ($) 21 40 Ratio of expenses to average net assets (%) 1.25(6) 1.49 Ratio of adjusted expenses to average net assets(7,8) (%) 1.63(6) 1.58 Ratio of net investment income (loss) to average net assets (%) (0.39)(6) (0.91) Portfolio turnover rate (%) 72 115 - ----------------------------------------------------------------------------------------- Class B - period ended: 2/00(1) 2/01 - ----------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $ 18.14 $ 19.73 Net investment income (loss)(2) (0.13) (0.31) Net realized and unrealized gain (loss) on investments 1.74 (4.92) Total from investment operations 1.61 (5.23) Less distributions: From net realized gain (0.02) (0.32) Net asset value, end of period $ 19.73 $ 14.18 Total return(3,4) (%) 8.86(5) (26.86) Ratios and supplemental data Net assets, end of period (in millions) ($) 23 23 Ratio of expenses to average net assets (%) 1.95(6) 2.19 Ratio of adjusted expenses to average net assets(7,8) (%) 2.33(6) 2.28 Ratio of net investment income (loss) to average net assets (%) (1.09)(6) (1.60) Portfolio turnover rate (%) 72 115
FUND DETAILS 17 Core Growth Fund continued
- ----------------------------------------------------------------------------------------- Class C - period ended: 2/00(1) 2/01 - ----------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $ 18.14 $ 19.73 Net investment income (loss)(2) (0.13) (0.31) Net realized and unrealized gain (loss) on investments 1.74 (4.91) Total from investment operations 1.61 (5.22) Less distributions: From net realized gain (0.02) (0.32) Net asset value, end of period $ 19.73 $ 14.19 Total return(3,4) (%) 8.86(5) (26.81) Ratios and supplemental data Net assets, end of period (in millions) ($) 0.9 2 Ratio of expenses to average net assets (%) 1.95(6) 2.19 Ratio of adjusted expenses to average net assets(7,8) (%) 2.33(6) 2.28 Ratio of net investment income (loss) to average net assets (%) (1.09)(6) (1.61) Portfolio turnover rate (%) 72 115
(1) Class A, Class B and Class C shares began operations on July 1, 1999. (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) The 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. ================================================================================ The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for Class A for the periods or years ended February 29, 2000 and February 28, 2001 would have been 8.87% and (26.35%), respectively. For Class B, the returns would have been 8.48% and (26.95%), respectively, and for Class C would have been 8.48% and (26.90%), respectively. 18 FUND DETAILS Core Value Fund Figures audited by Deloitte & Touche LLP.
- ---------------------------------------------------------------------------------------------------------------------------- Class A(1) - period ended: 2/97 2/98 2/99 2/00 2/01 - ---------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $9.47 $10.88 $13.93 $12.36 $10.70 Net investment income (loss)(2) 0.23 0.21 0.15 0.13 0.10 Net realized and unrealized gain (loss) on investments 1.77 3.33 1.23 (1.01) 2.04 Total from investment operations 2.00 3.54 1.38 (0.88) 2.14 Distributions to shareholders From net investment income (0.19) (0.13) (0.18) (0.08) (0.10) From net realized gain (0.40) (0.36) (2.77) (0.70) (0.03) (0.59) (0.49) (2.95) (0.78) (0.13) Net asset value, end of period $10.88 $13.93 $12.36 $10.70 $12.71 Total return(3,4) (%) 21.36 32.97 9.87 (8.08) 20.02 Ratios and supplemental data Net assets, end of period (in millions) ($) 1 8 7 12 11 Ratio of expenses to average net assets (%) 0.95 0.95 0.95 0.95 1.30 Ratio of adjusted expenses to average net assets(5,6) (%) 6.39 1.90 1.88 1.89 1.62 Ratio of net investment income (loss) to average net assets (%) 2.26 1.60 1.03 1.09 0.79 Portfolio turnover rate (%) 66 119 61 76 131
- --------------------------------------------------------------------------------------------- Class B - period ended: 2/00(7) 2/01 - --------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $13.35 $10.69 Net investment income (loss)(2) 0.02 (0.01) Net realized and unrealized gain (loss) on investments (2.56) 2.05 Total from investment operations (2.54) 2.04 Distributions to shareholders From net investment income (0.02) (0.01) From net realized gain (0.10) (0.03) Total distributions (0.12) (0.04) Net asset value, end of period $10.69 $12.69 Total return(3,4) (%) (19.19)(8) 19.02 Ratios and supplemental data Net assets, end of period (in millions) ($) 8 15 Ratio of expenses to average net assets (%) 1.95(9) 2.09 Ratio of adjusted expenses to average net assets(5,6) (%) 2.59(9) 2.41 Ratio of net investment income (loss) to average net assets (%) 0.19(9) (0.05) Portfolio turnover rate (%) 76 131
FUND DETAILS 19 Core Value Fund continued
- ------------------------------------------------------------------------------------------- Class C - period ended: 2/00(7) 2/01 - ------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $13.35 $10.69 Net investment income (loss)(2) 0.02 (0.01) Net realized and unrealized gain (loss) on investments (2.56) 2.04 Total from investment operations (2.54) 2.03 Distributions to shareholders From net investment income (0.02) --(10) From net realized gain (0.10) (0.03) Total distributions (0.12) (0.03) Net asset value, end of period $10.69 $12.69 Total return(3,4) (%) (19.19)(8) 18.98 Ratios and supplemental data Net assets, end of period (in millions) ($) 0.2 2 Ratio of expenses to average net assets (%) 1.95(9) 2.18 Ratio of adjusted expenses to average net assets(5,6) (%) 2.59(9) 2.50 Ratio of net investment income (loss) to average net assets (%) 0.21(9) (0.16) Portfolio turnover rate (%) 76 131
(1) Effective July 1, 1999, existing shares of the fund were designated Class A shares. The Fund, which had previously only been sold to institutional investors, also became available for sale to individual investors. (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) The 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) Class B and Class C shares began operations on July 1, 1999. (8) Not Annualized (9) Annualized. (10) Less than $0.01. ================================================================================ The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for Class A for the periods or years ended February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would have been 15.92%, 32.02%, 83.94%, (9.02%) and (19.70%), respectively. For Class B, the returns for the periods or years ended February 29, 2000 and February 28, 2001 would have been (19.83%) and 18.70%, respectively, and for Class C would have been (19.83%) and 18.66%, respectively. 20 FUND DETAILS For more information Two documents are available that offer further information on John Hancock equity 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 1000 Boston, MA 02217-1000 By phone: 1-800-225-5291 By EASI-Line: 1-800-338-8080 By TDD: 1-800-544-6713 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 SPONSOR 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 7988PN 3/02 John Hancock Equity Funds Institutional Class I Prospectus July 2, 2001 - -------------------------------------------------------------------------------- Core Growth Fund Core Value 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 Core Growth Fund 4 of goals, strategies, risks, performance and Core Value Fund 6 expenses. Policies and instructions Your account for opening, maintaining and closing an account. Who can buy shares 8 Opening an account 8 Buying shares 9 Selling shares 10 Transaction policies 12 Dividends and account policies 12 Business structure 13 Further information on the Financial highlights 14 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 EQUITY FUNDS -- INSTITUTIONAL CLASS I 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 equity 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 Core Growth Fund GOAL AND STRATEGY [Clip Art] The fund seeks capital appreciation. To pursue this goal, the fund invests in a diversified portfolio of primarily large-capitalization stocks and emphasizes stocks of companies with relatively high potential long-term earnings growth. The portfolio's risk profile is substantially similar to that of the Russell 1000 Growth Index. The managers select from a menu of stocks of approximately 550 companies that evolves over time. Approximately 40% to 50% of these companies also are included in the Russell 1000 Growth Index. The subadviser's investment research team is organized by industry and tracks these companies to develop earnings estimates and five-year projections for growth. A series of proprietary computer models use this in-house research to rank the stocks according to their combination of: o value, meaning they appear to be underpriced o improving fundamentals, meaning they show potential for strong growth This process, together with a risk/return analysis against the Russell 1000 Growth Index, results in a portfolio of approximately 90 to 130 of the stocks from the top 60% of the menu. The fund generally sells stocks that fall into the bottom 20% of the menu. In normal market conditions, the fund is almost entirely invested in stocks. The fund may, however, invest in certain other types of equity securities, including dollardenominated foreign securities. In abnormal market conditions, the fund may temporarily invest more than 35% 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 Independence Investment LLC - ---------------------------------- Team responsible for day-to-day investment management A subsidiary of John Hancock Financial Services, Inc. Founded in 1982 Supervised by the adviser 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 - -------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 20.52% 36.22% 37.94% 20.00% -17.16% 2001 total return as of March 31: -21.17% Best quarter: Q4 '98, 27.44% Worst quarter: Q3 '98, -12.00% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Class I Index 1 year -17.16% -22.42% 5 year 17.62% 18.15% Life of Class I - began 10/2/95 17.78% 18.21% Index: Russell 1000 Growth Index, an unmanaged index of growth stocks in the Russell 1000 Index of the 1,000 largest-capitalization U.S. stocks. 4 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on small- or medium-capitalization stocks. Similarly, growth stocks could underperform value stocks. The fund's management strategy has a significant influence on fund performance. If the investment research team's earnings estimates or projections turn out to be inaccurate, or if the proprietary computer models do not perform as expected, 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 Foreign investments carry additional risks, including potentially 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 0.24% Total fund operating expenses 1.04% Expense reimbursement (at least until 6/30/02) 0.09% Net annual operating expenses 0.95% 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 frame. 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 - -------------------------------------------------------------------------------- $97 $322 $565 $1,263 FUND CODES Class I - ------------------------------- Ticker JHIGX CUSIP 410132880 Newspaper -- JHfund number 420 5 Core Value Fund GOAL AND STRATEGY [Clip Art] The fund seeks above-average total return (capital appreciation plus income). To pursue this goal, the fund invests in a diversified portfolio of primarily large-capitalization stocks and emphasizes relatively undervalued stocks and high dividend yields. The portfolio's risk profile is substantially similar to that of the Russell 1000 Value Index. The managers select from a menu of stocks of approximately 550 companies that evolves over time. Approximately 50% to 60% of these companies also are included in the Russell 1000 Value Index. The subadviser's investment research team is organized by industry and tracks these companies to develop earnings estimates and five-year projections for growth. A series of proprietary computer models use this in-house research to rank the stocks according to their combination of: o value, meaning they appear to be underpriced o improving fundamentals, meaning they show potential for strong growth This process, together with a risk/ return analysis against the Russell 1000 Value Index, results in a portfolio of approximately 100 to 130 of the stocks from the top 60% of the menu. The fund generally sells stocks that fall into the bottom 20% of the menu. In normal market conditions, the fund is almost entirely invested in stocks. The fund may, however, invest in certain other types of equity securities, including dollardenominated foreign securities. In abnormal market conditions, the fund may temporarily invest more than 35% 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 Independence Investment LLC - ----------------------------------- Team responsible for day-to-day investment management A subsidiary of John Hancock Financial Services, Inc. Founded in 1982 Supervised by the adviser PAST PERFORMANCE [Clip Art] The graph shows the fund's total return, 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 - -------------------------------------------------------------------------------- 2000 6.84% 2001 total return as of March 31: -5.93% Best quarter: Q3 '00, 9.02% Worst quarter: Q3 '99, -11.01% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Class I Index 1 year 6.84% 7.02% Life of Class I - began 7/1/99 -0.00% 1.18% Index: Russell 1000 Value Index, an unmanaged index of value stocks in the Russell 1000 Index of the 1,000 largest-capitalization U.S. stocks. 6 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on small- or medium-capitalization stocks. Similarly, value stocks could underperform growth stocks. The fund's management strategy has a significant influence on fund performance. If the investment research team's earnings estimates or projections turn out to be inaccurate, or if the proprietary computer models do not perform as expected, 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 Foreign investments carry additional risks, including potentially 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 0.56% Total fund operating expenses 1.36% Expense reimbursement (at least until 6/30/02) 0.32% Net annual operating expenses 1.04% 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 frame. 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 - -------------------------------------------------------------------------------- $106 $398 $713 $1,604 FUND CODES Class I - ------------------------------- Ticker JHICX CUSIP 410132781 Newspaper -- JH fund number 488 7 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, 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. 8 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, investment amount payable to payable to "John Hancock "John Hancock Signature Signature Services, Inc." Services, Inc." o Deliver the check and your o Fill out the detachable completed application to investment slip from an your financial representative, account statement. If no or mail them to Signature slip is available, include Services (address below). a note 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 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 funds or Class I shares. Class I shares. By wire [Clip Art] o Deliver your completed o Instruct your bank to application to your wire 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 financial Specify the fund name(s), your representative or share class, your account Signature Services. number and the name(s) in which the account is o Instruct your bank to registered. Your bank may wire the amount of your charge a fee to wire funds. 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 9 - -------------------------------------------------------------------------------- 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 however, sales of $5 instruction indicating million or more must the fund name, your account be made by letter. number, your share class, the name(s) in which the o Certain requests will account is registered and require a Medallion the dollar value or number signature guarantee. of shares you 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 sell any amount. telephone redemption privilege is in place on o Requests by phone to sell an account, or to request up to $5 million (accounts the forms to add it to an with telephone redemption existing account, call privileges). Signature Services. 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. 10 YOUR ACCOUNT Selling shares in writing In certain circumstances, you will need to make your request to sell shares in writing. You may need to include additional items with your request, 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, guardians o Call 1-888-972-8696 for and other sellers or account types not instructions. 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 11 - -------------------------------------------------------------------------------- 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 valui ng 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 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 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 The funds declare and pay any income dividends annually. Capital gains, if any, are 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. 12 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 shareholderapproval. The investment adviser John Hancock Advisers, Inc., 101 Huntington Avenue, Boston, MA 02199-7603. The subadviser Independence Investment LLC, 53 State Street, Boston, MA 02109. Management fees The management fees paid to the investment adviser by the funds last fiscal year are as follows: - -------------------------------------------------------------------------------- Fund % of net assets - -------------------------------------------------------------------------------- Core Growth 0.71% Core Value 0.48% YOUR ACCOUNT 13 Financial highlights - -------------------------------------------------------------------------------- These tables detail the performance of each fund's Class I share, including total return information showing how much an investment in the fund has increased or decreased each year. Core Growth Fund Figures audited by Deloitte & Touche LLP.
- ---------------------------------------------------------------------------------------------------------------------- Period ended: 2/97 2/98 2/99 2/00(1) 2/01 - ---------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $ 9.29 $ 11.01 $ 14.88 $ 17.65 $ 19.83 Net investment income (loss)(2) 0.05 0.04 0.01 (0.01) (0.07) Net realized and unrealized gain (loss) on investments 2.16 4.34 3.40 3.31 (5.01) Total from investment operations 2.21 4.38 3.41 3.30 (5.08) Less distributions from net investment income (0.04) (0.03) (0.02) -- -- In excess of net investment income -- -- --(3) -- -- From net realized gain (0.45) (0.48) (0.62) (1.12) (0.32) Total distributions (0.49) (0.51) (0.64) (1.12) (0.32) Net asset value, end of period $ 11.01 $ 14.88 $ 17.65 $ 19.83 $ 14.43 Total investment return(4,5)(%) 24.19 40.52 22.92 19.67 (25.96) Ratios and supplemental data Net assets, end of period (in millions) ($) 0.9 5 8 9 3 Ratio of expenses to average net assets (%) 0.95 0.95 0.95 0.95 0.95 Ratio of adjusted expenses to average net assets(6,7)(%) 7.74 3.52 1.98 1.33 1.04 Ratio of net investment income (loss) to average net assets (%) 0.49 0.34 0.06 (0.06) (0.35) Portfolio turnover rate (%) 142 91 54 72 115
(1) Effective July 1, 1999, existing shares of the fund were designated Class I shares. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment and does not reflect the effect of sales charges. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (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. - -------------------------------------------------------------------------------- The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for Class I for the periods or years ended February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would have been 17.40%, 37.95%, 21.89%, 19.29% and (26.05%), respectively. 14 FINANCIAL HIGHLIGHTS Core Value Fund Figures audited by Deloitte & Touche LLP.
- ------------------------------------------------------------------------------------------ Period ended: 2/00(1) 2/01 - ------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $ 13.35 $ 10.70 Net investment income (loss)(2) 0.09 0.12 Net realized and unrealized gain (loss) on investments (2.56) 2.07 Total from investment operations (2.47) 2.19 Distributions to shareholders From net investment income (0.08) (0.14) From net realized gain (0.10) (0.03) (0.18) (0.17) Net asset value, end of period $ 10.70 $ 12.72 Total investment return(3,4) (%) (18.71)(5) 20.46 Ratios and supplemental data Net assets, end of period (in millions) ($) 0.7 2 Ratio of expenses to average net assets (%) 0.95(6) 0.95 Ratio of adjusted expenses to average net assets(7,8) (%) 1.59(6) 1.27 Ratio of net investment income (loss) to average net assets (%) 1.09(6) 0.97 Portfolio turnover rate (%) 76 131
(1) Began operations on July 1, 1999. (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) The 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. - -------------------------------------------------------------------------------- The following returns are not audited and are not part of the audited financial highlights presented above: Without the expense reductions, returns for Class I for the periods or years February 29, 2000 and February 28, 2001 would have been (19.35%) and 20.14%, respectively. FINANCIAL HIGHLIGHTS 15 For more information - -------------------------------------------------------------------------------- Two documents are available that offer further information on the John Hancock equity 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. K20PN 7/01 JOHN HANCOCK CORE VALUE FUND Class A, Class B, Class C and Class I Shares Statement of Additional Information July 1, 2001 This Statement of Additional Information provides information about John Hancock Core Value Fund (the "Fund") in addition to the information that is contained in the combined Equity Funds current Prospectus and in the Fund's current Prospectus for Class I shares, (the "Prospectuses"). The Fund is a diversified series of John Hancock Institutional Series Trust (the "Trust"). This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston MA 02217-1000 1-800-225-5291 TABLE OF CONTENTS Page Organization of the Fund ................................................ 2 Investment Objective and Policies ....................................... 2 Investment Restrictions ................................................. 9 Those Responsible for Management ........................................ 11 Investment Advisory and Other Services .................................. 17 Distribution Contracts .................................................. 20 Sales Compensation ...................................................... 22 Net Asset Value ......................................................... 24 Initial Sales Charge on Class A and Class C Shares ...................... 25 Deferred Sales Charge on Class B and Class C Shares ..................... 28 Special Redemptions ..................................................... 32 Additional Services and Programs ........................................ 32 Purchases and Redemptions through Third Parties ......................... 34 Description of the Fund's Shares ........................................ 34 Tax Status .............................................................. 36 Calculation of Performance .............................................. 40 Brokerage Allocation .................................................... 42 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 series of the Trust, an open-end investment management company organized as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts. Prior to July 1, 1999, the Fund was called John Hancock Independence Value 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 wholly owned by John Hancock Financial Services, Inc., a Delaware corporation organized in February, 2000. The Subadviser of the Fund is Independence Investment LLC ("Independence") (formerly Independence Investment Associates, Inc.) referred to herein as the "Subadviser." Independence is an affiliate of the Life Company. INVESTMENT OBJECTIVE AND POLICIES The following information supplements the discussion of the Fund's investment objective and policies as discussed in the Prospectus. Appendix A contains further information describing investment risks. The investment objective of the Fund is nonfundamental and may be changed without shareholder approval. There is no assurance that the Fund will achieve its investment objective. The Fund seeks above-average total return (capital appreciation plus income). The Fund emphasizes relatively undervalued securities. The Fund's performance and risk profile benchmark portfolio is the Russell 1000 Value Index which is comprised of stocks and companies with a less-than-average growth orientation and represents the universe of stocks from which value managers typically select. It is capitalization weighted and includes only common stocks belonging to large-capitalization, domestic corporations. The 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. The 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 the Fund's investment objective, shareholders should consider whether the Fund remains an appropriate investment in light of their then current financial position and needs. For a further description of the Fund's investment objectives, policies and restrictions see "Goal and Strategy" and "Main Risks" in the Fund's Prospectus and "Investment Restrictions" in this Statement of Additional Information. Common stocks. The 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, 2 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. The Fund will diversify its investments in common stocks of companies in a number of industry groups without concentrating in any particular industry. 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. Debt securities in which the Fund may invest are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk) and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). Particular debt securities will be selected based upon credit risk analysis of potential issuers, the characteristics of the security and the interest rate sensitivity of the various debt issues available with respect to a particular issuer, and analysis of the anticipated volatility and liquidity of the particular debt instruments. Preferred stocks. The Fund may invest in preferred stocks. Preferred stock generally has a preference to dividends and, upon liquidation, over an issuer's common stock but ranks junior to debt securities in an issuer's capital structure. Preferred stock generally pays dividends in cash (or additional shares of preferred stock) at a defined rate but, unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer's board of directors. Dividends on preferred stock may be cumulative, meaning that, in the event the issuer fails to make one or more dividend payments on the preferred stock, no dividends may be paid on the issuer's common stock until all unpaid preferred stock dividends have been paid. Preferred stock also may be subject to optional or mandatory redemption provisions. Investment in Foreign Securities. The Fund may invest in the securities of foreign issuers in the form of sponsored and unsponsored American Depository Receipts ("ADRs") and U.S. dollar-denominated securities of foreign issuers traded on U.S. exchanges. ADRs (sponsored and unsponsored) are receipts, typically issued by U.S. banks, which evidence ownership of underlying securities issued by a foreign corporation. ADRs are publicly traded on a U.S. stock exchange or in the over-the-counter market. An investment in foreign securities including ADRs may be affected by changes in currency rates and in exchange control regulations. Issuers of unsponsored ADRs are not contractually obligated to disclose material information including financial information, in the United States and, therefore, there may not be a correlation between such information and the market value of the unsponsored ADR. Foreign companies may not be subject to accounting standards or government supervision comparable to U.S. companies, and there is often less publicly available information about their operations. Foreign companies may also be affected by political or financial inability abroad. These risk considerations may be intensified in the case of investments in ADRs of foreign companies that are located in emerging market countries. ADRs of companies located in these countries may have limited marketability and may be subject to more abrupt or erratic price movements. 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. 3 Government securities. The Adviser will continuously monitor the creditworthiness of the parties with whom the Fund enters into repurchase agreements. The Fund has established a procedure providing that the securities serving as collateral for each repurchase agreement must be delivered to the Fund's custodian either physically or in book-entry form and that the collateral must be marked to market daily to ensure that each repurchase agreement is fully collateralized at all times. In the event of bankruptcy or other default by a seller of a repurchase agreement, the Fund could experience delays in liquidating the underlying securities during the period in which the Fund seeks to enforce its rights thereto, possible subnormal levels of income, decline in value of the underlying securities or lack of access to income during this period as well as the expense of enforcing its rights. Reverse Repurchase Agreements and Other Borrowings. The Fund may also enter into reverse repurchase agreements which involve the sale of U.S. Government securities held in its portfolio to a bank with an agreement that the Fund will buy back the securities at a fixed future date at a fixed price plus an agreed amount of "interest" which may be reflected in the repurchase price. Reverse repurchase agreements are considered to be borrowings by the Fund. Reverse repurchase agreements involve the risk that the market value of securities purchased by the Fund with proceeds of the transaction may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase. The Fund will also continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will reacquire those securities upon effecting its repurchase. To minimize various risks associated with reverse repurchase agreements, the 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, the 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 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 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. The Fund may purchase securities that are not registered ("restricted securities") under the Securities Act of 1933 ("1933 Act"), including commercial paper issued in reliance on Section 4(2) of the 1933 Act and securities offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not invest more than 15% of its net assets in illiquid investments. If the Trustees 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. 4 Forward Commitment and When-Issued Securities. The Fund may purchase securities on a when-issued or forward commitment basis. "When-issued" refers to securities whose terms are available and for which a market exists, but which have not been issued. The Fund will engage in when-issued transactions with respect to securities purchased for its portfolio in order to obtain what is considered to be an advantageous price and yield at the time of the transaction. For when-issued transactions, no payment is made until delivery is due, often a month or more after the purchase. In a forward commitment transaction, the Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. When the Fund engages in forward commitment and when-issued transactions, it relies on the seller to consummate the transaction. The failure of the issuer or seller to consummate the transaction may result in the Fund 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 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. Government Securities. The Fund may invest in government securities. Certain U.S. Government securities, including U.S. Treasury bills, notes and bonds, and Government National Mortgage Association certificates ("GNMA"), are supported by the full faith and credit of the United States. Certain other U.S. Government securities, issued or guaranteed by Federal agencies or government sponsored enterprises, are not supported by the full faith and credit of the United States, but may be supported by the right of the issuer to borrow from the U.S. Treasury. These securities include obligations of the Federal Home Loan Mortgage Corporation ("FHLMC"), and obligations supported by the credit of the instrumentality, such as Federal National Mortgage Association Bonds ("FNMA"). No assurance can be given that the U.S. Government will provide financial support to such Federal agencies, authorities, instrumentalities and government sponsored enterprises in the future. Mortgage-Backed Securities. The Fund may invest in mortgage pass-through certificates and multiple-class pass-through securities, such as real estate mortgage investment conduits ("REMIC") pass-through certificates, collateralized mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"), and other types of "Mortgage-Backed Securities" that may be available in the future. Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through securities represent participation interests in pools of residential mortgage loans and are issued by U.S. Governmental or private lenders and guaranteed by the U.S. Government or one of its agencies or instrumentalities, including but not limited to the GNMA, the FNMA and the FHLMC. GNMA certificates are guaranteed by the full faith and credit of the U.S. Government for timely 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 5 principal and interest on the certificates. FHLMC certificates are guaranteed by FHLMC, a corporate instrumentality of the U.S. Government, for timely payment of interest and the ultimate collection of all principal of the related mortgage loans. Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations. CMOs and REMIC pass-through or participation certificates may be issued by, among others, U.S. Government agencies and instrumentalities as well as private lenders. CMOs and REMIC certificates are issued in multiple classes and the principal of and interest on the mortgage assets may be allocated among the several classes of CMOs or REMIC certificates in various ways. Each class of CMOs or REMIC certificates, often referred to as a "tranche," is issued at a specific adjustable or fixed interest rate and must be fully retired no later than its final distribution date. Generally, interest is paid or accrues on all classes of CMOs or REMIC certificates on a monthly basis. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but also may be collateralized by other mortgage assets such as whole loans or private mortgage pass-through securities. Debt service on CMOs is provided from payments of principal and interest on collateral of mortgaged assets and any reinvestment income thereon. A REMIC is a CMO that qualifies for special tax treatment under the Code and invests in certain mortgages primarily secured by interests in real property and other permitted investments. Investors may purchase "regular" and "residual" interest shares of beneficial interest in REMIC trusts although the Fund does not intend to invest in residual interests. Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class mortgage-backed securities. SMBS are usually structured with two classes that receive different proportions of interest and principal distributions on a pool of mortgage assets. A typical SMBS will have one class receiving some of the interest and most of the principal, while the other class will receive most of the interest and the remaining principal. In the most extreme case, one class will receive all of the interest (the "interest only" class) while the other class will receive all of the principal (the "principal only" class). The yields and market risk of interest only and principal only SMBS, respectively, may be more volatile than those of other fixed income securities. The staff of the SEC considers privately issued SMBS to be illiquid. Structured or Hybrid Notes. Funds that may invest in mortgage-backed securities may invest in "structured" or "hybrid" notes. The distinguishing feature of a structured or hybrid note is that the amount of interest and/or principal payable on the note is based on the performance of a benchmark asset or market other than fixed-income securities or interest rates. Examples of these benchmarks include stock prices, currency exchange rates and physical commodity prices. Investing in a structured note allows the Fund to gain exposure to the benchmark market while fixing the maximum loss that the Fund may experience in the event that market does not perform as expected. Depending on the terms of the note, the Fund may forego all or part of the interest and principal that would be payable on a comparable conventional note; the Fund's loss cannot exceed this foregone interest and/or principal. An investment in structured or hybrid notes involves risks similar to those associated with a direct investment in the benchmark asset. Risk Factors Associated with Mortgage-Backed Securities. Investing in Mortgage-Backed Securities involves certain risks, including the failure of a counter-party to meet its 6 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, the Fund may fail to recoup fully its investment in Mortgage-Backed Securities notwithstanding any direct or indirect governmental, agency or other guarantee. When the Fund reinvests amounts representing payments and unscheduled prepayments of principal, it may receive a rate of interest that is lower than the rate on existing adjustable rate mortgage pass-through securities. Thus, Mortgage-Backed Securities, and adjustable rate mortgage pass-through securities in particular, may be less effective than other types of U.S. Government securities as a means of "locking in" interest rates. Conversely, in a rising interest rate environment, a declining prepayment rate will extend the average life of many Mortgage-Backed Securities. This possibility is often referred to as extension risk. Extending the average life of a Mortgage-Backed Security increases the risk of depreciation due to future increases in market interest rates. Risk Associated With Specific Types of Derivative Debt Securities. Different types of derivative debt securities are subject to different combinations of prepayment, extension and/or interest rate risk. Conventional mortgage pass-through securities and sequential pay CMOs are subject to all of these risks, but are typically not leveraged. Thus, the magnitude of exposure may be less than for more leveraged Mortgage-Backed Securities. The risk of early prepayments is the primary risk associated with interest only debt securities ("IOs"), super floaters, other leveraged floating rate instruments and Mortgage-Backed Securities purchased at a premium to their par value. In some instances, early prepayments may result in a complete loss of investment in certain of these securities. The primary risks associated with certain other derivative debt securities are the potential extension of average life and/or depreciation due to rising interest rates. These securities include floating rate securities based on the Cost of Funds Index ("COFI floaters"), other "lagging rate" floating rate securities, floating rate securities that are subject to a maximum interest rate ("capped floaters"), Mortgage-Backed Securities purchased at a discount, leveraged inverse floating rate securities ("inverse floaters"), principal only debt securities ("POs"), certain residual or support tranches of CMOs and index amortizing notes. Index amortizing notes are not Mortgage-Backed Securities, but are subject to extension risk resulting from the issuer's failure to exercise its option to call or redeem the notes before their stated maturity date. Leveraged inverse IOs combine several elements of the Mortgage-Backed 7 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 B contains further information concerning the rating of Moody's and S&P and their significance. Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither of these events will require the sale of the securities by the Fund, but the Adviser will consider the event in its determination of whether the Fund should continue to hold the securities. 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. The Fund can lend portfolio securities having a total value of 33 1/3% of its total assets. Short-Term Trading. 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 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. 8 INVESTMENT RESTRICTIONS Fundamental Investment Restrictions. The Fund has adopted the following investment restrictions which may not be changed without the approval of a majority of the Fund's outstanding voting securities which, as used in the Prospectus and this Statement of Additional Information means the approval by the lesser of (1) the holders of 67% or more of the Fund's shares represented at a meeting if more than 50% of the Fund's outstanding shares are present in person or by proxy or (2) more than 50% of the outstanding shares. The Fund may not: 1. Issue senior securities, except as permitted by paragraphs 3, 6 and 7 below. For purposes of this restriction, the issuance of shares of beneficial interest in multiple classes or series, the deferral of trustees' fees, the purchase or sale of options, futures contracts, forward commitments and repurchase agreements entered into in accordance with the Fund's investment policies or within the meaning of paragraph 6 below, are not deemed to be senior securities. 2. Purchase securities on margin or make short sales, or unless, by virtue of its ownership of other securities, the Fund has the right to obtain securities equivalent in kind and amount to the securities sold and, if the right is conditional, the sale is made upon the same conditions, except (i) in connection with arbitrage transactions, (ii) for hedging the Fund's exposure to an actual or anticipated market decline in the value of its securities, (iii) to profit from an anticipated decline in the value of a security, and (iv) obtaining such short-term credits as may be necessary for the clearance of purchases and sales of securities. 3. Borrow money, except for the following extraordinary or emergency purposes: (i) from banks for temporary or short-term purposes or for the clearance of transactions in amounts not to exceed 33 1/3% of the value of the Fund's total assets (including the amount borrowed) taken at market value; (ii) in connection with the redemption of Fund shares or to finance failed settlements of portfolio trades without immediately liquidating portfolio securities or other assets; (iii) in order to fulfill commitments or plans to purchase additional securities pending the anticipated sale of other portfolio securities or assets. The Fund may not borrow money for the purpose of leveraging the Fund's 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. 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 9 and sell mortgage-related securities and (v) hold and sell real estate acquired by the Fund as a result of the ownership of securities. 6. Invest in commodities, except the Fund may purchase and sell options on securities, securities indices and currency, futures contracts on securities, securities indices and currency and options on such futures, forward foreign currency exchange contracts, forward commitments, securities index put or call warrants and repurchase agreements entered into in accordance with the Fund's investment policies. 7. Make loans, except that the Fund (1) may lend portfolio securities in accordance with the Fund's investment policies up to 33 1/3% of the Fund's total assets taken at market value, (2) enter into repurchase agreements, and (3) purchase all or a portion of an issue of debt securities, bank loan participation interests, bank certificates of deposit, bankers' acceptances, debentures or other securities, whether or not the purchase is made upon the original issuance of the securities. 8. Purchase the securities of issuers conducting their principal activity in the same industry if, immediately after such purchase, the value of its investments in such industry would exceed 25% of its total assets taken at market value at the time of such investment. This limitation does not apply to investments in obligations of the U.S. Government or any of its agencies, instrumentalities or authorities. 9. With respect to 75% of the Fund's total assets, purchase securities of an issuer (other than the U.S. Government, its agencies, instrumentalities or authorities), if: (a) such purchase would cause more than 5% of the Fund's total assets taken at market value to be invested in the securities of such issuer; or (b) such purchase would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund. Non-Fundamental Investment Restrictions. The following investment restrictions are designated as non-fundamental and may be changed by the Trustees without shareholder approval. The Fund may not: 1. Purchase a security if, as a result, (i) more than 10% of the Fund's total assets would be invested in the securities of other investment companies, (ii) the Fund would hold more than 3% of the total outstanding voting securities of any one investment company, or (iii) more than 5% of the Fund's total assets would be invested in the securities of any one investment company. These limitations do not apply to (a) the investment of cash collateral, received by the Fund in connection with lending 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 10 Trustees/Directors, purchase securities of other investment companies within the John Hancock Group of Funds. 2. Invest more than 15% of the net assets of the Fund, taken at market value, in illiquid securities. 3. Invest for the purpose of exercising control over or management of any company. If a percentage restriction on investment or utilization of assets as set forth above is adhered to at the time an investment is made, a later change in percentage resulting from changes in the values of 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. THOSE RESPONSIBLE FOR MANAGEMENT The business of the Fund is managed by the Trustees who elect officers who are responsible for the day-to-day operations of the Fund and who execute policies formulated by the Trustees. Several of the officers and Trustees of the Fund are also officers or directors of the Fund's Adviser and/or Subadviser, or officers and/or directors of the Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock Funds"). 11
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 Hancock Financial 101 Huntington Avenue President and Chief Services, Inc., John Hancock Life Insurance Company; Boston, MA 02199 Executive Officer (1,2) Chairman, Director, President and Chief Executive March 1950 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 Investment Officer P.O. Box 111 John Hancock Financial Services, Inc.; Director, Boston, MA 02117 Executive Vice President and Chief Investment Officer, July 1948 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. 12
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 Laboratories 101 Huntington Avenue (chemical analysis), Carlin Consolidated, Inc. Boston, MA 02199 (management/investments); Trustee, Massachusetts Health April 1940 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 Texas System and 101 Huntington Avenue former President of the University of Texas, Austin, Boston, MA 02199 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 Officer, R.M. Bradley & 101 Huntington Avenue Co., Inc.; Director, The New England Council and Boston, MA 02199 Massachusetts Roundtable; Trustee, North Shore Medical March 1946 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 Village, Inc.; Senior 101 Huntington Avenue Vice President and Chief Financial Officer, UGI Boston, MA 02199 Corporation (Public Utility Holding Company) (retired February 1938 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. 13
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 Officer, Mast 101 Huntington Avenue Holdings, Inc. (since June 1, 2000); Director and Boston, MA 02199 President, Mast Holdings, Inc. (until May 31, 2000); August 1944 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 Marine Corps; 101 Huntington Avenue Deputy Chief of Staff for Manpower and Reserve Boston, MA 02199 Affairs, Headquarters Marine Corps; Commanding March 1933 General III Marine Expeditionary Force/3rd Marine Division (retired 1991). John P. Toolan Trustee Director, The Smith Barney Muni Bond Funds, The 101 Huntington Avenue Smith Barney Tax-Free Money Funds, Inc., Vantage Boston, MA 02199 Money Market Funds (mutual funds), The Inefficient- September 1930 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 Executive Vice President and Chief Investment 101 Huntington Avenue and Chief Investment Officer, the Adviser and each of the John Hancock Boston, MA 02199 Officer (2) Funds; Executive Vice President and Chief Investment December 1953 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. 14
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 Financial Officer of the 101 Huntington Avenue Chief Financial Officer (2) Adviser, John Hancock Funds, and The Berkeley Group; Boston, MA 02199 Second Vice President and Senior Associate Controller, April 1949 Corporate Tax Department, John Hancock Financial Services, Inc. (until January 2001). Susan S. Newton Senior Vice President, Senior Vice President and Chief Legal Officer the 101 Huntington Avenue Secretary and Chief Legal Adviser; John Hancock Funds; Vice President, Signature Boston, MA 02199 Officer Services (until May 2000), The Berkeley Group, NM March 1950 Capital and SAMCorp. Thomas H. Connors Vice President and Vice President and Compliance Officer, the Adviser; 101 Huntington Avenue Compliance Officer Vice President, John Hancock Funds. Boston, MA 02199 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. 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 Fund (1) Complex to Trustees (2) - -------- ----------------- ----------------------- James F. Carlin $ 149 $ 72,000 William H. Cunningham* 149 72,100 Ronald R. Dion* 149 72,000 Charles L. Ladner 154 75,100 Steven R. Pruchansky* 154 75,000 Norman H. Smith* 159 78,000 John P. Toolan* 144 70,250 Total $1,058 $514,450 15 (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.
- ------------------------------------------------------------------------------------------------------------------------ Name and Address of Shareholder Class of shares Percentage of Total Outstanding Shares - ------------------------------------------------------------------------------------------------------------------------ Sterling Trust Company A 7.33% FBO J.P. Chemical Co., Inc. PS Plan 1380 Lawrence St Denver CO. 80204 - ------------------------------------------------------------------------------------------------------------------------ MLPF&S for the Sole Benefit of its Customers B 21.49% Attn: Fund Administration 4800 Deerlake Drive East Jacksonville, FL - ------------------------------------------------------------------------------------------------------------------------ Donaldson Lufkin Jenrette C 9.62% Securities Corp. Inc. P.O. Box 2052 Jersey City NJ 07303 - ------------------------------------------------------------------------------------------------------------------------ MLPF&S for the Sole Benefit of its Customers C 9.39% Attn: Fund Administration 4800 Deerlake Drive East Jacksonville, FL - ------------------------------------------------------------------------------------------------------------------------
16
- ------------------------------------------------------------------------------------------------------------------------ Name and Address of Shareholder Class of shares Percentage of Total Outstanding Shares - ------------------------------------------------------------------------------------------------------------------------ Independence Investment Associates I 26.95% 53 State Street Boston MA 02109-2809 - ------------------------------------------------------------------------------------------------------------------------ Independence Investment Associates I 19.82% Employee Deferred Compensation Plan 53 State Street Boston MA 02109-2809 - ------------------------------------------------------------------------------------------------------------------------ CG Enterprises EE Sal Savings I 34.13% Retirement Plan 12001 Guilford Road Annapolis Junction MD 20701 - ------------------------------------------------------------------------------------------------------------------------ Liguori Publications Inc. I 13.80% 1 Liguori Drive Liguori, MO - ------------------------------------------------------------------------------------------------------------------------ Sterling Trust Company I 5.17% FBO TL Cannon 401K Plan 1380 Lawrence St Denver CO. 80204 - ------------------------------------------------------------------------------------------------------------------------
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 Fund and other funds in the John Hancock group of funds, as well as retail and institutional privately managed accounts. The Adviser is an affiliate of the Life Company, one of the most recognized and respected financial institutions in the nation. With total assets under management of 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 17 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. The Adviser has entered into a Sub-Advisory Agreement with Independence Investment LLC ("Independence"). Under the Sub-Advisory Agreement, the Subadviser, subject to the review of the Trustees and the overall supervision of the Adviser, is responsible for managing the investment operations of the Fund and the composition of the Fund's investment portfolio and furnishing the Fund with advice and recommendations with request to investments, investment policies and the purchase and sale of securities. Independence, located at 53 State Street, Boston, Massachusetts 02109, and organized in 1982, is a wholly owned indirect subsidiary of John Hancock Subsidiaries, Inc. 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 $500,000,000 0.80% Amount over $500,000,000 0.75% The advisory fees paid by the Fund are greater than those paid by most funds, but they are comparable to those paid by many investment companies with similar investment objectives and policies. The Adviser (not the Fund) pays a portion of its fee to the Subadviser at the rate of 55% of the advisory fee payable on the Fund's average daily net assets. For the periods ended February 28, 1999, the Adviser waived the entire investment management fee for the Fund. For the fiscal year ended February 29, 2000 and February 28, 2001, the Fund paid the Adviser $21,113 and $115,809. The Subadviser waived all subadvisory fees for these periods. 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 its average daily net assets. The Adviser has agreed to 18 limit Fund expenses (excluding 12b-1 and transfer agent fees) to 0.90% of the Fund's average daily net assets at least until June 30, 2002. The Adviser retains the right to reimpose a fee and recover any other payments to the extent that, at the end of any fiscal year, the Fund's annual expenses fall below this limit. Securities held by the Fund may also be held by other funds or investment advisory clients for which the Adviser, the Subadviser or its affiliates provide investment advice. Because of different investment objectives or other factors, a particular security may be bought for one or more funds or clients when one or more other funds or clients are selling the same security. If opportunities for purchase or sale of securities by the Adviser or Subadviser for the Fund or for other funds or clients for which the Adviser or Subadviser 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, Subadviser or its affiliates may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Pursuant to its Advisory Agreement and Sub-Advisory Agreement, the Adviser and Subadviser are not liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which the respective Agreements relate, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser or Subadviser in the performance of its duties or from reckless disregard of the obligations and duties under the applicable Agreement. Under the Advisory Agreement, the 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 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. Under the Sub-Advisory Agreement of the Fund, the 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 in 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 (formerly Independence Investment Associates, Inc.). 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, Sub-Advisory Agreement and the Distribution Agreement (discussed below) was approved by all Trustees. The Advisory Agreement, Sub-Advisory Agreement and the Distribution Agreement will continue in effect from year to year, provided that its continuance is approved annually both (i) by the holders of a majority of the 19 outstanding voting securities of the Trust or by the Trustees, and (ii) by a majority of the Trustees who are not parties to the Agreement or "interested persons" of any such parties. Each Agreement may be terminated on 60 days written notice by any party or by vote of a majority of the outstanding voting securities of the Fund and will terminate automatically if assigned. 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 year ended February 28, 1999, February 29, 2000 and February 28, 2001, the Fund paid the Adviser $1,055, $2,447 and $5,064, respectively, for services under this agreement. Personnel of the Adviser, Sub-Adviser, and their 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, Sub-Adviser and their affiliates 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") that 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 that are continually offered at net asset value next determined, plus an applicable sales charge, if any. In connection with the sale of Fund shares, John Hancock Funds and Selling Brokers receive compensation from a sales charge imposed, in the case of Class A and Class C shares, at the time of sale. In the case of Class B or Class C shares, the broker receives compensation immediately but John Hancock Funds is compensated on a deferred basis. Total underwriting commissions for sales of the Fund's Class A shares for the fiscal year ended February 29, 2000 and February 28, 2001 were $86,872 and $71,320 and $36,652 and $3,652 were retained by John Hancock Funds, respectively. The remainder of the underwriting commissions were reallowed to dealers. The Fund's Trustees adopted Distribution Plans with respect to Class A, Class B and Class C shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Plans, the Fund will pay distribution and service fees at an aggregate annual rate of up to 0.30% for Class A shares and 1.00% for Class B and Class C shares of the Fund's average daily net assets attributable to shares of that class. However, the service fees will not exceed 0.25% of the Fund's average daily net assets attributable to each class of shares. The distribution fees will be used to reimburse John Hancock Funds for its distribution expenses, including but not limited to: (i) initial and ongoing sales compensation to Selling 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 20 personal and account maintenance services to shareholders. In the event that John Hancock Funds is not fully reimbursed for payments or expenses it incurs under the Class A Plan, these expenses will not be carried beyond twelve months from the date they were incurred. Unreimbursed expenses under the Class B and Class C Plans will be carried forward together with interest on the balance of these unreimbursed expenses. The Fund does not treat unreimbursed expenses under the Class B and Class C Plans as a liability of the Fund because the Trustees may terminate the Class B and /or Class C Plans at any time with no additional liability for these expenses to the shareholders and the Fund. For the fiscal year ended February 28, 2001, an aggregate of $3,137 of distribution expenses or 0.03% 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 February 28, 2001, an aggregate of $319 of distribution expenses or 0.03% 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 in prior periods. The Plans were approved by a majority of the voting securities of the Fund. The Plans amendments were approved by the Trustees, including a majority of the Trustees who are not interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Plans (the "Independent Trustees"), by votes cast in person at meetings called for the purpose of voting on these Plans. Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund with a written report of the amounts expended under the Plans and the purpose for which these expenditures were made. The Trustees review these reports on a quarterly basis to determine their continued appropriateness. The Plans provide that they will continue in effect only so long as its continuance is approved at least annually by a majority of both the Trustees and the Independent Trustees. The Plans provide that they may be terminated without penalty, (a) by a vote of a majority of the Independent Trustees, (b) by a vote of a majority of the Fund's outstanding shares of the applicable class upon 60 days' written notice to John Hancock Funds 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 that Plan. Each plan provides, that no material amendment to the Plans will be effective unless it is approved by a majority vote of the Trustees and the Independent Trustees of the Fund. The holders of Class A, Class B and Class C shares have exclusive voting rights with respect to the Plan applicable to their respective class of shares. In adopting the Plans, the Trustees concluded that, in their judgment, there is a reasonable likelihood that the Plans will benefit the holders of the applicable class of shares of the Fund. Class I shares of the Fund are not subject to any distribution plan. Expenses associated with the obligation of John Hancock Funds to use its best efforts to sell Class I shares will be paid by the Adviser or by John Hancock Funds and will not be paid from the fees paid under Class A, Class B or Class C Plans. Amounts paid to the John Hancock Funds by any class of shares of the Fund will not be used to pay the expenses incurred with respect to any other class of shares of the Fund; provided, 21 however, that expenses attributable to the Fund as a whole will be allocated, to the extent permitted by law, according to the formula based upon gross sales dollars and/or average daily net assets of each such class, as may be approved from time to time by vote of a majority of the Trustees. From time to time, the Fund may participate in joint distribution activities with other Funds and the costs of those activities will be borne by each Fund in proportion to the relative net asset value of the participating Fund. During the fiscal year ended February 28, 2001, the Fund paid John Hancock Funds the following amounts of expenses in connection with their services for the Fund:
Expense Items ------------- Printing and Mailing of Expenses Interest, Prospectuses of John Carrying or to new Compensation to Hancock Other Finance Advertising Shareholders Selling Brokers Funds Charges ----------- ------------ --------------- ----- ------- Class A $ 3,822 $ 248 $ 2,259 $12,151 -- Class B $20,024 $1,019 $24,117 $58,944 $2,719 Class C $ 2,588 $ 107 $ 1,157 $ 7,347 --
SALES COMPENSATION As part of their business strategies, each of the John Hancock funds, along with John Hancock Funds, pay compensation to financial services firms that sell the funds' 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 shares are (1) the 12b-1 fees that are paid out of the funds' assets and (2) sales charges paid by investors. The sales charges and 12b-1 fees paid by investors are detailed in the prospectus and under the "Distribution Contracts" in this Statement of Additional Information. The portions of these expenses that are paid to financial services firms are shown on the next page. For Class I shares, John Hancock Funds may make a one-time payment at the time of initial purchase out of its own resources to a Selling Broker who sells shares of the Fund. This payment may not exceed 0.15% of the amount invested. Whenever you purchase Class A, Class B or Class C shares, the financial services firm receives a reallowance/payment, as described below. The firm also receives the first year's 12b-1 service fee at this time. Beginning with the second year after an investment is made, the financial services firm receives an annual 12b-1 service fee of 0.25% of its total eligible fund net assets. This fee is paid quarterly in arrears by the Fund. In addition, from time to time, John Hancock Funds, at its expense, may provide significant additional compensation to financial services firms in connection with 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 22 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.
Broker receives Broker receives Sales charge paid maximum 12b-1 service Total broker by investors (% reallowance fee (% of net compensation (1) Class A investments of offering price) (% of offering price) investment) (3) (% of offering price) - ------------------- ------------------ --------------------- --------------- --------------------- Up to $49,999 5.00% 4.01% 0.25% 4.25% $50,000 - $99,999 4.50% 3.51% 0.25% 3.75% $100,000 - $249,999 3.50% 2.61% 0.25% 2.85% $250,000 - $499,999 2.50% 1.86% 0.25% 2.10% $500,000 - $999,999 2.00% 1.36% 0.25% 1.60% Investments of Class A share of $1 million or more (4) - ------------------------- First $1M - $4,999,999 -- 0.75% 0.25% 1.00% Next $1 - $5M above that -- 0.25% 0.25% 0.50% (2) Next $1 or more above that -- 0.00% 0.25% 0.25% (2) Broker receives Broker receives maximum 12b-1 service Total broker reallowance fee (% of net compensation (1) Class B investments (% of offering price) investment) (3) (% of offering price) - ------------------- --------------------- --------------- --------------------- All amounts -- 3.75% 0.25% 4.00% Broker receives Broker receives maximum 12 b-1 service Total broker reallowance fee (% of net compensation Class C Investments (% of offering price) investment) (% of offering price) - ------------------- --------------------- ----------- --------------------- Amounts purchased at NAV -- 0.75% 0.25% 1.00% All other amounts 1.00% 1.75% 0.25% 2.00% Broker receives Broker receives maximum 12b-1 service Total broker Class I investments reallowance fee (% of net compensation (1) (% of offering price) investment) (3) (% of offering price) - ------------------- --------------------- --------------- --------------------- All amounts -- 0.00% 0.00% 0.00% (5)
23 (1) Broker percentages and 12b-1 service fee percentages are calculated from different amounts, and therefore may not equal total broker compensation percentages if combined using simple addition. (2) For Group Investment Programs sales, the maximum total broker compensation for investments of $1 million or more is 1.00% of the offering price (one year CDSC of 1.00% applies for each sale). (3) After first year broker receives 12b-1 fees quarterly in arrears. (4) John Hancock Funds reduce aggregate investments by the amount of recent redemptions. (5) John Hancock Funds may make a one-time payment at the time of initial purchase out of its own resources to a Selling Broker who sells Class I shares of the Fund. This payment may be up to 0.15% of the amount invested. CDSC revenues collected by John Hancock Funds may be used to pay brokers commissions when there is no initial sales charge NET ASSET VALUE For purposes of calculating the net asset value ("NAV") of the Fund's shares, the following procedures are utilized wherever applicable. Debt investment securities are valued on the basis of valuations furnished by a principal market- maker or a pricing service, both of which generally utilize electronic data processing techniques to determine valuations for normal institutional size trading units of debt securities without exclusive reliance upon quoted prices. Equity securities traded on a principal exchange or NASDAQ National Market Issues are generally valued at last sale price on the day of valuation. Securities in the aforementioned category for which no sales are reported and other securities traded over-the-counter are generally valued at the last available bid price. Short-term debt investments which have a remaining maturity of 60 days or less are generally valued at amortized cost which approximates market value. If market quotations are not readily available or if in the opinion of the Adviser any quotation or price is not representative of true market value, the fair value of the security may be determined in good faith in accordance with procedures approved by the Trustees. The NAV of each Fund and class is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by dividing a class's net assets by the number of its shares outstanding. On any day an international market is closed and the New York Stock Exchange is open, any foreign securities will be valued at the prior day's close with the current day's exchange rate. Trading of foreign securities may take place on Saturdays and U.S. business holidays on which the Fund's NAV is not calculated. Consequently, the Fund's portfolio securities may trade and the NAV of the Fund's redeemable securities may be significantly affected on days when a shareholder has no access to the Fund. 24 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 Fund's Prospectus. Methods of obtaining reduced sales charges referred to generally in the Prospectus are described in detail below. In calculating the sales charge applicable to current purchases of Class A shares of the Fund, the investor is entitled to accumulate current purchases with the greater of the current value (at offering price) of the Class A shares of the Fund, owned by the investor, or if John Hancock Signature Services, Inc. ("Signature Services") is notified by the investor's dealer or the investor at the time of the purchase, the cost of the Class A shares owned. Without Sales Charges. Class A shares may be offered without a front-end sales charge or contingent deferred sales charge ("CDSC") to various individuals and institutions as follows: o A Trustee or officer of the Trust; a Director or officer of the Adviser and its affiliates, subadviser or Selling Brokers; employees or sales representatives of any of the foregoing; retired officers, employees or Directors of any of the foregoing; a member of the immediate family (spouse, children, grandparents, grandchildren, mother, father, sister, brother, mother-in-law, father-in-law, daughter-in-law, son-in-law, niece, nephew, and same sex domestic partner) of any of the foregoing; or any fund, pension, profit sharing or other benefit plan for the individuals described above. o A broker, dealer, financial planner, consultant or registered investment advisor that has entered into a signed agreement with John Hancock Funds providing specifically for the use of Fund shares in fee-based investment products or services made available to their clients. o A former participant in an employee benefit plan with John Hancock funds, when he or she withdraws from his or her plan and transfers any or all of his or her plan distributions directly to the Fund. o A member of a class action lawsuit against insurance companies who is investing settlement proceeds. o Retirement plans participating in Merrill Lynch servicing programs, if the Plan has more than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information. 25 o Retirement plans investing through the PruArray Program sponsored by Prudential Securities. o Pension plans transferring assets from a John Hancock variable annuity contract to the Fund pursuant to an exemptive application approved by the Securities and Exchange Commission. o Existing shareholders/retirement plans as of June 30, 1999. o Existing full service clients of the Life Company who were group annuity contract holders as of September 1, 1994, and participant directed retirement plans with at least 100 eligible employees at the inception of the Fund account. Each of these investors may purchase Class A shares with no initial sales charge. However, if the shares are redeemed within 12 months after the end of the calendar year in which the purchase was made, a CDSC will be imposed at the following rate: Amount Invested CDSC Rate --------------- --------- $1 to $4,999,999 1.00% Next $5 million to $9,999,999 0.50% Amounts of $10 million and over 0.25% Class C shares may be offered without a front-end sales charge to: o Retirement plans for which John Hancock Signature Services formerly performed employer sponsored plan recordkeeping services. (These types of plans include 401(k), money purchase pension, profit sharing and SIMPLE 401k). 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. 26 Accumulation Privilege. Investors (including investors combining purchases) who are already Class A shareholders may also obtain the benefit of the reduced sales charge by taking into account not only the amount being invested but also the investor's purchase price or current value of the Class A shares of all John Hancock funds which carry a sales charge already held by such person. Class A shares of John Hancock money market funds will only be eligible for the accumulation privilege if the investor has previously paid a sales charge on the amount of those shares. Retirement plan investors may include the value of Class B shares if Class B shares held are greater than $1 million. Retirement plans must notify Signature Services to utilize. A company's (not an individual's) qualified and non-qualified retirement plan investments can be combined to take advantage of this privilege. Group Investment Program. Under the Combination and Accumulation Privileges, all members of a group may combine their individual purchases of Class A shares to potentially qualify for breakpoints in the sales charge schedule. This feature is provided to any group which (1) has been in existence for more than six months, (2) has a legitimate purpose other than the purchase of mutual fund shares at a discount for its members, (3) utilizes salary deduction or similar group methods of payment, and (4) agrees to allow sales materials of the fund in its mailings to members at a reduced or no cost to John Hancock Funds. Letter of Intention. Reduced sales charges are also applicable to investments made pursuant to a Letter of Intention (the "LOI"), which should be read carefully prior to its execution by an investor. The Fund offers two options regarding the specified period for making investments under the LOI. All investors have the option of making their investments over a specified period of thirteen (13) months. Investors who are using the Fund as a funding medium for a retirement plan, however, may opt to make the necessary investments called for by the LOI over a forty-eight (48) month period. These retirement plans include traditional, Roth 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 retirement plan investments cannot be combined to satisfy LOI of 48 months. Such an investment (including accumulations and combinations but not including reinvested dividends) must aggregate $50,000 or more 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 escrowed Class A shares will be released. If the total investment specified in the LOI is not completed, the Class A shares held in escrow may be redeemed and the proceeds used as required to pay such sales charge as may be due. By signing the LOI, the investor authorizes Signature Services to act as his attorney-in-fact to redeem any escrowed Class A shares and adjust the sales charge, if necessary. A LOI does not constitute a 27 binding commitment by an investor to purchase, or by the Fund to sell, any additional Class A shares and may be terminated at any time. Because Class I shares are sold at net asset value without the imposition of any sales charge, none of the privileges described under these captions are available to Class I investors. DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES Investments in Class B shares are purchased at net asset value per share without the imposition of an initial sales charge so that the Fund will receive the full amount of the purchase payment. Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed within six years or one year of purchase, respectively will be subject to a CDSC at the rates set forth in the Prospectus as a percentage of the dollar amount subject to the CDSC. The charge will be assessed on an amount equal to the lesser of the current market value or the original purchase cost of the Class B or Class C shares being redeemed. No CDSC will be imposed on increases in account value above the initial purchase 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 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: 28 o Proceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00 o *Minus Appreciation ($12 - $10) x 100 shares (200.00) o Minus proceeds of 10 shares not subject to CDSC (dividend reinvestment) (120.00) -------- o Amount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the account not just the shares being redeemed. Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or in part by John Hancock Funds to defray its expenses related to providing distribution-related services to the Fund in connection with the sale of the Class B and Class C shares, such as the payment of compensation to select Selling Brokers for selling Class B and Class C shares. The combination of the CDSC and the distribution and service fees facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of the purchase. Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on redemptions of Class B and Class C shares and of Class A shares that are subject to a CDSC, unless indicated otherwise, in the circumstances defined below: For all account types: * Redemptions made pursuant to the Fund's right to liquidate your account if you own shares worth less than $1,000. * Redemptions made under certain liquidation, merger or acquisition transactions involving other investment companies or personal holding companies. * Redemptions due to death or disability. (Does not apply to trust accounts unless trust is being dissolved.) * Redemptions made under the Reinstatement Privilege, as described in "Sales Charge Reductions and Waivers" of the Prospectus. * Redemption 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 or Class C shares that are subject to a CDSC.) * Redemptions by Retirement plans participating in Merrill Lynch servicing programs, if the Plan has less than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information. 29 * Redemptions of Class A shares made after one year from the inception date of a retirement plan at John Hancock. * Redemption of Class A or Class C shares by retirement plans that invested through the PruArray Program sponsored by Prudential Securities. For Retirement Accounts (such as traditional, Roth 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 sections 401(a) (such as Money Purchase Pension Plans and Profit Sharing Plan/401(k) Plans), 457 and 408 (SEPs and SIMPLE IRAs) of the Internal Revenue Code. * Redemptions from certain IRA and retirement plans that purchased shares prior to October 1, 1992 and certain IRA plans that purchased shares prior to May 15, 1995. Please see matrix for some examples. 30 - ----------------------------------------------------------------------------------------------------------------- Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non- Distribution (401 (k), MPP, Rollover retirement 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 required account value minimum annually in distributions* periodic or 12% of payments account value annually in periodic payments. - ----------------------------------------------------------------------------------------------------------------- Between 59 1/2 Waived Waived Waived Waived for 12% of and 70 1/2 Life account value Expectancy annually in or 12% of periodic account value payments annually in periodic payments. - ----------------------------------------------------------------------------------------------------------------- Under 59 1/2 Waived for Waived for Waived for Waived for 12% of (Class B only) annuity annuity annuity annuity account value payments (72t) payments payments payments annually in or 12% of (72t) or 12% (72t) or 12% (72t) or 12% periodic account value of account of account of account payments annually in value value value periodic annually in annually in annually in payments. periodic periodic periodic payments. payments. payments. - ----------------------------------------------------------------------------------------------------------------- Loans Waived Waived N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Termination of Not Waived Not Waived Not Waived Not Waived N/A Plan - ----------------------------------------------------------------------------------------------------------------- Hardships Waived Waived Waived N/A N/A - ----------------------------------------------------------------------------------------------------------------- Qualified Waived Waived Waived N/A N/A Domestic 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 - -----------------------------------------------------------------------------------------------------------------
31 *Required minimum distributions based on John Hancock Mutual Fund IRA assets only. If you qualify for a CDSC waiver under one of these situations, you must notify Signature Services at the time you make your redemption. The waiver will be granted once Signature Services has confirmed that you are entitled to the waiver. SPECIAL REDEMPTIONS Although it would not normally do so, the Fund has the right to pay the redemption price of shares of the Fund in whole or in part in portfolio securities as prescribed by the Trustees. When the shareholder sells portfolio securities received in this fashion, the shareholders will incur a brokerage charge. Any such securities would be valued for the purposes of making such payment at the same value as used in determining net asset value. The Fund has, however, elected to be governed by Rule 18f-1 under the Investment Company Act. Under that rule, the Fund must redeem its shares for cash except to the extent that the redemption payments to any shareholder during any 90-day period would exceed the lesser of $250,000 or 1% of the Fund's net asset value at the beginning of such period. ADDITIONAL SERVICES AND PROGRAMS Exchange Privilege. The Fund permits exchanges of shares of any class 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 and John Hancock Intermediate Government 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. 32 An exchange of shares is treated as a redemption of shares of one fund and the purchase of shares of another for Federal Income Tax purposes. An exchange may result in a taxable gain or loss. See "TAX STATUS". Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic Withdrawal Plan. Payments under this plan represent proceeds arising from the redemption of Fund shares which may result in realization of gain or loss for purposes of Federal, state and local income taxes. The maintenance of a Systematic Withdrawal Plan concurrently with purchases of additional shares of the Fund could be disadvantageous to a shareholder because of the initial sales charge payable on such purchases of Class A shares and the CDSC imposed on redemptions of Class B and Class C shares and because redemptions are taxable events. Therefore, a shareholder should not purchase shares at the same time a Systematic Withdrawal Plan is in effect. The Fund reserves the right to modify or discontinue the Systematic Withdrawal Plan of any shareholder on 30 days' prior written notice to such shareholder, or to discontinue the availability of such plan in the future. The shareholder may terminate the plan at any time by giving proper notice to Signature Services. Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the Prospectus. The program, as it relates to automatic investment checks, is subject to the following conditions: The investments will be drawn on or about the day of the month indicated. The privilege of making investments through the MAAP may be revoked by Signature Services without prior notice if any investment is not honored by the shareholder's bank. The bank shall be under no obligation to notify the shareholder as to the non-payment of any checks. The program may be discontinued by the shareholder either by calling Signature Services or upon written notice to Signature Services which is received at least five (5) business days prior to the order date of any investment. Reinstatement or Reinvestment Privilege. If Signature Services is notified prior to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days after the date of redemption, reinvest without payment of a sales charge any part of the redemption proceeds in shares of the same class of the Fund or another John Hancock fund, subject to the minimum investment limit in that fund. The proceeds from the redemption of Class A shares may be reinvested at net asset value without paying a sales charge in Class A shares of the Fund or in Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a shareholder may reinvest the proceeds from this redemption at net asset value in additional shares of the class from which the redemption was made. The shareholder's account will be credited with the amount of any CDSC charged upon the prior redemption and the new shares will continue to be subject to the CDSC. The holding period of the shares acquired through reinvestment will, for purposes of computing the CDSC payable upon a subsequent redemption, include the holding period of the redeemed shares. 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 33 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. 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/or and 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 authorized shares of the Fund and eleven series. Additional series may be added in the future. The Declaration of Trust also authorizes the Trustees to classify and reclassify the shares of the Fund, or any new series of the Trust, into one or more classes. The Trustees have also authorized the issuance of four classes of shares of the Fund, designated as Class A, Class B, Class C and Class I. 34 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 Class A, Class B, Class C and Class I 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. 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. 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 Class A, Class B and Class C will be borne exclusively by that class, (ii) Class B and Class C shares will pay higher distribution and service fees than Class A shares and (iii) each class of shares will bear any class expenses properly allocable to that class of shares, subject to the conditions the Internal Revenue Service imposes with respect to the multiple-class structures. Similarly, the net asset value per share may vary depending on which class of shares are purchased. No interest will be paid on uncashed dividend or redemption checks. In the event of liquidation, shareholders of each class are entitled to share pro rata in the net assets of the Fund available for distribution to these shareholders. Shares entitle their holders to one vote per share, are freely transferable and have no preemptive, subscription or conversion rights. When issued, shares are fully paid and non-assessable, except as set forth below. Unless otherwise required by the Investment Company Act or the Declaration of Trust, the Fund has no intention of holding annual meetings of shareholders. Fund shareholders may remove a Trustee by the affirmative vote of at least two-thirds of the Trust's outstanding shares and the Trustees shall promptly call a meeting for such purpose when requested to do so in writing by the record holders of not less than 10% of the outstanding shares of the Trust. Shareholders may, under certain circumstances, communicate with other shareholders in connection with requesting a special meeting of shareholders. However, at any time that less than a majority of the Trustees holding office were elected by the shareholders, the Trustees will call a special meeting of shareholders for the purpose of electing Trustees. Under Massachusetts law, shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable for acts or obligations of the Fund. However, the Fund's Declaration of Trust contains an express disclaimer of shareholder liability for acts, obligations or affairs of the Fund. The Declaration of Trust also provides for indemnification out of the Fund's assets for all losses and expenses of any shareholder held personally liable for reason of being or having been a shareholder. The Declaration of Trust also provides that no series of the Trust shall be liable for the liabilities of any other series. Furthermore, no fund included in this Fund's prospectus shall be liable for the liabilities of any other John Hancock Fund. Liability is therefore limited to circumstances in which the Fund itself would be unable to meet its obligations, and the possibility of this occurrence is remote. 35 The Fund reserves the right to reject any application which conflicts with the Fund's internal policies or the policies of any regulatory authority. John Hancock Funds does not accept starter, credit card or third party checks. All checks returned by the post office as undeliverable will be reinvested at net asset value in the fund or funds from which a redemption was made or dividend paid. Information provided on the account application may be used by the Fund to verify the accuracy of the information or for background or financial history purposes. A joint account will be administered as a joint tenancy with right of survivorship, unless the joint owners notify Signature Services of a different intent. A shareholder's account is governed by the laws of The Commonwealth of Massachusetts. For telephone transactions, the transfer agent will take measures to verify the identity of the caller, such as asking for name, account number, Social Security or other taxpayer ID number and other relevant information. If appropriate measures are taken, the transfer agent is not responsible for any losses that may occur to any account due to an unauthorized telephone call. Also for your protection telephone transactions are not permitted on accounts whose names or addresses have changed within the past 30 days. Proceeds from telephone transactions can only be mailed to the address of record. Selling activities for the Fund may not take place outside the U.S. except with U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on Non-U.S. investors' accounts with foreign mailing addresses are required to certify that all sales activities have occurred, and in the future will occur, only in the U.S. A foreign corporation may purchase shares of the Fund only if it has a U.S. mailing address. TAX STATUS The Fund is treated as a separate entity for accounting and tax purposes, has qualified and elected to be treated as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and intends to continue to qualify for each taxable year. As such and by complying with the applicable provisions of the Code regarding the sources of its income, the timing of its distributions and the diversification of its assets, the Fund will not be subject to Federal income tax on its taxable income (including net realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. The Fund will be subject to a 4% nondeductible Federal excise tax on certain amounts not distributed (and not treated as having been distributed) on a timely basis in accordance with annual minimum distribution requirements. The Fund intends under normal circumstances to seek to avoid or minimize liability for such tax by satisfying such distribution requirements. Distribution from the Fund's current or accumulated earnings and profits ("E&P") will be taxable under the Code for investors who are subject to tax. If these distributions are paid from the Fund's "investment company taxable income," they will be taxable as ordinary income; and if they are paid from the Fund's "net capital gain" they will be taxable as 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 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. 36 Distributions, if any, in excess of E&P will constitute a return of capital under the Code, which will first reduce an investor's federal tax basis in Fund shares and then, to the extent such basis is exceeded, will generally give rise to capital gains. Shareholders who have chosen automatic reinvestment of their distributions will have a federal tax basis in each share received pursuant to such a reinvestment equal to the amount of cash they would have received had they elected to receive the distribution in cash, divided by the number of shares received in the reinvestment. The Fund may be subject to withholding and other taxes imposed by foreign countries with respect to its investments in foreign securities. Some tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. Because more than 50% of the Fund's total assets at the close of any taxable year will not consist of stocks or securities of foreign corporations, the Fund will be unable to pass such taxes through to shareholders, who consequently will not include any portion of such taxes in their incomes and will not be entitled to any associated tax credits or deductions with respect to such taxes. The Fund will deduct the foreign taxes it pays in determining the amount it has available for distribution to shareholders. If the Fund invests in stock or ADRs representing stock (including an option to acquire stock such as is inherent in a convertible bond) in certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties, or capital gain) or hold at least 50% of their asset in investments producing such passive income ("passive foreign investment companies"), the Fund could be subject to Federal income tax and additional interest charges on "excess distributions" received from such companies or gain from the sale of stock in such companies, even if all income or gain actually received by the Fund is timely distributed to its shareholders. The Fund would not be able to pass through to its shareholders any credit or deduction for such a tax. An election may be available to ameliorate these adverse tax consequences, but could require the Fund to recognize taxable income or gain without the concurrent receipt of cash. These investments could also result in the treatment of associated capital gains as ordinary income. The Fund may limit and/or manage its holdings in passive foreign investment companies or make an available election to minimize its tax liability or maximize its return from these investments. The amount of the Fund's net realized capital gains, if any, in any given year will vary depending upon the Adviser's current investment strategy and whether the Adviser believes it to be in the best interest of the Fund to dispose of portfolio securities that will generate capital gains. At the time of an investor's purchase of Fund shares, a portion of the purchase price is often attributable to realized or unrealized appreciation in the Fund's portfolio or undistributed taxable income of the Fund. Consequently, subsequent distributions on those shares from such appreciation or income may be taxable to such investor even if the net asset value of the investor's shares is, as a result of the distributions, reduced below the investor's cost for such shares, and the distributions in reality represent a return of a portion of the purchase price. Upon a redemption or other disposition of shares of the Fund (including by exercise of the exchange privilege) 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 90 days after their purchase to the extent shares of the Fund or 37 another John Hancock fund are subsequently acquired without payment of a sales charge pursuant to the reinvestment or exchange privilege. This disregarded charge will result in an increase in the shareholder's tax basis in the shares subsequently acquired. Also, any loss realized on a redemption or exchange may be disallowed to the extent the shares disposed of are replaced with other shares of the Fund within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of, such as pursuant to automatic dividend reinvestments. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. 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. 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 long-term capital gain in his return for his taxable year in which the last day of the Fund's taxable year falls, (b) be entitled either to a tax credit on his return for, or to a refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his shares in the Fund by the difference between his pro rata share of such excess and his pro rata share of such taxes. For Federal income tax purposes, the Fund is permitted to carry forward a net realized capital loss in any year to offset net capital gains, if any, during the eight years following the year of the loss. To the extent subsequent net capital gains are offset by such losses, they would not result in Federal income tax liability to the Fund and, as noted above, would not be distributed as such to shareholders. The Fund has $86,884 of capital loss carry forwards available to the extent provided by regulations to offset future net realized capital gains. The carry forwards expire as follows: December 31, 2007. For purposes of the dividends-received deduction available to corporations, dividends received by the Fund, if any, from U.S. domestic corporations in respect of the stock of such corporations held by the Fund, for U.S. Federal income tax purposes, for at least 46 days (91 days in the case of certain preferred stock) during a prescribed period extending before and after each such dividend and distributed and properly designated by the Fund may be treated as qualifying dividends. Corporate shareholders must meet the holding period requirements stated above with respect to their shares of the Fund for each dividend in order to qualify for the deduction and, if 38 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. The Fund is required to accrue income on any debt securities that have more than a de minimis amount of original issue discount (or debt securities acquired at a market discount, if the Fund elects to include market discount in income currently) prior to the receipt of the corresponding cash payments. However, the Fund must distribute to shareholders for each taxable year substantially all of its net income and net capital gains, including such income or gain, to qualify as a regulated investment company and avoid liability for any federal income or excise tax. Therefore, the Fund may have to dispose of its portfolio securities under disadvantageous circumstances to generate cash, or may borrow cash, to satisfy these distribution requirements. A state income (and possibly local income and/or intangible property) tax exemption is generally available to the extent (if any) the Fund's distributions are derived from interest on (or, in the case of intangible property taxes, the value of its assets is attributable to) certain U.S. Government obligations, provided in some states that certain thresholds for holdings of such obligations and/or reporting requirements are satisfied. The Fund will not seek to satisfy any threshold or reporting requirements that may apply in particular taxing jurisdictions, although it may in its sole discretion provide relevant information to shareholders. The Fund will be required to report to the Internal Revenue Service (the "IRS") all 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 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. 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. 39 The foregoing discussion relates solely to Federal income tax law as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic corporations, partnerships, trusts or estates) subject to tax under such law. The discussion does not address special tax rules applicable to certain types of investors, such as tax-exempt entities, insurance companies and financial institutions. Dividends, capital gain distributions and ownership of or gains realized on the redemption (including an exchange) of shares of the Fund may also be subject to state and local taxes. Shareholders should consult their own tax advisers as to the Federal, state or local tax consequences of ownership of shares of, and receipt of distributions from, the Fund in their particular circumstances. Non-U.S. investors not engaged in a U.S. trade or business with which their investment in the Fund is effectively connected will be subject to U.S. Federal income tax treatment that is different from that described above. These investors may be subject to non-resident alien withholding tax at the rate of 30% (or a lower rate under an applicable tax treaty) on amounts treated as ordinary dividends from the Fund and, unless an effective IRS Form W-8, Form W-8BEN, or other authorized withholding certificate is on file, to 31% backup withholding on certain other payments from the Fund. Non-U.S. investors should consult their tax advisers regarding such treatment and the application of foreign taxes to an investment in the Fund. The Fund is not subject to Massachusetts corporate excise or franchise taxes. The Fund anticipates that, provided that the Fund qualifies as a regulated investment company under the Code, it will also not be required to pay any Massachusetts income tax. CALCULATION OF PERFORMANCE As of February 28, 2001, the average annual total returns for Class A shares of the Fund for the 1 year and since commencement of operations on October 2, 1995 were 14.05% and 14.61%, respectively. As of February 28, 2001, the average annual total return for Class B shares of the Fund for the 1 year and since commencement of operations on July 1, 1999 were 14.02% and -4.65%, respectively. As of February 28, 2001, the average annual total return for Class C shares of the Fund for the 1 year and since commencement of operations on July 1, 1999 were 16.78% and -2.90% respectively. As of February 28, 2001, the average annual total return for Class I shares of the Fund for the 1 year and since commencement of operations on July 1, 1999 were 20.46% and -1.26% respectively. 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: 40 T = ((ERV/P)^(1/n)) - 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 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 Class A, Class B or Class C, this calculation assumes the maximum sales charge when incurred is included in the initial investment or the CDSC is 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 or Class C shares or the CDSC on Class B or Class C shares into account. Excluding the Fund's sales charge on Class A shares and the CDSC on Class B or Class C shares from a total return calculation produces a higher total return figure. The Fund may advertise yield, where appropriate. The Fund's yield is computed by dividing net investment income per share determined for a 30-day period by the maximum offering price per share (which includes the full sales charge) on the last day of the period, according to the following standard formula: respectively. 41 Yield = 2 ( [ ( a-b/cd ) + 1 ] ^6 - 1) Where: a = dividends and interest earned during the period. b = net expenses accrued during the period. c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends. d = the maximum offering price per share on the last day of the period (NAV where applicable). From time to time, in reports and promotional literature, the Fund's total return will be compared to indices of mutual funds such as Lipper Analytical Services, Inc.'s "Lipper - Mutual Fund Performance Analysis," a monthly publication which tracks net assets, total return and yield on mutual funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used for comparison purposes, as well as the Russell and Wilshire Indices. Performance rankings and ratings reported periodically in, and excerpts from, national financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S may also be utilized. The Fund's promotional and sales literature may make reference to the Fund's "beta". Beta is a reflection of the market related risk of the Fund by showing how responsive the Fund is to the market. The performance of the Fund is not fixed or guaranteed. Performance quotations should not be considered to be representations of performance of the Fund for any period in the future. The performance of the Fund is a function of many factors including its earnings, expenses and number of outstanding shares. Fluctuating market conditions; purchases, sales and maturities of portfolio securities; sales and redemptions of shares of beneficial interest; and changes in operating expenses are all examples of items that can increase or decrease the Fund's performance. BROKERAGE ALLOCATION Decisions concerning the purchase and sale of portfolio securities and the allocation of brokerage commissions are made by the Adviser pursuant to recommendations made by an investment committee of the Adviser, which consists of officers and directors of the Adviser and affiliates and officers 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 these transactions. 42 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 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 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 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 not make commitments 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, their policies and practices 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 and February 29, 2000 and February 28, 2001, the Fund paid negotiated brokerage commissions in the amount of $5,371, $17,957 and $48.092, respectively. As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund may pay 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 commission is reasonable in light of the services provided and to such policies as the Trustees may adopt from time to time. For the fiscal year ended February 28, 2001, the Fund did not pay commissions as compensation to any brokers for research services such as industry, economic and company reviews and evaluations of securities. 43 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 the Affiliated Broker. During the fiscal years ended February 28, 1999, February 29, 2000 and February 28, 2001, the Fund did not execute any portfolio transactions with the Affiliated Broker. 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 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 Broker, has, as an investment adviser to the Fund, the obligation to provide investment management services, which include 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 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. 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. For purchases of equity securities, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. For high demand issues (for example, initial public offerings), shares will be allocated pro rata by account size as well as on the basis of account objective, account size ( a small account's allocation may be increased to provide it with a meaningful position), and the account's other holdings. In addition, an account's allocation may be increased if that account's portfolio manager was responsible for generating the investment idea or the portfolio manager intends to buy more shares in the secondary market. For fixed income accounts, generally securities will be allocated when appropriate among accounts based on account size, except if the accounts have different objectives or if an account is too small to get a meaningful allocation. For new issues, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. However, if a partial allocation is too small to be meaningful, it may be reallocated based on such factors as account objectives, duration benchmarks and credit and sector exposure. For example, value funds will likely not participate in initial public offerings s frequently as growth funds. In some 44 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, MA 02217-1000, a wholly owned indirect subsidiary of the Life Company, is the transfer and dividend paying agent for the Fund. The Fund pays Signature Services an annual fee of $20.00 for each Class A shareholder account and $22.50 for each Class B shareholder account and $21.50 for each Class C shareholder account. For Class A, B and C shares, 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 Investors Bank & Trust Company, 200 Clarendon Street, Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank & Trust Company performs custody, portfolio and fund accounting services. 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. 45 APPENDIX A MORE ABOUT RISK A fund's risk profile is largely defined by the fund's primary securities and investment practices. You may find the most concise description of the fund's risk profile in the prospectus. A fund is permitted to utilize -- within limits established by the trustees -- certain other securities and investment practices that have higher risks and opportunities associated with them. To the extent that the Fund utilizes these securities or practices, its overall performance may be affected, either positively or negatively. On the following pages are brief definitions of certain associated risks with them with examples of related securities and investment practices included in brackets. See the "Investment Objective and Policies" and "Investment Restrictions" sections of this Statement of Additional Information for a description of this Fund's investment policies. The Fund follows certain policies that may reduce these risks. As with any mutual fund, there is no guarantee that the Fund will earn income or show a positive return over any period of time -- days, months or years. TYPES OF INVESTMENT RISK Correlation risk The risk that changes in the value of a hedging instrument will not match those of the asset being hedged (hedging is the use of one investment to offset the effects of another investment). Incomplete correlation can result in unanticipated risks. (e.g., short sales, financial futures and options; securities and index options, currency contracts). Credit risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation. (e.g., borrowing; reverse repurchase agreements, repurchase agreements, securities lending, non-investment-grade securities, financial futures and options; securities and index options). Currency risk The risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign currency denominated investments and may widen any losses. (e.g., foreign equities, financial futures and options; securities and index options, currency contracts). Information risk The risk that key information about a security or market is inaccurate or unavailable. (e.g., non-investment-grade securities, foreign equities). Interest rate risk The risk of market losses attributable to changes in interest rates. With fixed-rate securities, a rise in interest rates typically causes a fall in values, while a fall in rates typically causes a rise in values. (e.g., non-investment-grade securities, financial futures and options; securities and index options). Leverage risk Associated with securities or practices (such as borrowing) that multiply small index or market movements into large changes in value. (e.g., borrowing; reverse repurchase agreements, when-issued securities and forward commitments). 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. (e.g., short sales, financial futures and options securities and index options; currency contracts). o Speculative To the extent that a derivative is not used as a hedge, the fund is directly exposed to the risks of that derivative. Gains or losses from speculative positions in a derivative may be substantially greater than the derivative's original cost. (e.g., short sales, financial futures and options securities and index options; currency contracts). o Liquidity risk The risk that certain securities may be difficult or impossible to sell at the time and the price that the seller would like. The seller may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on fund management or performance. (e.g., non-investment-grand securities, short sales, restricted and illiquid securities, financial futures and options securities and index options; currency contracts). Management risk The risk that a strategy used by a fund's management may fail to produce the intended result. Common to all mutual funds. Market risk The risk that the market value of a security may move up and down, sometimes rapidly and unpredictably. These fluctuations may cause a security to be worth less than the price originally paid for it, or less than it was worth at an earlier time. Market risk may affect a single issuer, industry, sector of the economy or the market as a whole. Common to all stocks and bonds and the mutual funds that invest in them. (e.g., short sales, short-term trading, when-issued securities and forward commitments, non-investment-grade securities, foreign equities, financial futures and options; securities and index options restricted and illiquid securities). Natural event risk The risk of losses attributable to natural disasters, crop failures and similar events. (e.g., foreign equities). Opportunity risk The risk of missing out on an investment opportunity because the assets necessary to take advantage of it are tied up in less advantageous investments. (e.g., short sales, when-issued securities and forward commitments; financial futures and options; securities and index options, currency contracts). Political risk The risk of losses attributable to government or political actions, from changes in tax or trade statutes to governmental collapse and war.(e.g., foreign equities). Valuation risk The risk that a fund has valued certain of its securities at a higher price than it can sell them for. (e.g., non-investment-grade securities, restricted and illiquid securities). A-2 APPENDIX B 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 characterizes 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. S&P describes its lower ratings for corporate bonds as follows: 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. Debt rated BB, B, CCC, or CC is regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. 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 B-1 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- (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. S&P 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. B-2 FINANCIAL STATEMENTS The financial statements listed below are included in the Fund's 2001 Annual Report to Shareholder's 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 Core Value Fund (file nos. 33-86102 and 811-8852). John Hancock Institutional Series Trust John Hancock Core Value Fund Statement of Assets and Liabilities as of February 28, 2001 Statement of Operations for the year ended of February 28, 2001. Statement of Changes in Net Asset for each of the two years in the period ended February 28, 2001. Financial Highlights for each of the five years in the period ended February 28, 2001. Schedule of Investments as of February 28, 2001. Notes to Financial Statements. Report of Independent Auditors. F-1 JOHN HANCOCK CORE GROWTH FUND Class A, Class B, Class C and Class I Shares Statement of Additional Information July 1, 2001 This Statement of Additional Information provides information about John Hancock Core Growth Fund (the "Fund") in addition to the information that is contained in the combined Equity Funds current Prospectus and in the Fund's current Prospectus for Class I shares, (the "Prospectuses"). The Fund is a diversified series of John Hancock Institutional Series Trust (the "Trust"). This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning: John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston MA 02217-1000 1-800-225-5291 TABLE OF CONTENTS Page Organization of the Fund.................................................. 2 Investment Objective and Policies......................................... 2 Investment Restrictions................................................... 9 Those Responsible for Management.......................................... 11 Investment Advisory and Other Services.................................... 18 Distribution Contracts.................................................... 21 Sales Compensation........................................................ 23 Net Asset Value........................................................... 25 Initial Sales Charge on Class A and Class C Shares........................ 25 Deferred Sales Charge on Class B and Class C Shares....................... 29 Special Redemptions....................................................... 33 Additional Services and Programs.......................................... 33 Purchases and Redemptions through Third Parties........................... 35 Description of the Fund's Shares.......................................... 35 Tax Status................................................................ 37 Calculation of Performance................................................ 41 Brokerage Allocation...................................................... 43 Transfer Agent Services................................................... 46 Custody of Portfolio...................................................... 46 Independent Auditors...................................................... 46 Appendix A- Description of Investment Risk................................ A-1 Appendix B-Description of Bond Ratings.................................... B-1 Financial Statements...................................................... F-1 1 ORGANIZATION OF THE FUND The Fund is a series of the Trust, an open-end investment management company organized as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts. Prior to July 1, 1999, the Fund was called John Hancock Independence Growth 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 wholly owned by John Hancock Financial Services, Inc., a Delaware corporation organized in February, 2000. The Subadviser of the Fund is Independence Investment LLC ("Independence") (formerly Independence Investment Associates, Inc.) referred to herein as the "Subadviser" and is an affiliate of the Life Company. INVESTMENT OBJECTIVE AND POLICIES The following information supplements the discussion of the Fund's investment objective and policies as discussed in the Prospectus. Appendix A contains further information describing investment risks. The investment objective of the Fund is nonfundamental and may be changed without shareholder approval. There is no assurance that the Fund will achieve its investment objective. The Fund seeks capital appreciation. The Fund emphasizes investments in companies whose securities show potential for relatively high long-term earnings growth rather than current dividend yield. The Fund's performance and risk profile benchmark is the Russell 1000 Growth Index which is comprised of stocks of companies with a greater-than-average growth orientation. and represents a universe of stocks from which growth managers typically select. It is capitalization weighted and includes only common stocks belonging to large-capitalization domestic corporations. The 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. The 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 the Fund's investment objective, shareholders should consider whether the Fund remains an appropriate investment in light of their then current financial position and needs. For a further description of the Fund's investment objectives, policies and restrictions see "Goal and Strategy" and "Main Risks" in the Fund's Prospectus and "Investment Restrictions" in this Statement of Additional Information. Common stocks. The 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 2 carries with it the right to vote and, frequently, an exclusive right to do so. The Fund will diversify its investments in common stocks of companies in a number of industry groups without concentrating in any particular industry. 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. Debt securities in which the Fund may invest are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk) and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). Particular debt securities will be selected based upon credit risk analysis of potential issuers, the characteristics of the security and the interest rate sensitivity of the various debt issues available with respect to a particular issuer, and analysis of the anticipated volatility and liquidity of the particular debt instruments. Preferred stocks. The Fund may invest in preferred stocks. Preferred stock generally has a preference to dividends and, upon liquidation, over an issuer's common stock but ranks junior to debt securities in an issuer's capital structure. Preferred stock generally pays dividends in cash (or additional shares of preferred stock) at a defined rate but, unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer's board of directors. Dividends on preferred stock may be cumulative, meaning that, in the event the issuer fails to make one or more dividend payments on the preferred stock, no dividends may be paid on the issuer's common stock until all unpaid preferred stock dividends have been paid. Preferred stock also may be subject to optional or mandatory redemption provisions. Investment in Foreign Securities. The Fund may invest in the securities of foreign issuers in the form of sponsored and unsponsored American Depository Receipts ("ADRs") and U.S. dollar-denominated securities of foreign issuers traded on U.S. exchanges. ADRs (sponsored and unsponsored) are receipts, typically issued by U.S. banks, which evidence ownership of underlying securities issued by a foreign corporation. ADRs are publicly traded on a U.S. stock exchange or in the over-the-counter market. An investment in foreign securities including ADRs may be affected by changes in currency rates and in exchange control regulations. Issuers of unsponsored ADRs are not contractually obligated to disclose material information including financial information, in the United States and, therefore, there may not be a correlation between such information and the market value of the unsponsored ADR. Foreign companies may not be subject to accounting standards or government supervision comparable to U.S. companies, and there is often less publicly available information about their operations. Foreign companies may also be affected by political or financial inability abroad. These risk considerations may be intensified in the case of investments in ADRs of foreign companies that are located in emerging market countries. ADRs of companies located in these countries may have limited marketability and may be subject to more abrupt or erratic price movements. 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. 3 The Fund has established a procedure providing that the securities serving as collateral for each repurchase agreement must be delivered to the Fund's custodian either physically or in book-entry form and that the collateral must be marked to market daily to ensure that each repurchase agreement is fully collateralized at all times. In the event of bankruptcy or other default by a seller of a repurchase agreement, the Fund could experience delays in liquidating the underlying securities during the period in which the Fund seeks to enforce its rights thereto, possible subnormal levels of income, decline in value of the underlying securities or lack of access to income during this period as well as the expense of enforcing its rights. Reverse Repurchase Agreements and Other Borrowings. The Fund may also enter into reverse repurchase agreements which involve the sale of U.S. Government securities held in its portfolio to a bank with an agreement that the Fund will buy back the securities at a fixed future date at a fixed price plus an agreed amount of "interest" which may be reflected in the repurchase price. Reverse repurchase agreements are considered to be borrowings by the Fund. Reverse repurchase agreements involve the risk that the market value of securities purchased by the Fund with proceeds of the transaction may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase. The Fund will also continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will reacquire those securities upon effecting its repurchase. To minimize various risks associated with reverse repurchase agreements, the 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, the Fund will not enter into reverse repurchase agreements or borrow money, except from banks temporarily for extraordinary or emergency purposes (not for leveraging) in amounts not to exceed 33 1/3% of 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 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. The Fund may purchase securities that are not registered ("restricted securities") under the Securities Act of 1933 ("1933 Act"), including commercial paper issued in reliance on Section 4(2) of the 1933 Act and securities offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not invest more than 15% of its net assets in illiquid investments. If the Trustees 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. 4 Forward Commitment and When-Issued Securities. The Fund may purchase securities on a when-issued or forward commitment basis. "When-issued" refers to securities whose terms are available and for which a market exists, but which have not been issued. The Fund will engage in when-issued transactions with respect to securities purchased for its portfolio in order to obtain what is considered to be an advantageous price and yield at the time of the transaction. For when-issued transactions, no payment is made until delivery is due, often a month or more after the purchase. In a forward commitment transaction, the Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. When the Fund engages in forward commitment and when-issued transactions, it relies on the seller to consummate the transaction. The failure of the issuer or seller to consummate the transaction may result in the Fund 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 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. Government Securities. The Fund may invest in government securities. Certain U.S. Government securities, including U.S. Treasury bills, notes and bonds, and Government National Mortgage Association certificates ("GNMA"), are supported by the full faith and credit of the United States. Certain other U.S. Government securities, issued or guaranteed by Federal agencies or government sponsored enterprises, are not supported by the full faith and credit of the United States, but may be supported by the right of the issuer to borrow from the U.S. Treasury. These securities include obligations of the Federal Home Loan Mortgage Corporation ("FHLMC"), and obligations supported by the credit of the instrumentality, such as Federal National Mortgage Association Bonds ("FNMA"). No assurance can be given that the U.S. Government will provide financial support to such Federal agencies, authorities, instrumentalities and government sponsored enterprises in the future. Mortgage-Backed Securities. The Fund may invest in mortgage pass-through certificates and multiple-class pass-through securities, such as real estate mortgage investment conduits ("REMIC") pass-through certificates, collateralized mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"), and other types of "Mortgage-Backed Securities" that may be available in the future. Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through securities represent participation interests in pools of residential mortgage loans and are issued by U.S. Governmental or private lenders and guaranteed by the U.S. Government or one of its agencies or instrumentalities, including but not limited to the GNMA, the FNMA and the FHLMC. GNMA certificates are guaranteed by the full faith and credit of the U.S. Government for timely 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. 5 Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations. CMOs and REMIC pass-through or participation certificates may be issued by, among others, U.S. Government agencies and instrumentalities as well as private lenders. CMOs and REMIC certificates are issued in multiple classes and the principal of and interest on the mortgage assets may be allocated among the several classes of CMOs or REMIC certificates in various ways. Each class of CMOs or REMIC certificates, often referred to as a "tranche," is issued at a specific adjustable or fixed interest rate and must be fully retired no later than its final distribution date. Generally, interest is paid or accrues on all classes of CMOs or REMIC certificates on a monthly basis. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but also may be collateralized by other mortgage assets such as whole loans or private mortgage pass-through securities. Debt service on CMOs is provided from payments of principal and interest on collateral of mortgaged assets and any reinvestment income thereon. A REMIC is a CMO that qualifies for special tax treatment under the Code and invests in certain mortgages primarily secured by interests in real property and other permitted investments. Investors may purchase "regular" and "residual" interest shares of beneficial interest in REMIC trusts although the Fund does not intend to invest in residual interests. Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class mortgage-backed securities. SMBS are usually structured with two classes that receive different proportions of interest and principal distributions on a pool of mortgage assets. A typical SMBS will have one class receiving some of the interest and most of the principal, while the other class will receive most of the interest and the remaining principal. In the most extreme case, one class will receive all of the interest (the "interest only" class) while the other class will receive all of the principal (the "principal only" class). The yields and market risk of interest only and principal only SMBS, respectively, may be more volatile than those of other fixed income securities. The staff of the SEC considers privately issued SMBS to be illiquid. Structured or Hybrid Notes. Funds that may invest in mortgage-backed securities may invest in "structured" or "hybrid" notes. The distinguishing feature of a structured or hybrid note is that the amount of interest and/or principal payable on the note is based on the performance of a benchmark asset or market other than fixed-income securities or interest rates. Examples of these benchmarks include stock prices, currency exchange rates and physical commodity prices. Investing in a structured note allows the Fund to gain exposure to the benchmark market while fixing the maximum loss that the Fund may experience in the event that market does not perform as expected. Depending on the terms of the note, the Fund may forego all or part of the interest and principal that would be payable on a comparable conventional note; the Fund's loss cannot exceed this foregone interest and/or principal. An investment in structured or hybrid notes involves risks similar to those associated with a direct investment in the benchmark asset. Risk Factors Associated with Mortgage-Backed Securities. Investing in Mortgage-Backed Securities involves certain risks, including the failure of a counter-party to meet its commitments, adverse interest rate changes and the effects of prepayments on mortgage cash flows. In addition, investing in the lowest tranche of CMOs and REMIC certificates involves risks similar to those associated with investing in equity securities. Further, the yield 6 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, the Fund may fail to recoup fully its investment in Mortgage-Backed Securities notwithstanding any direct or indirect governmental, agency or other guarantee. When the Fund reinvests amounts representing payments and unscheduled prepayments of principal, it may receive a rate of interest that is lower than the rate on existing adjustable rate mortgage pass-through securities. Thus, Mortgage-Backed Securities, and adjustable rate mortgage pass-through securities in particular, may be less effective than other types of U.S. Government securities as a means of "locking in" interest rates. Conversely, in a rising interest rate environment, a declining prepayment rate will extend the average life of many Mortgage-Backed Securities. This possibility is often referred to as extension risk. Extending the average life of a Mortgage-Backed Security increases the risk of depreciation due to future increases in market interest rates. Risk Associated With Specific Types of Derivative Debt Securities. Different types of derivative debt securities are subject to different combinations of prepayment, extension and/or interest rate risk. Conventional mortgage pass-through securities and sequential pay CMOs are subject to all of these risks, but are typically not leveraged. Thus, the magnitude of exposure may be less than for more leveraged Mortgage-Backed Securities. The risk of early prepayments is the primary risk associated with interest only debt securities ("IOs"), super floaters, other leveraged floating rate instruments and Mortgage-Backed Securities purchased at a premium to their par value. In some instances, early prepayments may result in a complete loss of investment in certain of these securities. The primary risks associated with certain other derivative debt securities are the potential extension of average life and/or depreciation due to rising interest rates. These securities include floating rate securities based on the Cost of Funds Index ("COFI floaters"), other "lagging rate" floating rate securities, floating rate securities that are subject to a maximum interest rate ("capped floaters"), Mortgage-Backed Securities purchased at a discount, leveraged inverse floating rate securities ("inverse floaters"), principal only debt securities ("POs"), certain residual or support tranches of CMOs and index amortizing notes. Index "amortizing notes are not Mortgage-Backed Securities, but are subject to extension risk resulting from the issuer's failure to exercise its option to call or redeem the notes before their stated maturity date. Leveraged inverse IOs combine several elements of the Mortgage-Backed Securities described above and thus present an especially intense combination of prepayment, extension and interest rate risks. 7 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 B contains further information concerning the rating of Moody's and S&P and their significance. Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither of these events will require the sale of the securities by the Fund, but the Adviser will consider the event in its determination of whether the Fund should continue to hold the securities. 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. The Fund can lend portfolio securities having a total value of 33 1/3% of its total assets. Short-Term Trading. 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 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. 8 INVESTMENT RESTRICTIONS Fundamental Investment Restrictions. The Fund has adopted the following investment restrictions which may not be changed without the approval of a majority of the Fund's outstanding voting securities which, as used in the Prospectus and this Statement of Additional Information means the approval by the lesser of (1) the holders of 67% or more of the Fund's shares represented at a meeting if more than 50% of the Fund's outstanding shares are present in person or by proxy or (2) more than 50% of the outstanding shares. The Fund may not: 1. Issue senior securities, except as permitted by paragraphs 3, 6 and 7 below. For purposes of this restriction, the issuance of shares of beneficial interest in multiple classes or series, the deferral of trustees' fees, the purchase or sale of options, futures contracts, forward commitments and repurchase agreements entered into in accordance with the Fund's investment policies or within the meaning of paragraph 6 below, are not deemed to be senior securities. 2. Purchase securities on margin or make short sales, or unless, by virtue of its ownership of other securities, the Fund has the right to obtain securities equivalent in kind and amount to the securities sold and, if the right is conditional, the sale is made upon the same conditions, except (i) in connection with arbitrage transactions, (ii) for hedging the Fund's exposure to an actual or anticipated market decline in the value of its securities, (iii) to profit from an anticipated decline in the value of a security, and (iv) obtaining such short-term credits as may be necessary for the clearance of purchases and sales of securities. 3. Borrow money, except for the following extraordinary or emergency purposes: (i) from banks for temporary or short-term purposes or for the clearance of transactions in amounts not to exceed 33 1/3% of the value of the Fund's total assets (including the amount borrowed) taken at market value; (ii) in connection with the redemption of Fund shares or to finance failed settlements of portfolio trades without immediately liquidating portfolio securities or other assets; (iii) in order to fulfill commitments or plans to purchase additional securities pending the anticipated sale of other portfolio securities or assets. The Fund may not borrow money for the purpose of leveraging the Fund's 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. . 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. 9 6. Invest in commodities, except the Fund may purchase and sell options on securities, securities indices and currency, futures contracts on securities, securities indices and currency and options on such futures, forward foreign currency exchange contracts, forward commitments, securities index put or call warrants and repurchase agreements entered into in accordance with the Fund's investment policies. 7. Make loans, except that the Fund (1) may lend portfolio securities in accordance with the Fund's investment policies up to 33 1/3% of the Fund's total assets taken at market value, (2) enter into repurchase agreements, and (3) purchase all or a portion of an issue of debt securities, bank loan participation interests, bank certificates of deposit, bankers' acceptances, debentures or other securities, whether or not the purchase is made upon the original issuance of the securities. 8. Purchase the securities of issuers conducting their principal activity in the same industry if, immediately after such purchase, the value of its investments in such industry would exceed 25% of its total assets taken at market value at the time of such investment. This limitation does not apply to investments in obligations of the U.S. Government or any of its agencies, instrumentalities or authorities. 9. With respect to 75% of the Fund's total assets, purchase securities of an issuer (other than the U. S. Government, its agencies, instrumentalities or authorities), if: (a) such purchase would cause more than 5% of the Fund's total assets taken at market value to be invested in the securities of such issuer; or (b) such purchase would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund. Non-Fundamental Investment Restrictions. The following investment restrictions are designated as non-fundamental and may be changed by the Trustees without shareholder approval. The Fund may not: 1. Purchase a security if, as a result, (i) more than 10% of the Fund's total assets would be invested in the securities of other investment companies, (ii) the Fund would hold more than 3% of the total outstanding voting securities of any one investment company, or (iii) more than 5% of the Fund's total assets would be invested in the securities of any one investment company. These limitations do not apply to (a) the investment of cash collateral, received by the Fund in connection with lending 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. 10 2. Invest more than 15% of the net assets of the Fund, taken at market value, in illiquid securities. 3. Invest for the purpose of exercising control over or management of any company. If a percentage restriction on investment or utilization of assets as set forth above is adhered to at the time an investment is made, a later change in percentage resulting from changes in the values of a Fund's assets will not be considered a violation of the restriction. 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 Fund is managed by the Trustees who elect officers who are responsible for the day-to-day operations of the Fund and who execute policies formulated by the Trustees. Several of the officers and Trustees of the Fund are also officers or directors of the Fund's Adviser and/or Subadviser, or officers and/or directors of the Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock Funds"). 11
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. 12 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. 13 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. 14 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.
15 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 Aggregate Compensation all Funds in John Hancock Trustees from the Fund (1) Fund Complex to Trustees (2) - -------- ----------------- ---------------------------- James F. Carlin $ 377 $ 72,000 William H. Cunningham* 377 72,100 Ronald R. Dion* 377 72,000 Charles L. Ladner 391 75,100 Steven R. Pruchansky* 391 75,000 Norman H. Smith* 405 78,000 John P. Toolan* 365 70,250 ------- ---------- Total $2,683 $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. 16 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. - -------------------------------------------------------------------------------- Class of Percentage of Total Name and Address of Shareholder Shares Outstanding Shares - ------------------------------- ------ ------------------ - -------------------------------------------------------------------------------- MLPF &S for the Sole B 13.65% Benefit of its Customers ATT: Fund Administration 4800 Deerlake Drive East Jacksonville FL - -------------------------------------------------------------------------------- Sterling Trust Company C 7.32% Rancho La Puerta 401(k) Plan 1380 Lawrence St Ste 1400 Denver CO 80204 - -------------------------------------------------------------------------------- Sterling Trust Company C 6.12% Starry Associates Retirement Plan 1380 Lawrence St Ste 1400 Denver CO 80204 - -------------------------------------------------------------------------------- Independence Investment Associates I 24.02% 53 State Street Boston MA 02109 - -------------------------------------------------------------------------------- Sterling Trust Company I 30.25% Arden Group 401(k) Ret Savings Plan 1380 Lawrence St Ste 1400 Denver CO 80204 - -------------------------------------------------------------------------------- Sterling Trust Company I 8.60% TL Cannon 401(k) Plan 1380 Lawrence St Ste 1400 Denver CO 80204 - -------------------------------------------------------------------------------- Sterling Trust Company I 17.17% FBO ARA Individual Retirement 1380 Lawrence St Ste 1400 Denver CO 80204 - -------------------------------------------------------------------------------- 17 - -------------------------------------------------------------------------------- Class of Percentage of Total Name and Address of Shareholder Shares Outstanding Shares - ------------------------------- ------ ------------------ - -------------------------------------------------------------------------------- Sealol Inc. Retirement and 401(k) I 7.68% EG&G Sealol Inc 15 Pioneer avenue Warwick, RI - -------------------------------------------------------------------------------- Manistique Papers, Inc. I 5.63% 453 S. Mackinac Avenue Manistique MI. 49854 - -------------------------------------------------------------------------------- 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 Fund and other funds in the John Hancock group of funds, as well as retail and institutional privately managed accounts. The Adviser is an affiliate of the Life Company, one of the most recognized and respected financial institutions in the nation. With total assets under management of 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. 18 The Adviser has entered into a Sub-Advisory Agreement with Independence Investment LLC ("Independence") (formerly Independence Investment Associates, Inc.). Under the Sub-Advisory Agreement, the Subadviser, subject to the review of the Trustees and the overall supervision of the Adviser, is responsible for managing the investment operations of the Fund and the composition of the Fund's investment portfolio and furnishing the Fund with advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. Independence, located at 53 State Street, Boston, Massachusetts 02109, and organized in 1982, is a wholly owned indirect subsidiary of John Hancock Subsidiaries, Inc. 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 $500,000,000 0.80% Amount over $500,000,000 0.75% The advisory fees paid by the Fund are greater than those paid by most funds, but they are comparable to those paid by many investment companies with similar investment objectives and policies. The Adviser (not the Fund) pays a portion of its fee to the Subadviser at the rate of 55% of the advisory fee payable on the Fund's average daily net assets. For the years ended February 28, 1999, the Adviser waived the entire investment management fee for the Fund. For the year ended February 29, 2000 and February 28, 2001, the management fee paid by the Fund to the adviser amounted to $85,117 and $506,120 for services, net of expense limitation. The Subadviser waived all subadvisory fees for these periods. 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 its average daily net assets. The Adviser has agreed to limit Fund expenses (excluding 12b-1 and transfer agent fees) to 0.90% of the Fund's average daily net assets at least until June 30, 2002. The Adviser retains the right to reimpose a fee and recover any other payments to the extent that, at the end of any fiscal year, the Fund's annual expenses fall below this limit. Securities held by the Fund may also be held by other funds or investment advisory clients for which the Adviser, the Subadviser or its affiliates provide investment advice. Because of different investment objectives or other factors, a particular security may be bought for one or more funds or clients when one or more other funds or clients are selling the same security. If opportunities for purchase or sale of securities by the Adviser or Subadviser for the Fund or for other funds or clients for which the Adviser or Subadviser 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, Subadviser 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. 19 Pursuant to its Advisory Agreement and Sub-Advisory Agreement, the Adviser and Subadviser are not liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which the respective Agreements relate, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser or Subadviser in the performance of its duties or from reckless disregard of the obligations and duties under the applicable Agreement. Under the Advisory Agreement, the 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 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. Under the Sub-Advisory Agreement of the Fund, the 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 in 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, Sub-Advisory Agreement and the Distribution Agreement (discussed below) was approved by all Trustees. The Advisory Agreement, Sub-Advisory Agreement and the Distribution Agreement will continue in effect from year to year, provided that its continuance is approved annually both (i) by the holders of a majority of the outstanding voting securities of the Trust or by the Trustees, and (ii) by a majority of the Trustees who are not parties to the Agreement or "interested persons" of any such parties. Each Agreement may be terminated on 60 days written notice by any party or by vote of a majority of the outstanding voting securities of the Fund and will terminate automatically if assigned. 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 year ended February 28, 1999, February 29, 2000 and February 28, 2001, the Fund paid the Adviser $929, $3,827 and $13,590, respectively, for services under this agreement. Personnel of the Adviser, Sub-Adviser, and their 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, Sub-Adviser and their affiliates and the Fund have adopted a code of ethics which restricts the trading activity of those personnel. 20 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") that 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 that are continually offered at net asset value next determined, plus an applicable sales charge, if any. In connection with the sale of Fund shares, John Hancock Funds and Selling Brokers receive compensation from a sales charge imposed, in the case of Class A and Class C shares, at the time of sale. In the case of Class B or Class C shares, the broker receives compensation immediately but John Hancock Funds is compensated on a deferred basis. Total underwriting commissions for sales of the Fund's Class A shares for the fiscal year ended February 29, 2000 and February 28, 2001 were $210,331 and $519,459 respectively. Of such amounts, $5,622 and $36,155 were retained by John Hancock Funds in 2000 and 2001, respectively. The remainder of the underwriting commissions were reallowed to dealers. The Fund's Trustees adopted Distribution Plans with respect to Class A, Class B and Class C of shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Plans, the Fund will pay distribution and service fees at an aggregate annual rate of up to 0.30% for Class A shares and 1.00% for Class B and Class C shares of the Fund's average daily net assets attributable to shares of that class. However, the service fees will not exceed 0.25% of the Fund's average daily net assets attributable to each class of shares. The distribution fees will be used to reimburse John Hancock Funds for its distribution expenses, including but not limited to: (i) initial and ongoing sales compensation to Selling Brokers and others (including affiliates of the John Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional and overhead expenses incurred in connection with the distribution of Fund shares; and (iii) with respect to Class B and Class C shares only, interest expenses on unreimbursed distribution expenses. The service fees will be used to compensate Selling Brokers and others for providing personal and account maintenance services to shareholders. In the event that John Hancock Funds is not fully reimbursed for payments or expenses it incurs under the Class A Plan, these expenses will not be carried beyond twelve months from the date they were incurred. Unreimbursed expenses under the Class B and Class C Plans will be carried forward together with interest on the balance of these unreimbursed expenses. The Fund does not treat unreimbursed expenses under the Class B and Class C Plans as a liability of the Fund because the Trustees may terminate the Class B and /or Class C Plans at any time with no additional liability for these expenses to the shareholders and the Fund. For the fiscal year ended February 28, 2001, an aggregate of $18,003 of distribution expenses or 0.06% 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 February 28, 2001, an aggregate of $1,527 of distribution expenses or 0.09% 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 in prior periods. The Plans 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. 21 Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund with a written report of the amounts expended under the Plans and the purpose for which these expenditures were made. The Trustees review these reports on a quarterly basis to determine their continued appropriateness. The Plans provide that they will continue in effect only so long as its continuance is approved at least annually by a majority of both the Trustees and the Independent Trustees. The Plans provide that they may be terminated without penalty, (a) by a vote of a majority of the Independent Trustees, (b) by a vote of a majority of the Fund's outstanding shares of the applicable class upon 60 days' written notice to John Hancock Funds 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 that Plan. Each plan provides, that no material amendment to the Plans will be effective unless it is approved by a majority vote of the Trustees and the Independent Trustees of the Fund. The holders of Class A, Class B and Class C shares have exclusive voting rights with respect to the Plan applicable to their respective class of shares. In adopting the Plans, the Trustees concluded that, in their judgment, there is a reasonable likelihood that the Plans will benefit the holders of the applicable class of shares of the Fund. Class I shares of the Fund are not subject to any distribution plan. Expenses associated with the obligation of John Hancock Funds to use its best efforts to sell Class I shares will be paid by the Adviser or by John Hancock Funds and will not be paid from the fees paid under Class A, Class B or Class C Plans. Amounts paid to the John Hancock Funds by any class of shares of the Fund will not be used to pay the expenses incurred with respect to any other class of shares of the Fund; provided, however, that expenses attributable to the Fund as a whole will be allocated, to the extent permitted by law, according to the formula based upon gross sales dollars and/or average daily net assets of each such class, as may be approved from time to time by vote of a majority of the Trustees. From time to time, the Fund may participate in joint distribution activities with other Funds and the costs of those activities will be borne by each Fund in proportion to the relative net asset value of the participating Fund. During the fiscal year ended February 28, 2001, the Fund paid John Hancock Funds the following amounts of expenses in connection with their services for the Fund: 22
Expense Items ------------- Printing and Mailing of Interest, Prospectuses Expenses of Carrying or to new Compensation to John Hancock Other Finance Advertising Shareholders Selling Brokers Funds Charges ----------- ------------ --------------- ------------ ------------- Class A $25,312 $1,229 $ 6,372 $ 67,758 -- Class B $58,147 $2,768 $ 2,768 $147,877 $2,474 Class C $ 3,971 $ 247 $ 247 $ 9,883 --
SALES COMPENSATION As part of their business strategies, the Fund, along with John Hancock Funds, pay 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 shares are (1) the 12b-1 fees that are paid out of the fund's assets and (2) sales charges paid by investors. The sales charges and 12b-1 fees are detailed in the prospectus and under the "Distribution Contracts" in this Statement of Additional Information. The portions of these expenses that are paid to financial services firms are shown on the next page. For Class I shares, John Hancock Funds may make a one-time payment at the time of initial purchase out of its own resources to a Selling Broker who sells shares of the Fund. This payment may not exceed 0.15% of the amount invested. Whenever you purchase Class A, Class B or Class C shares, the financial services firm receives a reallowance/payment as described below. The firm also receives the first year's12b-1 service fee at this time. Beginning with the second year after an investment is made, the financial services firm receives an annual 12-1 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. 23
Sales charge paid Broker receives Broker receives by investors (% maximum reallowance 12b-1 service Total broker of offering (% of offering fee (% of net compensation (1) Class A investments price) price) investment) (3) (% of offering price) - ------------------- ----------------- -------------------- --------------- --------------------- Up to $49,999 5.00% 4.01% 0.25% 4.25% $50,000 - $99,999 4.50% 3.51% 0.25% 3.75% $100,000 - $249,999 3.50% 2.61% 0.25% 2.85% $250,000 - $499,999 2.50% 1.86% 0.25% 2.10% $500,000 - $999,999 2.00% 1.36% 0.25% 1.60% Investments of Class A share of $1 million or more (4) - ------------------- First $1M - $4,999,999 -- 0.75% 0.25% 1.00% Next $1 - $5M above that -- 0.25% 0.25% 0.50% (2) Next $1 or more above that -- 0.00% 0.25% 0.25% (2) Broker receives Broker receives maximum reallowance 12b-1 service Total broker (% of offering fee (% of net compensation (1) Class B investments price) investment) (3) (% of offering price) - ------------------- ------ --------------- --------------------- All amounts -- 3.75% 0.25% 4.00% Broker receives Broker receives 12 maximum b-1 service Total broker reallowance fee (% of net compensation Class C Investments (% of offering price) investment) (% of offering price) - ------------------- --------------------- ----------- --------------------- Amounts purchased at NAV 0.75% 0.25% 1.00% All other amounts 1.00% 1.75% 0.25% 2.00% Broker receives Broker receives maximum 12b-1 service Total broker reallowance fee (% of net compensation (1) Class I investments (% of offering price) investment) (3) (% of offering price) - ------------------- -------------------- --------------- --------------------- All amounts -- 0.00% 0.00% 0.00% (5)
(1) Broker percentages and 12b-1 service fee percentages are calculated from different amounts, and therefore may not equal total broker compensation percentages if combined using simple addition. (2) For Group Investment Programs sales, the maximum total broker compensation for investments of $1 million or more is 1.00% of the offering price (one year CDSC of 1.00% applies for each sale). (3) After first year broker receives 12b-1 fees quarterly in arrears. 24 (4) John Hancock Funds reduce aggregate investments by the amount of recent redemptions. (5) John Hancock Funds may make a one-time payment at the time of initial purchase out of its own resources to a Selling Broker who sells Class I shares of the Fund. This payment may be up to 0.15% of the amount invested. CDSC revenues collected by John Hancock Funds may be used to pay brokers commissions when there is no initial sales charge NET ASSET VALUE For purposes of calculating the net asset value (NAV) of the Fund's shares, the following procedures are utilized wherever applicable. Debt investment securities are valued on the basis of valuations furnished by a principal market- maker or a pricing service, both of which generally utilize electronic data processing techniques to determine valuations for normal institutional size trading units of debt securities without exclusive reliance upon quoted prices. Equity securities traded on a principal exchange or NASDAQ National Market Issues are generally valued at last sale price on the day of valuation. Securities in the aforementioned category for which no sales are reported and other securities traded over-the-counter are generally valued at the last available bid price. Short-term debt investments which have a remaining maturity of 60 days or less are generally valued at amortized cost which approximates market value. If market quotations are not readily available or if in the opinion of the Adviser any quotation or price is not representative of true market value, the fair value of the security may be determined in good faith in accordance with procedures approved by the Trustees. The NAV of each Fund and class is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by dividing a class's net assets by the number of its shares outstanding. On any day an international market is closed and the New York Stock Exchange is open, any foreign securities will be valued at the prior day's close with the current day's exchange rate. Trading of foreign securities may take place on Saturdays and U.S. business holidays on which the Fund's NAV is not calculated. Consequently, the Fund's portfolio securities may trade and the NAV of the Fund's redeemable securities may be significantly affected on days when a shareholder has no access to the Fund. INITIAL SALES CHARGE ON CLASS A AND CLASS C SHARES Shares of the Fund are offered at a price equal to their net asset value plus a sales charge which, at the option of the purchaser, may be imposed either at the time of purchase (the "initial sales charge alternative") or on a contingent deferred basis (the "deferred sales charge alternative"). The Fund no longer issues shares certificates. All 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. 25 The sales charges applicable to purchases of Class A and Class C shares of the Fund are described in the Fund's Prospectus. Methods of obtaining reduced sales charges referred to generally in the Prospectus are described in detail below. In calculating the sales charge applicable to current purchases of Class A shares of the Fund, the investor is entitled to accumulate current purchases with the greater of the current value (at offering price) of the Class A shares of the Fund, owned by the investor, or if John Hancock Signature Services, Inc. ("Signature Services") is notified by the investor's dealer or the investor at the time of the purchase, the cost of the Class A shares owned. Without Sales Charges. Class A shares may be offered without a front-end sales charge or contingent deferred sales charge ("CDSC") to various individuals and institutions as follows: o A Trustee or officer of the Trust; a Director or officer of the Adviser and its affiliates, subadviser or Selling Brokers; employees or sales representatives of any of the foregoing; retired officers, employees or Directors of any of the foregoing; a member of the immediate family (spouse, children, grandparents, grandchildren, mother, father, sister, brother, mother-in-law, father-in-law, daughter-in-law, son-in-law, niece, nephew and same sex domestic partner) of any of the foregoing; or any fund, pension, profit sharing or other benefit plan for the individuals described above. o A broker, dealer, financial planner, consultant or registered investment advisor that has entered into a signed agreement with John Hancock Funds providing specifically for the use of Fund shares in fee-based investment products or services made available to their clients. o A former participant in an employee benefit plan with John Hancock funds, when he or she withdraws from his or her plan and transfers any or all of his or her plan distributions directly to the Fund. o A member of a class action lawsuit against insurance companies who is investing settlement proceeds. o Retirement plans participating in Merrill Lynch servicing programs, if the Plan has more than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information. o Retirement plans investing through the PruArray Program sponsored by Prudential Securities. o Pension plans transferring assets from a John Hancock variable annuity contract to the Fund pursuant to an exemptive application approved by the Securities and Exchange Commission. o Existing full service clients of the Life Company who were group annuity contract holders as of September 1, 1994, and participant directed retirement plans with at least 100 eligible employees at the inception of the Fund account. Each of these investors may purchase Class A shares with no initial sales charge. However, if the shares are redeemed within 12 months after the end of the calendar year in which the purchase was made, a CDSC will be imposed at the following rate: 26 Amount Invested CDSC Rate --------------- --------- $1 to $4,999,999 1.00% Next $5 million to $9,999,999 0.50% Amounts of $10 million and over 0.25% Class C shares may be offered without a front-end sales charge to: o Retirement plans for which John Hancock Signature Services formerly performed employer sponsored plan recordkeeping services. (These types of plans include 401(k), money purchase pension, profit sharing and SIMPLE 401(k)). 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 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. 27 Letter of Intention. Reduced sales charges are also applicable to investments made pursuant to a Letter of Intention (the "LOI"), which should be read carefully prior to its execution by an investor. The Fund offers two options regarding the specified period for making investments under the LOI. All investors have the option of making their investments over a specified period of thirteen (13) months. Investors who are using the Fund as a funding medium for a retirement plan, however, may opt to make the necessary investments called for by the LOI over a forty-eight (48) month period. These retirement plans include traditional, Roth 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 retirement plan investments cannot be combined to satisfy LOI of 48 months. Such an investment (including accumulations and combinations but not including reinvested dividends) must aggregate $50,000 or more 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 escrowed Class A shares will be released. If the total investment specified in the LOI is not completed, the Class A shares held in escrow may be redeemed and the proceeds used as required to pay such sales charge as may be due. By signing the LOI, the investor authorizes Signature Services to act as his attorney-in-fact to redeem any escrowed Class A shares and adjust the sales charge, if necessary. A LOI does not constitute a binding commitment by an investor to purchase, or by the Fund to sell, any additional Class A shares and may be terminated at any time. Because Class I shares are sold at net asset value without the imposition of any sales charge, none of the privileges described under these captions are available to Class I investors. 28 DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES Investments in Class B shares are purchased at net asset value per share without the imposition of an initial sales charge so that the Fund will receive the full amount of the purchase payment. Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed within six years or one year of purchase, respectively will be subject to a CDSC at the rates set forth in the Prospectus as a percentage of the dollar amount subject to the CDSC. The charge will be assessed on an amount equal to the lesser of the current market value or the original purchase cost of the Class B or Class C shares being redeemed. No CDSC will be imposed on increases in account value above the initial purchase 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 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 shares (50 x 12) $600.00 o*Minus Appreciation ($12 - $10) x 100 shares (200.00) o Minus proceeds of 10 shares not subject to CDSC (dividend reinvestment) (120.00) ------- oAmount subject to CDSC $280.00 *The appreciation is based on all 100 shares in the account not just the shares being redeemed. 29 Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or in part by John Hancock Funds to defray its expenses related to providing distribution-related services to the Fund in connection with the sale of the Class B and Class C shares, such as the payment of compensation to select Selling Brokers for selling Class B and Class C shares. The combination of the CDSC and the distribution and service fees facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of the purchase. Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on redemptions of Class B and Class C shares and of Class A shares that are subject to a CDSC, unless indicated otherwise, in the circumstances defined below: For all account types: * Redemptions made pursuant to the Fund's right to liquidate your account if you own shares worth less than $1,000. * Redemptions made under certain liquidation, merger or acquisition transactions involving other investment companies or personal holding companies. * Redemptions due to death or disability. (Does not apply to trust accounts unless trust is being dissolved.) * Redemptions made under the Reinstatement Privilege, as described in "Sales Charge Reductions and Waivers" of the Prospectus. * Redemption 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 or Class C shares that are subject to a CDSC.) * Redemptions by Retirement plans participating in Merrill Lynch servicing programs, if the Plan has less than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information. * Redemptions of Class A shares made after one year from the inception date of a retirement plan at John Hancock. * Redemption of Class A shares by retirement plans that invested through the PruArray Program sponsored by Prudential Securities. 30 For Retirement Accounts (such as traditional, Roth 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 sections 401(a) (such as Money Purchase Pension Plans and Profit Sharing Plan/401(k) Plans), 457 and 408 (SEPs and SIMPLE IRAs) of the Internal Revenue Code. * Redemptions from certain IRA and retirement plans that purchased shares prior to October 1, 1992 and certain IRA plans that purchased shares prior to May 15, 1995. 31
Please see matrix for some examples. - ------------------------- ---------------- ---------------- -------------- -------------------- -------------------- Type of 401 (a) Plan 403 (b) 457 IRA, IRA Rollover Non-retirement Distribution (401 (k), MPP, PSP) 457 & 408 (SEPs & Simple IRAs) - ------------------------- ---------------- ---------------- -------------- -------------------- -------------------- Death or Disability Waived Waived Waived Waived Waived - ------------------------- ---------------- ---------------- -------------- -------------------- -------------------- Over 70 1/2 Waived Waived Waived Waived for 12% of account required minimum value annually in distributions* or periodic payments 12% of account value annually in periodic payments. - ------------------------- ---------------- ---------------- -------------- -------------------- -------------------- Between 59 1/2 Waived Waived Waived Waived for Life 12% of account and 70 1/2 Expectancy or 12% value annually in of account value periodic payments annually in periodic payments. - ------------------------- ---------------- ---------------- -------------- -------------------- -------------------- Under 59 1/2 Waived for Waived for Waived for Waived for annuity 12% of account (Class B only) annuity annuity annuity payments (72t) or value annually in payments (72t) payments (72t) payments 12% of account periodic payments or 12% of or 12% of (72t) or 12% value annually in account value account value of account periodic payments. annually in annually in value periodic periodic annually in payments. payments. periodic 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 Relations Orders Waived Waived Waived N/A N/A - ------------------------- ---------------- ---------------- -------------- -------------------- -------------------- Termination of Waived Waived Waived N/A N/A Employment Before Normal Retirement Age - ------------------------- ---------------- ---------------- -------------- -------------------- -------------------- Return of Excess Waived Waived Waived Waived N/A - ------------------------- ---------------- ---------------- -------------- -------------------- --------------------
32 *Required minimum distributions based on John Hancock Mutual Fund IRA assets only. If you qualify for a CDSC waiver under one of these situations, you must notify Signature Services at the time you make your redemption. The waiver will be granted once Signature Services has confirmed that you are entitled to the waiver. SPECIAL REDEMPTIONS Although it would not normally do so, the Fund has the right to pay the redemption price of shares of the Fund in whole or in part in portfolio securities as prescribed by the Trustees. When the shareholder sells portfolio securities received in this fashion, the shareholders will incur a brokerage charge. Any such securities would be valued for the purposes of making such payment at the same value as used in determining net asset value. The Fund has, however, elected to be governed by Rule 18f-1 under the Investment Company Act. Under that rule, the Fund must redeem its shares for cash except to the extent that the redemption payments to any shareholder during any 90-day period would exceed the lesser of $250,000 or 1% of the Fund's net asset value at the beginning of such period. ADDITIONAL SERVICES AND PROGRAMS Exchange Privilege. The Fund permits exchanges of shares of any class 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 and John Hancock Intermediate Government 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. 33 An exchange of shares is treated as a redemption of shares of one fund and the purchase of shares of another for Federal Income Tax purposes. An exchange may result in a taxable gain or loss. See "TAX STATUS". Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic Withdrawal Plan. Payments under this plan represent proceeds arising from the redemption of Fund shares which may result in realization of gain or loss for purposes of Federal, state and local income taxes. The maintenance of a Systematic Withdrawal Plan concurrently with purchases of additional shares of the Fund could be disadvantageous to a shareholder because of the initial sales charge payable on such purchases of Class A shares and the CDSC imposed on redemptions of Class B and Class C shares and because redemptions are taxable events. Therefore, a shareholder should not purchase shares at the same time a Systematic Withdrawal Plan is in effect. The Fund reserves the right to modify or discontinue the Systematic Withdrawal Plan of any shareholder on 30 days' prior written notice to such shareholder, or to discontinue the availability of such plan in the future. The shareholder may terminate the plan at any time by giving proper notice to Signature Services. Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the Prospectus. The program, as it relates to automatic investment checks, is subject to the following conditions: The investments will be drawn on or about the day of the month indicated. The privilege of making investments through the MAAP may be revoked by Signature Services without prior notice if any investment is not honored by the shareholder's bank. The bank shall be under no obligation to notify the shareholder as to the non-payment of any checks. The program may be discontinued by the shareholder either by calling Signature Services or upon written notice to Signature Services which is received at least five (5) business days prior to the order date of any investment. Reinstatement or Reinvestment Privilege. If Signature Services is notified prior to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days after the date of redemption, reinvest without payment of a sales charge any part of the redemption proceeds in shares of the same class of the Fund or another John Hancock fund, subject to the minimum investment limit in that fund. The proceeds from the redemption of Class A shares may be reinvested at net asset value without paying a sales charge in Class A shares of the Fund or in Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a shareholder may reinvest the proceeds from this redemption at net asset value in additional shares of the class from which the redemption was made. The shareholder's account will be credited with the amount of any CDSC charged upon the prior redemption and the new shares will continue to be subject to the CDSC. The holding period of the shares acquired through reinvestment will, for purposes of computing the CDSC payable upon a subsequent redemption, include the holding period of the redeemed shares. 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. 34 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. 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 authorized shares of the Fund and eleven series. Additional series may be added in the future. The Declaration of Trust also authorizes the Trustees to classify and reclassify the shares of the Fund, or any new series of the Trust, into one or more classes. The Trustees have also authorized the issuance of four classes of shares of the Fund, designated as Class A, Class B, Class C and Class I. 35 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 Class A, Class B, Class C and Class I 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. 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. 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 Class A, Class B and Class C will be borne exclusively by that class, (ii) Class B and Class C shares will pay higher distribution and service fees than Class A shares and (iii) each class of shares will bear any class expenses properly allocable to that class of shares, subject to the conditions the Internal Revenue Service imposes with respect to the multiple-class structures. Similarly, the net asset value per share may vary depending on which class of shares are purchased. No interest will be paid on uncashed dividend or redemption checks. In the event of liquidation, shareholders of each class are entitled to share pro rata in the net assets of the Fund available for distribution to these shareholders. Shares entitle their holders to one vote per share, are freely transferable and have no preemptive, subscription or conversion rights. When issued, shares are fully paid and non-assessable, except as set forth below. Unless otherwise required by the Investment Company Act or the Declaration of Trust, the Fund has no intention of holding annual meetings of shareholders. Fund shareholders may remove a Trustee by the affirmative vote of at least two-thirds of the Trust's outstanding shares and the Trustees shall promptly call a meeting for such purpose when requested to do so in writing by the record holders of not less than 10% of the outstanding shares of the Trust. Shareholders may, under certain circumstances, communicate with other shareholders in connection with requesting a special meeting of shareholders. However, at any time that less than a majority of the Trustees holding office were elected by the shareholders, the Trustees will call a special meeting of shareholders for the purpose of electing Trustees. Under Massachusetts law, shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable for acts or obligations of the Fund. However, the Fund's Declaration of Trust contains an express disclaimer of shareholder liability for acts, obligations or affairs of the Fund. The Declaration of Trust also provides for indemnification out of the Fund's assets for all losses and expenses of any shareholder held personally liable for reason of being or having been a shareholder. The Declaration of Trust also provides that no series of the Trust shall be liable for the liabilities of any other series. Furthermore, no fund included in this Fund's prospectus shall be liable for the liabilities of any other John Hancock Fund. Liability is therefore limited to circumstances in which the Fund itself would be unable to meet its obligations, and the possibility of this occurrence is remote. 36 The Fund reserves the right to reject any application which conflicts with the Fund's internal policies or the policies of any regulatory authority. John Hancock Funds does not accept starter, credit card or third party checks. All checks returned by the post office as undeliverable will be reinvested at net asset value in the fund or funds from which a redemption was made or dividend paid. Information provided on the account application may be used by the Fund to verify the accuracy of the information or for background or financial history purposes. A joint account will be administered as a joint tenancy with right of survivorship, unless the joint owners notify Signature Services of a different intent. A shareholder's account is governed by the laws of The Commonwealth of Massachusetts. For telephone transactions, the transfer agent will take measures to verify the identity of the caller, such as asking for name, account number, Social Security or other taxpayer ID number and other relevant information. If appropriate measures are taken, the transfer agent is not responsible for any losses that may occur to any account due to an unauthorized telephone call. Also for your protection telephone transactions are not permitted on accounts whose names or addresses have changed within the past 30 days. Proceeds from telephone transactions can only be mailed to the address of record. Selling activities for the Fund may not take place outside the U.S. except with U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on Non-U.S. investors' accounts with foreign mailing addresses are required to certify that all sales activities have occurred, and in the future will occur, only in the U.S. A foreign corporation may purchase shares of the Fund only if it has a U.S. mailing address. TAX STATUS The Fund is treated as a separate entity for accounting and tax purposes, has qualified and elected to be treated as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and intends to continue to qualify for each taxable year. As such and by complying with the applicable provisions of the Code regarding the sources of its income, the timing of its distributions and the diversification of its assets, the Fund will not be subject to Federal income tax on its taxable income (including net realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. The Fund will be subject to a 4% nondeductible Federal excise tax on certain amounts not distributed (and not treated as having been distributed) on a timely basis in accordance with annual minimum distribution requirements. The Fund intends under normal circumstances to seek to avoid or minimize liability for such tax by satisfying such distribution requirements. Distribution from the Fund's current or accumulated earnings and profits ("E&P") will be taxable under the Code for investors who are subject to tax. If these distributions are paid from the Fund's "investment company taxable income," they will be taxable as ordinary income; and if they are paid from the Fund's "net capital gain" they will be taxable as 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 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. 37 Distributions, if any, in excess of E&P will constitute a return of capital under the Code, which will first reduce an investor's federal tax basis in Fund shares and then, to the extent such basis is exceeded, will generally give rise to capital gains. Shareholders who have chosen automatic reinvestment of their distributions will have a federal tax basis in each share received pursuant to such a reinvestment equal to the amount of cash they would have received had they elected to receive the distribution in cash, divided by the number of shares received in the reinvestment. The Fund may be subject to withholding and other taxes imposed by foreign countries with respect to its investments in foreign securities. Some tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. Because more than 50% of the Fund's total assets at the close of any taxable year will not consist of stocks or securities of foreign corporations, the Fund will be unable to pass such taxes through to shareholders, who consequently will not include any portion of such taxes in their incomes and will not be entitled to any associated tax credits or deductions with respect to such taxes. The Fund will deduct the foreign taxes it pays in determining the amount it has available for distribution to shareholders. If the Fund invests in stock or ADRs representing stock (including an option to acquire stock such as is inherent in a convertible bond) in certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties or capital gain) or hold at least 50% of their asset in investments producing such passive income ("passive foreign investment companies"), the Fund could be subject to Federal income tax and additional interest charges on "excess distributions" received from such companies or gain from the sale of stock in such companies, even if all income or gain actually received by the Fund is timely distributed to its shareholders. The Fund would not be able to pass through to its shareholders any credit or deduction for such a tax. An election may be available to ameliorate these adverse tax consequences, but could require the Fund to recognize taxable income or gain without the concurrent receipt of cash. These investments could also result in the treatment of associated capital gains as ordinary income. The Fund may limit and/or manage its holdings in passive foreign investment companies or make an available election to minimize its tax liability or maximize its return from these investments. The amount of the Fund's net realized capital gains, if any, in any given year will vary depending upon the Adviser's current investment strategy and whether the Adviser believes it to be in the best interest of the Fund to dispose of portfolio securities that will generate capital gains. At the time of an investor's purchase of Fund shares, a portion of the purchase price is often attributable to realized or unrealized appreciation in the Fund's portfolio or undistributed taxable income of the Fund. Consequently, subsequent distributions on those shares from such appreciation or income may be taxable to such investor even if the net asset value of the investor's shares is, as a result of the distributions, reduced below the investor's cost for such shares, and the distributions in reality represent a return of a portion of the purchase price. Upon a redemption or other disposition of shares of the Fund (including by exercise of the exchange privilege)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 90 days after their purchase to the extent shares of the Fund or another John Hancock fund are 38 subsequently acquired without payment of a sales charge pursuant to the reinvestment or exchange privilege. This disregarded charge will result in an increase in the shareholder's tax basis in the shares subsequently acquired. Also, any loss realized on a redemption or exchange may be disallowed to the extent the shares disposed of are replaced with other shares of the Fund within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of, such as pursuant to automatic dividend reinvestments. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. 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. 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 long-term capital gain in his return for his taxable year in which the last day of the Fund's taxable year falls, (b) be entitled either to a tax credit on his return for, or to a refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his shares in the Fund by the difference between his pro rata share of such excess and his pro rata share of such taxes. For Federal income tax purposes, the Fund is permitted to carry forward a net realized capital loss in any year to offset net capital gains, if any, during the eight years following the year of the loss. To the extent subsequent net capital gains are offset by such losses, they would not result in Federal income tax liability to the Fund and, as noted above, would not be distributed as such to shareholders. Presently, there are no realized capital loss carry forwards available to offset future net realized capital gains. For purposes of the dividends-received deduction available to corporations, dividends received by the Fund, if any, from U.S. domestic corporations in respect of the stock of such corporations held by the Fund, for U.S. Federal income tax purposes, for at least 46 days (91 days in the case of certain preferred stock) during a prescribed period extending before and after each such dividend and distributed and properly designated by the Fund may be treated as qualifying dividends. Corporate shareholders must meet the holding period requirements stated above with respect to their shares of the Fund for each dividend in order to qualify for the deduction and, if they have any debt that 39 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 a corporate shareholder's 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. The Fund is required to accrue income on any debt securities that have more than a de minimis amount of original issue discount (or debt securities acquired at a market discount, if the Fund elects to include market discount in income currently) prior to the receipt of the corresponding cash payments. However, the Fund must distribute to shareholders for each taxable year substantially all of its net income and net capital gains, including such income or gain, to qualify as a regulated investment company and avoid liability for any federal income or excise tax. Therefore, the Fund may have to dispose of its portfolio securities under disadvantageous circumstances to generate cash, or may borrow cash, to satisfy these distribution requirements. A state income (and possibly local income and/or intangible property) tax exemption is generally available to the extent (if any) the Fund's distributions are derived from interest on (or, in the case of intangible property taxes, the value of its assets is attributable to) certain U.S. Government obligations, provided in some states that certain thresholds for holdings of such obligations and/or reporting requirements are satisfied. The Fund will not seek to satisfy any threshold or reporting requirements that may apply in particular taxing jurisdictions, although it may in its sole discretion provide relevant information to shareholders. The Fund will be required to report to the Internal Revenue Service (the "IRS") all 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 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. 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 The foregoing discussion relates solely to Federal income tax law as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic corporations, partnerships, trusts or estates) subject to tax under such law. The discussion does not address special tax rules applicable to certain types of investors, such as tax-exempt entities, insurance companies and financial institutions. Dividends, capital gain distributions and ownership of or gains realized on the redemption (including an exchange) of shares of the Fund may also be subject to state and local taxes. Shareholders should consult their own tax advisers as to the Federal, state or local tax consequences of ownership of shares of, and receipt of distributions from, the Fund in their particular circumstances. Non-U.S. investors not engaged in a U.S. trade or business with which their investment in the Fund is effectively connected will be subject to U.S. Federal income tax treatment that is different from that described above. These investors may be subject to non-resident alien withholding tax at the rate of 30% (or a lower rate under an applicable tax treaty) on amounts treated as ordinary dividends from the Fund and, unless an effective IRS Form W-8, Form W-8BEN, or other authorized withholding certificate is on file, to 31% backup withholding on certain other payments from the Fund. Non-U.S. investors should consult their tax advisers regarding such treatment and the application of foreign taxes to an investment in the Fund. The Fund is not subject to Massachusetts corporate excise or franchise taxes. The Fund anticipates that, provided that the Fund qualifies as a regulated investment company under the Code, it will also not be required to pay any Massachusetts income tax. CALCULATION OF PERFORMANCE As of February 28, 2001, the average annual total return for Class A shares of the Fund for the 1 year period and since commencement of operations on July 1, 1999 were -29.94% and -14.84%, respectively. As of February 28, 2001, the average annual total return for Class B shares of the Fund for the 1 year period and since commencement of operations on July 1, 1999 were -30.45% and -14.88%, respectively. As of February 28, 2001, the average annual total return for Class C shares of the Fund for the 1 year period and since commencement of operations on July 1, 1999 were -28.26% and -13.29%, respectively. As of February 28, 2001, the average annual total returns for Class I shares of the Fund for the 1 year and five year periods and since commencement of operations on October 2, 1995 were -25.96%, 13.70% and 14.60%, respectively. 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: 41 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 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 Class A, Class B or Class C, this calculation assumes the maximum sales charge when incurred is included in the initial investment or the CDSC is 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 or Class C shares or the CDSC on Class B or Class C shares into account. Excluding the Fund's sales charge on Class A shares and the CDSC on Class B or Class C shares from a total return calculation produces a higher total return figure. The Fund may advertise yield, where appropriate. The Fund's yield is computed by dividing net investment income per share determined for a 30-day period by the maximum offering price per share (which includes the full sales charge) on the last day of the period, according to the following standard formula: 42 6 Yield = 2 ( [ ( a - b ) + 1 ] - 1 ) ------- cd Where: a = dividends and interest earned during the period. b = net expenses accrued during the period. c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends. d = the maximum offering price per share on the last day of the period (NAV where applicable). From time to time, in reports and promotional literature, the Fund's total return will be compared to indices of mutual funds such as Lipper Analytical Services, Inc.'s "Lipper - Mutual Fund Performance Analysis," a monthly publication which tracks net assets, total return and yield on mutual funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used for comparison purposes, as well as the Russell and Wilshire Indices. Performance rankings and ratings reported periodically in, and excerpts from, national financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S may also be utilized. The Fund's promotional and sales literature may make reference to the Fund's "beta". Beta is a reflection of the market related risk of the Fund by showing how responsive the Fund is to the market. The performance of the Fund is not fixed or guaranteed. Performance quotations should not be considered to be representations of performance of the Fund for any period in the future. The performance of the Fund is a function of many factors including its earnings, expenses and number of outstanding shares. Fluctuating market conditions; purchases, sales and maturities of portfolio securities; sales and redemptions of shares of beneficial interest; and changes in operating expenses are all examples of items that can increase or decrease the Fund's performance. BROKERAGE ALLOCATION Decisions concerning the purchase and sale of portfolio securities and the allocation of brokerage commissions are made by the Adviser pursuant to recommendations made by an investment committee of the Adviser, which consists of officers and directors of the Adviser and affiliates and officers 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 these transactions. 43 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 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 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 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 not make commitments 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, their policies and practices 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 Fund paid negotiated brokerage commissions in the amount of $4,453, $24,719 and $105,035, respectively. As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund may pay 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 commission is reasonable in light of the services provided and to such policies as the Trustees may adopt from time to time. For the fiscal year ended February 28, 2001, the Fund did not pay commissions as compensation to any brokers for research services such as industry, economic and company reviews and evaluations of securities. 44 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 the Affiliated Broker. During the fiscal years ended February 28, 1999, February 29, 2000 and February 28, 2001, the Fund did not execute any portfolio transactions with the Affiliated Broker. 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 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 Broker, has, as an investment adviser to the Fund, the obligation to provide investment management services, which include 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 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. 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. For purchases of equity securities, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. For high demand issues (for example, initial public offerings), shares will be allocated pro rata by account size as well as on the basis of account objective, account size ( a small account's allocation may be increased to provide it with a meaningful position), and the account's other holdings. In addition, an account's allocation may be increased if that account's portfolio manager was responsible for generating the investment idea or the portfolio manager intends to buy more shares in the secondary market. For fixed income accounts, generally securities will be allocated when appropriate among accounts based on account size, except if the accounts have different objectives or if an account is too small to get a meaningful allocation. For new issues, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. However, if a partial allocation is too small to be meaningful, it may be reallocated based on such factors as account objectives, duration benchmarks and credit and sector exposure. For example, value funds will likely not participate in initial public offerings 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. 45 TRANSFER AGENT SERVICES John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston, MA 02217-1000, a wholly owned indirect subsidiary of the Life Company, is the transfer and dividend paying agent for the Fund. The Fund pays Signature Services an annual fee of $20.00 for each Class A shareholder account and $22.50 for each Class B shareholder account and $21.50 for each Class C shareholder account. For Class A, B and C shares, 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 Investors Bank & Trust Company, 200 Clarendon Street, Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank & Trust Company performs custody, portfolio and fund accounting services. 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 MORE ABOUT RISK A fund's risk profile is largely defined by the fund's primary securities and investment practices. You may find the most concise description of the fund's risk profile in the prospectus. A fund is permitted to utilize -- within limits established by the trustees -- certain other securities and investment practices that have higher risks and opportunities associated with them. To the extent that the Fund utilizes these securities or practices, its overall performance may be affected, either positively or negatively. On the following pages are brief definitions of certain associated risks with them with examples of related securities and investment practices included in brackets. See the "Investment Objective and Policies" and "Investment Restrictions" sections of this Statement of Additional Information for a description of this Fund's investment policies. The Fund follows certain policies that may reduce these risks. As with any mutual fund, there is no guarantee that the Fund will earn income or show a positive return over any period of time -- days, months or years. TYPES OF INVESTMENT RISK Correlation risk The risk that changes in the value of a hedging instrument will not match those of the asset being hedged (hedging is the use of one investment to offset the effects of another investment). Incomplete correlation can result in unanticipated risks. (e.g., short sales, financial futures and options; securities and index options, currency contracts). Credit risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation. (e.g., borrowing; reverse repurchase agreements, repurchase agreements, securities lending, non-investment-grade securities, financial futures and options; securities and index options). Currency risk The risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign currency denominated investments and may widen any losses. (e.g., foreign equities, financial futures and options; securities and index options, currency contracts). Information risk The risk that key information about a security or market is inaccurate or unavailable. (e.g., non-investment-grade securities, foreign equities). A-1 Interest rate risk The risk of market losses attributable to changes in interest rates. With fixed-rate securities, a rise in interest rates typically causes a fall in values, while a fall in rates typically causes a rise in values. (e.g., non-investment-grade securities, financial futures and options; securities and index options). Leverage risk Associated with securities or practices (such as borrowing) that multiply small index or market movements into large changes in value. (e.g., borrowing; reverse repurchase agreements, when-issued securities and forward commitments). o Hedged When a derivative (a security whose value is based on another security or index) is used as a hedge against an opposite position that the fund also holds, any loss generated by the derivative should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. (e.g., short sales, financial futures and options securities and index options; currency contracts). o Speculative To the extent that a derivative is not used as a hedge, the fund is directly exposed to the risks of that derivative. Gains or losses from speculative positions in a derivative may be substantially greater than the derivative's original cost. (e.g., short sales, financial futures and options securities and index options; currency contracts). o Liquidity risk The risk that certain securities may be difficult or impossible to sell at the time and the price that the seller would like. The seller may have to lower the price, sell other securities instead or forego an investment opportunity, any of which could have a negative effect on fund management or performance. (e.g., non-investment-grand securities, short sales, restricted and illiquid securities, financial futures and options securities and index options; currency contracts). Management risk The risk that a strategy used by a fund's management may fail to produce the intended result. Common to all mutual funds. Market risk The risk that the market value of a security may move up and down, sometimes rapidly and unpredictably. These fluctuations may cause a security to be worth less than the price originally paid for it, or less than it was worth at an earlier time. Market risk may affect a single issuer, industry, sector of the economy or the market as a whole. Common to all stocks and bonds and the mutual funds that invest in them. (e.g., short sales, short-term trading, when-issued securities and forward commitments, non-investment-grade securities, foreign equities, financial futures and options; securities and index options restricted and illiquid securities). A-2 Natural event risk The risk of losses attributable to natural disasters, crop failures and similar events. (e.g., foreign equities). Opportunity risk The risk of missing out on an investment opportunity because the assets necessary to take advantage of it are tied up in less advantageous investments. (e.g., short sales, when-issued securities and forward commitments; financial futures and options; securities and index options, currency contracts). Political risk The risk of losses attributable to government or political actions, from changes in tax or trade statutes to governmental collapse and war.(e.g., foreign equities). Valuation risk The risk that a fund has valued certain of its securities at a higher price than it can sell them for. (e.g., non-investment-grade securities, restricted and illiquid securities). A-3 APPENDIX B 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 characterizes 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. S&P describes its lower ratings for corporate bonds as follows: 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. Debt rated BB, B, CCC, or CC is regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. 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. B-1 Issuers rated P- (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. S&P 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. B-2 FINANCIAL STATEMENTS The financial statements listed below are included in the Fund's 2001 Annual Report to Shareholder's 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 Core Growth Fund (file nos. 33-86102 and 811-8852). John Hancock Institutional Series Trust John Hancock Core Growth Fund Statement of Assets and Liabilities as of February 28, 2001. Statement of Operations for the year ended of February 28, 2001. Statement of Changes in Net Asset for each of the two years in the period ended February 28, 2001. Financial Highlights for each of the five years in the period ended February 28, 2001. Schedule of Investments as of February 28, 2001. Notes to Financial Statements. Report of Independent Auditors. F-1 John Hancock Core Growth Fund ANNUAL REPORT 2.28.01 [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, Vice 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 Fund's investments page 8 Financial statements page 12 For your information page 29 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. 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 and improved version will make the task easier and more meaningful. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Vice Chairman and Chief Executive Officer YOUR FUND AT A GLANCE The Fund seeks above-average total return by investing in large- capitalization stocks with high potential earnings growth. Over the last twelve months * Investors fled growth stocks, especially technology and telecommunications names. * The Fund's high stake in technology hurt near-term performance. * Health-care and financial stocks were positive contributors to returns, as their more reasonable prices and consistent earnings growth attracted investors. [Bar chart with heading "John Hancock Core Growth Fund." Under the heading is a note that reads "Fund performance for the year ended February 28, 2001." The chart is scaled in increments of 10% with -30% at the bottom and 0% at the top. The first bar represents the -26.26% total return for Class A. The second bar represents the -26.86% total return for Class B. The third bar represents the -26.81% total return for Class C. The fourth bar represents the -25.96 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."] Top 10 holdings 7.7% General Electric 6.8% Pfizer 5.3% Microsoft 4.8% Intel 4.0% Cisco Systems 3.8% AOL Time Warner 3.3% International Business Machines 2.7% Merck 2.4% EMC 2.0% Wal-Mart Stores As a percentage of net assets on February 28, 2001. BY COREEN KRAYSLER FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock Core Growth Fund MANAGERS' REPORT Volatility rocked the stock market throughout the past year, displacing high-flying growth stocks from their leadership positions. Rising interest rates early on, then a marked slowdown in economic growth, plus higher energy prices, conflict in the Middle East and rolling blackouts in California all fueled a flight to safety. Defensive stocks with steady earnings growth, especially in the financial, health-care and utilities sectors, benefited. Technology and telecommunications growth stocks, by contrast, took it on the chin. Technology stocks, which tumbled severely last spring, declined sharply again during the third quarter as personal computer (PC) and semiconductor sales slowed. Telecommunications stocks also fell as competition increased and financing tightened. By the fourth quarter, a clear-cut downturn in economic growth was crimping the earnings outlooks for all growth stocks. Although the Federal Reserve lowered interest rates early in the New Year, the market -- particularly growth sectors -- remained in a slump. "Volatility rocked the stock market throughout the past year, displacing high- flying growth stocks from their leadership positions." PERFORMANCE REVIEW The Russell 1000 Growth Index -- which is 50% in technology stocks -- returned -31.12% for the year ended February 28, 2001. John Hancock Core Growth Fund maintained its disciplined strategy of mirroring the Index's industry diversification, while focusing on inexpensive stocks with strong earnings growth prospects. The Fund's Class A, Class B, Class C, and Class I shares returned -26.26%, -26.86%, -26.81%, and -25.96%, respectively, at net asset value, during the same period. The average large-cap growth fund, by comparison, returned -29.22%, according to Lipper, Inc.1 Keep in mind that your net asset value return will differ from the Fund's if you were not invested for the exact same period and did not reinvest all distributions. See pages six and seven for historical performance information. TECHNOLOGY DISAPPOINTMENTS Most of the Fund's losses during the period came from our heavy investment in technology stocks, many of which plunged 50% or more during the period as earnings growth slowed. Our largest technology names were Intel, which makes the Pentium chips for PCs, and Cisco Systems, the dominant network provider for Internet traffic. Both stocks took nosedives as near-term demand for their products weakened. The Fund had sizable stakes in other technology-related companies, including EMC, a data storage company, and Sun Microsystems, which makes workstations and servers. These stocks tumbled as demand softened. Even names that had earlier been top performers for the Fund took a beating. Among them were Lucent Technologies and Corning, both of which were hurt as the build-out of new high-speed fiber-optic networks slowed. "Most of the Fund's losses during the period came from our heavy invest ment in technology stocks..." HEALTH-CARE, FINANCIAL WINNERS Gains in health care, which ended the period at 19% of the Fund's assets, offset some of our technology losses. Pharmaceutical stocks in particular did well as investors searched for companies that could grow earnings consistently even in an economic slowdown. Our top performer for the year period was Pfizer, a drug company with diverse products and high earnings growth rates that recently acquired Warner-Lambert (another strong performer for the Fund). We also owned Merck, which did well by beating earnings expectations, and Johnson & Johnson. Other winners included Allergan, a drug company that focuses on treatments for eye diseases, and Cardinal Health, which distributes drugs to nursing homes. [Table at top left-hand side of page entitled "Top five standard industry classifications." The first listing is Computers 26%, the second is Medical 19%, the third Electronics 13%, the fourth Retail 9%, and the fifth Diversified operations 8%.] Outside the health-care sector, we did well owning financial and business services names. In the financial sector, our biggest gainer was AXA Financial, a diversified financial services company that was acquired by its parent. Citigroup, with its unparalleled global franchise, and Lincoln National, a life insurance and asset management company, also rallied as investors flocked to the financial sector. In addition, transaction processors like SunGard Data Systems, First Data and Fiserv did exceptionally well. These are companies that have steady businesses from settling credit card or equities transactions. [Pie chart at bottom of page with heading "Types of investments in the Fund As of February 28, 2001." The chart is divided into two sections (from top to left): Common stocks 97% and Short-term investments & other 3%.] BUYS AND SELLS We made relatively few changes to the Fund during the period. We sold a couple of technology names whose prospects had weakened, including Lucent Technologies, which faced accounting problems; JD Uniphase, which competes with Cisco Systems but without the same clout; and Dell Computer, which we knew would be hurt by weak PC sales. We then added to our stakes in tech stocks like Microsoft and IBM, which have more reasonable expectations regarding their earnings as well as more favorable outlooks going forward. In addition, we took advantage of market weakness to boost our investment in AOL Time Warner, which we believe has strong synergies from merging their complementary businesses, and General Electric, which should benefit from cost savings and synergies related to the Honeywell acquisition. We also bought a few new names, including Kohl's, a discount retailer that is exceptionally well managed and has great expansion opportunities. In addition, we began nibbling on health-care stocks like Invitrogen, a company that makes products used in genomic research, and Lincare Holdings, a home oxygen therapy company with improved prospects under the new administration. [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 Pfizer followed by an up arrow with the phrase "Acquisition of Warner-Lambert, strong new product line." The second listing is Yahoo! followed by a down arrow with the phrase "Declining advertising revenue, Internet downdraft." The third listing is Portal Software followed by a down arrow with the phrase "Slowdown in demand, customer bankruptcies."] "We expect continued economic weakness along with market volatility in the next six months." CAUTIOUS OUTLOOK We expect continued economic weakness along with market volatility in the next six months. Slowing corporate and consumer demand continues to affect many sectors. In addition, many companies are cutting jobs, which will further slow spending. We expect the Fed to respond with more interest-rate decreases, which usually take at least six to nine months to work their way through the system and stimulate the economy. As investors begin to focus on the potential economic rebound, we believe that the stock market -- especially growth stocks -- will benefit. This commentary reflects the views of the portfolio management team through the end of the Fund's period discussed in this report. Of course, the team's 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 ending February 28, 2001. The index used for comparison is the Russell 1000 Growth Index, an unmanaged capitalization- weighted price-only index, which is comprised of 1,000 of the largest capitalized U.S.-domiciled companies whose common stock is traded on the New York Stock Exchange. The securities in this index have a greater-than-aver age growth orientation. It is not possible to invest directly in an index. The returns reflect past results and should not be considered indicative of future performance.
Class A Class B Class C Class I* Index Inception date 7-1-99 7-1-99 7-1-99 10-2-95 -- Average annual returns with maximum sales charge (POP) One year -29.94% -30.45% -28.26% -25.96% -31.12% Five years -- -- -- 13.70% 14.19% Since inception -14.84% -14.88% -13.29% 14.60% -- Cumulative total returns with maximum sales charge (POP) One year -29.94% -30.45% -28.26% -25.96% -31.12% Five years -- -- -- 90.05% 94.15% Since inception -23.45% -23.51% -21.11% 108.94% --
Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 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. Sales charge is not applicable for Class I shares. 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 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. * For certain institutional investors. GROWTH OF $250,000 This chart shows what happened to a hypothetical $250,000 investment of Class I* shares for the period indicated. For comparison, we've shown the same investment in the Russell 1000 Growth Index. Line chart with the heading "GROWTH OF $250,000." Within the chart are two lines. The first line represents the Russell 1000 Growth Index and is equal to $534,060 as of February 28, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Core Growth Fund, before sales charge, and is equal to $522,361 as of February 28, 2001. Class A Class B Class C Inception date 7-1-99 7-1-99 7-1-99 Without sales charge $8,056 $7,962 $7,967 With maximum sales charge $7,655 $7,643 $7,888 Index $8,301 $8,301 $8,301 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 A, Class B and Class C shares, as of February 28, 2001. Performance will vary based on the difference in sales charges paid by shareholders investing in the different classes and the fee structure of those classes. * For certain institutional investors. FUND'S INVESTMENTS Securities owned by the Fund on February 28, 2001. This schedule is 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.
SHARES ISSUER VALUE COMMON STOCKS 97.17% $66.419,741 (Cost $78,609,673) Advertising 0.98% $666,830 2,600 Interpublic Group of Cos., Inc. (The) 97,760 7,200 Lamar Advertising Co.* 297,000 3,000 Omnicom Group, Inc. 272,070 Banks -- United States 0.61% 413,566 2,700 Bank of New York Co., Inc. (The) 139,806 11,800 U.S. Bancorp 273,760 Building 0.52% 352,835 8,500 Black & Decker Corp. (The) 352,835 Chemicals 0.34% 231,920 5,200 Praxair, Inc. 231,920 Computers -- Services 2.10% 1,437,396 16,600 First Data Corp. 1,025,216 7,400 SunGard Data Systems, Inc.* 412,180 Computers -- Software 9.56% 6,534,459 7,500 Adobe Systems, Inc. 217,969 15,500 BEA Systems, Inc.* 594,813 15,900 Cadence Design Systems, Inc.* 403,065 6,300 Intuit, Inc.* 259,087 61,200 Microsoft Corp.* 3,610,800 44,800 Oracle Corp.* 851,200 5,600 PeopleSoft, Inc.* 180,600 10,900 Siebel Systems, Inc.* 416,925 Computers 14.12% 9,654,207 4,600 Brocade Communications Systems, Inc.* 178,537 114,800 Cisco Systems, Inc.* 2,719,325 40,800 EMC Corp.* 1,622,208 22,700 International Business Machines Corp. 2,267,730 6,300 Juniper Networks, Inc.* 406,744 5,800 Network Appliance, Inc.* 172,550 12,200 Palm, Inc.* 211,975 55,400 Sun Microsystems, Inc.* 1,101,075 15,000 VERITAS Software Corp.* 974,063 Diversified Operations 8.47% 5,792,515 112,700 General Electric Co. 5,240,550 10,100 Tyco International Ltd. 551,965 Electronics 13.38% 9,143,046 11,700 Altera Corp.* 270,562 13,100 American Power Conversion Corp.* 159,656 9,300 Analog Devices, Inc.* 346,890 8,000 Applied Materials, Inc.* 338,000 116,000 Intel Corp. 3,313,250 11,600 Jabil Circuit, Inc.* 260,768 7,300 Lam Research Corp.* 156,950 14,000 Linear Technology Corp. 554,750 11,300 Maxim Integrated Products, Inc.* 521,213 6,300 Novellus Systems, Inc.* 243,337 4,200 QLogic Corp.* 156,975 18,000 Sanmina Corp.* 536,625 6,600 Sawtek, Inc.* 108,900 28,500 Solectron Corp.* 776,625 9,400 Tektronix, Inc.* 232,086 16,600 Texas Instruments, Inc. 490,530 5,600 Waters Corp.* 368,816 7,900 Xilinx, Inc.* 307,113 Energy 0.31% 213,552 4,800 Calpine Corp.* 213,552 Fiber Optics 0.27% 181,406 2,700 CIENA Corp.* 181,406 Finance 1.34% 919,121 12,200 Citigroup, Inc. 599,996 6,900 Concord EFS, Inc.* 319,125 Food 0.47% 318,843 14,700 Sara Lee Corp. 318,843 Instruments -- Scientific 0.42% 290,220 4,200 Applera Corp. -- Applied Biosystems Group 290,220 Insurance 2.02% 1,380,697 10,800 Hartford Financial Services Group, Inc. (The) 689,580 10,900 Lincoln National Corp. 478,183 4,600 St. Paul Cos., Inc. (The) 212,934 Manufacturing 0.66% 450,424 7,100 Danaher Corp. 450,424 Media 4.62% 3,159,860 59,500 AOL Time Warner, Inc.* 2,619,785 20,800 AT&T Corp. -- Liberty Media Group* 305,760 4,100 Clear Channel Communications, Inc.* 234,315 Medical 19.17% 13,100,184 5,900 Allergan, Inc. 513,005 12,600 ALZA Corp.* 498,330 12,000 American Home Products Corp. 741,240 6,500 Aviron* 272,594 16,600 Bristol-Myers Squibb Co. 1,052,606 2,300 Cephalon, Inc.* 126,644 3,600 CV Therapeutics, Inc.* 128,700 4,100 Enzon, Inc.* 260,606 2,200 Invitrogen Corp.* 177,100 4,800 Johnson & Johnson 467,184 4,700 Lincare Holdings, Inc.* 277,006 9,800 Medtronic, Inc. 501,564 22,600 Merck & Co., Inc. 1,812,520 104,000 Pfizer, Inc. 4,680,000 11,800 Pharmacia Corp. 610,060 15,900 Schering-Plough Corp. 639,975 3,800 Universal Health Services, Inc. (Class B)* 341,050 Office 0.54% 371,000 7,000 Avery Dennison Corp. 371,000 Oil & Gas 0.88% 599,260 2,300 El Paso Energy Corp. 161,690 9,400 Noble Drilling Corp.* 437,570 Retail 8.83% 6,037,015 4,600 CVS Corp. 280,600 14,600 Family Dollar Stores, Inc. 383,396 5,578 Home Depot, Inc. (The) 237,065 16,700 Kohl's Corp.* 1,100,697 8,100 Lowe's Cos., Inc. 452,628 20,200 RadioShack Corp. 864,560 7,900 Tiffany & Co. 245,769 11,800 TJX Cos., Inc. 360,844 16,900 Walgreen Co. 749,008 27,200 Wal-Mart Stores, Inc. 1,362,448 Telecommunications 6.69% 4,575,585 12,800 Broadwing, Inc.* 301,056 6,200 Comverse Technology, Inc.* 464,613 18,700 Corning, Inc. 506,770 6,100 EchoStar Communications Corp.* 159,362 18,200 General Motors Corp. (Class H)* 412,594 12,500 QUALCOMM, Inc.* 685,156 25,400 Qwest Communications International, Inc.* 939,038 9,000 Scientific-Atlanta, Inc. 422,100 27,200 Sprint PCS* 684,896 Utilities 0.87% 595,800 6,600 Duke Energy Corp. 268,950 5,000 Exelon Corp. 326,850 INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s omitted) VALUE SHORT-TERM INVESTMENTS 0.01% $3,000 (Cost $3,000) Joint Repurchase Agreement 0.01% 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% $3 3,000 TOTAL INVESTMENTS 97.18% $66,422,741 OTHER ASSETS AND LIABILITIES, NET 2.82% $1,929,789 TOTAL NET ASSETS 100.00% $68,352,530 * 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.
FINANCIAL STATEMENTS ASSETS AND LIABILITIES February 28, 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 $78,612,673) $66,422,741 Cash 849 Receivable for investments sold 2,042,211 Dividends and interest receivable 27,754 Other assets 3,464 Total assets 68,497,019 LIABILITIES Payable for shares repurchased 38,531 Payable to affiliates 74,083 Other payables and accrued expenses 31,875 Total liabilities 144,489 NET ASSETS Capital paid-in 88,295,360 Accumulated net realized loss on investments (7,752,604) Net unrealized depreciation of investments (12,189,932) Accumulated net investment loss (294) Net assets $68,352,530 NET ASSET VALUE PER SHARE Based on net asset values and shares outstanding Class A ($40,054,925 [DIV] 2,792,209 shares) $14.35 Class B ($23,748,257 [DIV] 1,674,385 shares) $14.18 Class C ($1,817,177 [DIV] 128,068 shares) $14.19 Class I ($2,732,171 [DIV] 189,309 shares) $14.43 MAXIMUM OFFERING PRICE PER SHARE Class A-1 ($14.35 [DIV] 95.0%) $15.11 Class C ($14.19 [DIV] 99.0%) $14.33 1 On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales, the offering price is reduced. See notes to financial statements. OPERATIONS For the year ended February 28, 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 Dividends (net of foreign withholding taxes of $158) $319,179 Interest (including income on securities loaned of $3,433) 97,686 Total investment income 416,865 EXPENSES Investment management fee 568,631 Class A distribution and service fee 100,672 Class B distribution and service fee 286,188 Class C distribution and service fee 17,070 Transfer agent fee 186,567 Custodian fee 47,116 Registration and filing fees 25,985 Auditing fee 18,950 Printing 16,937 Accounting and legal services fee 13,590 Miscellaneous 4,405 Trustees' fees 2,948 Interest expense 2,259 Organizational expense 1,018 Legal fees 717 Total expenses 1,293,053 Less expense reductions (62,511) Net expenses 1,230,542 Net investment loss (813,677) REALIZED AND UNREALIZED GAIN (LOSS) Net realized loss on investments (6,132,232) Change in net unrealized appreciation (depreciation) on investments (17,794,404) Net realized and unrealized loss (23,926,636) Decrease in net assets from operations ($24,740,313) 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 and any increase or decrease in money shareholders invested in the Fund. YEAR YEAR ENDED ENDED 2-29-00 2-28-01 INCREASE (DECREASE) IN NET ASSETS From operations Net investment loss ($104,658) ($813,677) Net realized gain (loss) 768,558 (6,132,232) Change in net unrealized appreciation (depreciation) 3,946,942 (17,794,404) Increase (decrease) in net assets resulting from operations 4,610,842 (24,740,313) Distributions to shareholders From net realized gain on investments sold Class A (8,052) (668,487) Class B (10,306) (515,655) Class C (394) (34,612) Class I (449,026) (89,326) (467,778) (1,308,080) From fund share transactions 40,985,257 41,418,025 NET ASSETS Beginning of period 7,854,577 52,982,898 End of period 1 $52,982,898 $68,352,530 1 Includes accumulated net investment loss of $89 and $294, 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 2-29-00 1 2-28-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $18.14 $19.80 Net investment loss 2 (0.05) (0.18) Net realized and unrealized gain (loss) on investments 1.73 (4.95) Total from investment operations 1.68 (5.13) Less distributions from net realized gain (0.02) (0.32) Net asset value, end of period $19.80 $14.35 Total return 3,4 (%) 9.25 5 (26.26) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $21 $40 Ratio of expenses to average net assets (%) 1.25 6 1.49 Ratio of adjusted expenses to average net assets 7,8 (%) 1.63 6 1.58 Ratio of net investment loss to average net assets (%) (0.39)6 (0.91) Portfolio turnover (%) 72 115 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS B SHARES PERIOD ENDED 2-29-00 1 2-28-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $18.14 $19.73 Net investment loss 2 (0.13) (0.31) Net realized and unrealized gain (loss) on investments 1.74 (4.92) Total from investment operations 1.61 (5.23) Less distributions from net realized gain (0.02) (0.32) Net asset value, end of period $19.73 $14.18 Total return 3,4 (%) 8.86 5 (26.86) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $23 $23 Ratio of expenses to average net assets (%) 1.95 6 2.19 Ratio of adjusted expenses to average net assets 7,8 (%) 2.33 6 2.28 Ratio of net investment loss to average net assets (%) (1.09)6 (1.60) Portfolio turnover (%) 72 115 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS C SHARES PERIOD ENDED 2-29-00 1 2-28-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $18.14 $19.73 Net investment loss 2 (0.13) (0.31) Net realized and unrealized gain (loss) on investments 1.74 (4.91) Total from investment operations 1.61 (5.22) Less distributions from net realized gain (0.02) (0.32) Net asset value, end of period $19.73 $14.19 Total return 3,4 (%) 8.86 5 (26.81) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $0.9 $2 Ratio of expenses to average net assets (%) 1.95 6 2.19 Ratio of adjusted expenses to average net assets 7,8 (%) 2.33 6 2.28 Ratio of net investment loss to average net assets (%) (1.09)6 (1.61) Portfolio turnover (%) 72 115
See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS I SHARES 9 PERIOD ENDED 2-28-97 2-28-98 2-28-99 2-29-00 2-28-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $9.29 $11.01 $14.88 $17.65 $19.83 Net investment income (loss) 2 0.05 0.04 0.01 (0.01) (0.07) Net realized and unrealized gain (loss) on investments 2.16 4.34 3.40 3.31 (5.01) Total from investment operations 2.21 4.38 3.41 3.30 (5.08) Less distributions from net investment income (0.04) (0.03) (0.02) -- -- in excess of net investment income -- -- -- 10 -- -- from net realized gain (0.45) (0.48) (0.62) (1.12) (0.32) Total distributions (0.49) (0.51) (0.64) (1.12) (0.32) Net asset value, end of period $11.01 $14.88 $17.65 $19.83 $14.43 Total return 3,4 (%) 24.19 40.52 22.92 19.67 (25.96) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $0.9 $5 $8 $9 $3 Ratio of expenses to average net assets (%) 0.95 0.95 0.95 0.95 0.95 Ratio of adjusted expenses to average net assets 7,8 (%) 7.74 3.52 1.98 1.33 1.04 Ratio of net investment income (loss) to average net assets (%) 0.49 0.34 0.06 (0.06) (0.35) Portfolio turnover (%) 142 91 54 72 115 1 Class A, Class B and Class C shares began operations on July 1, 1999. Class I shares began operations on October 2, 1995. 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 The 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 Effective July 1, 1999, existing shares of the Fund were designated Class I shares. 10 Less than $0.01 per share. See notes to financial statements.
NOTES TO STATEMENTS NOTE A Accounting policies John Hancock Core Growth Fund ("the Fund") is a diversified series of John Hancock Institutional Series Trust (the "Trust"), an open-end management investment company, registered under the Investment Company Act of 1940. The investment objective of the Fund is to seek above-average total return by investing in large-capitalization stocks with high potential earnings growth. 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 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. Capital gains realized on some foreign securities are subject to foreign taxes, which are accrued as applicable. 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. Organization expenses Expenses incurred in connection with the organization of the Fund have been capitalized and are being charged to the Fund's operations ratably over a five-year period that began with the commencement of the investment operations of the Fund. 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 average daily loan balance during the year for which loans were outstanding amounted to $4,581,000. The weighted average interest rate was 6.00%. Interest expense includes $2,259 paid under the line of credit. There was no outstanding borrowing under the line of credit on February 28, 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. There were no securities loaned as of February 28, 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. Additionally, net capital losses of $5,934,974 attributable to security transactions occurring after October 31, 2000 are treated as arising on the first day (March 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 or, in the case of some foreign securities, on the date thereafter when the Fund identifies 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 Fund records 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. Dividends 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) 0.80% of the first $500,000,000 of the Fund's average daily net asset value and (b) 0.75% of the Fund's average daily net asset value in excess of $500,000,000. The Fund and the Adviser have a subadvisory contract with Independence Investment LLC ("IIL," formerly Independence Investment Associates, Inc.) IIL is a wholly owned indirect subsidiary of John Hancock Life Insurance Company ("JHLICo"). The Fund is not responsible for payment of subadviser's fees. The Adviser has agreed to limit the Fund's expenses (excluding 12b-1 fee and the transfer agent fee) to 0.90% of the Fund's average daily net asset at least until June 30, 2001. Accordingly, the reduction in the Fund's expenses amounted to $62,511 for the year ended February 28, 2001. The Adviser reserves the right to terminate this limitation in the future. 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 February 28, 2001, JH Funds received net up-front sales charges of $519,459 with regard to sales of Class A shares. Of this amount, $36,155 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $348,882 was paid as sales commissions to unrelated broker-dealers and $134,422 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. The Adviser's indirect parent, JHLICo, is the indirect sole shareholder of Signator Investors. During the year ended February 28, 2001, JH Funds received net up-front sales charges of $35,973 with regard to sales of Class C shares. Of this amount, $30,971 was paid as sales commissions to unrelated broker-dealers and $5,002 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 will be 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 February 28, 2001, CDSCs received by JH Funds amounted to $94,654 for Class B shares and $497 for Class C shares. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc. ("Signature Services"), an indirect subsidiary of JHLICo. The Fund paid Signature Services a monthly transfer agent fee equivalent, on an annual basis, to 0.05% of its average daily net assets, through June 30, 2000. Effective July 1, 2000, Class A, Class B and Class C shares pay monthly transfer agent fees based on the number of shareholder accounts for Class A, Class B and Class C shares, plus certain out-of-pocket expenses. For Class I shares, the Fund pays Signature Services a monthly transfer agent fee equivalent, on an annual basis, to 0.05% of the average daily net assets attributable to Class I shares. 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 less than 0.02% of the average net assets of the 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 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 Compensation 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 February 28, 2001, aggregated $116,636,573 and $78,760,870, respectively. The cost of investments owned at February 28, 2001 (including short-term investments) for federal income tax purposes was $80,402,155. Gross unrealized appreciation and depreciation of investments aggregated $4,723,991 and $18,703,405, respectively, resulting in net unrealized depreciation of $13,979,414. NOTE D Fund share transactions The 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 2-29-00 YEAR ENDED 2-28-01 SHARES AMOUNT SHARES AMOUNT CLASS A SHARES 1 Sold 1,519,350 $28,037,749 4,170,090 $78,607,221 Distributions reinvested 616 11,717 35,641 656,530 Repurchased (468,286) (8,668,556) (2,465,202) (45,602,022) Net increase 1,051,680 $19,380,910 1,740,529 $33,661,729 CLASS B SHARES 1 Sold 1,278,590 $23,451,319 923,333 $18,569,923 Distributions reinvested 614 11,341 22,936 418,902 Repurchased (127,150) (2,412,874) (423,938) (8,285,894) Net increase 1,152,054 $21,049,786 522,331 $10,702,931 CLASS C SHARES 1 Sold 48,989 $896,165 112,707 $2,276,333 Distributions reinvested 29 552 1,834 33,680 Repurchased (2,653) (50,979) (32,838) (649,067) Net increase 46,365 $845,738 81,703 $1,660,946 CLASS I SHARES Sold 177,003 $3,265,932 170,572 $3,426,290 Distributions reinvested 26,179 449,001 4,818 89,090 Repurchased (218,474) (4,006,110) (415,813) (8,122,961) Net decrease (15,292) ($291,177) (240,423) ($4,607,581) NET INCREASE 2,234,807 $40,985,257 2,104,140 $41,418,025
1 Class A, Class B and Class C shares commenced operations on July 1, 1999. NOTE E Reclassification of accounts During the year ended February 28, 2001, the Fund has reclassified amounts to reflect an increase in net realized loss on investments of $607,512, a decrease in accumulated net investment loss of $813,472 and a decrease in capital paid-in of $205,960. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary differences, 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 Fund, are primarily attributable to certain differences in computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles and the Fund's use of the tax accounting practice known as equalization. The calculation of net investment income (loss) per share in the financial highlights excludes these adjustments. AUDITORS' REPORT Report of Deloitte & Touche LLP, Independent Auditors To the Board of Trustees and Shareholders, We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of John Hancock Core Growth Fund (the "Fund") as of February 28, 2001, the related statement of operations for the year then ended, the statement 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 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 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 at 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 the Fund at February 28, 2001, the results of its operations, the changes in its net assets, and its 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 30, 2001 TAX INFORMATION Unaudited. For federal income tax purposes, the following information is furnished with respect to the taxable distributions of the Fund for the fiscal year ended February 28, 2001. The Fund has designated distributions to shareholders of $519,416 as a long-term capital gain dividend. These amounts were reported on the 2000 U.S. Treasury Department form 1099-DIV. With respect to the ordinary dividends paid by the Fund for the fiscal year ended February 28, 2001, 84.64% of the dividends qualify for the corporate dividends received deduction. FOR YOUR INFORMATION 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 the 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 INVESTMENT ADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 SUBADVISER Independence Investment Associates, Inc. 53 State Street Boston, Massachusetts 02109 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 Deloitte & Touche LLP 200 Berkeley Street Boston, Massachusetts 02116 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."] 101 Huntington Avenue Boston, MA 02199-7603 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 Core Growth Fund. 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. 7900A 2/01 4/01 John Hancock Core Value Fund ANNUAL REPORT 2.28.01 [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, Vice 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 Fund's investments page 8 Financial statements page 13 For your information page 29 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. 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 and improved version will make the task easier and more meaningful. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Vice Chairman and Chief Executive Officer YOUR FUND AT A GLANCE The Fund seeks above-average total return through investments in large- capitalization stocks that appear relatively undervalued. Over the last twelve months * Value stocks rallied as investors looked for safe havens amid increased market volatility. * The Fund's utility, pharmaceutical and financial stocks helped boost performance. * The Fund shifted toward more defensive names in the fall in expectation of an economic downturn. [Bar chart with heading "John Hancock Core Value Fund." Under the heading is a note that reads "Fund performance for the year ended February 28, 2001." The chart is scaled in increments of 10% with 0% at the bottom and 20% at the top. The first bar represents the 20.02% total return for Class A. The second bar represents the 19.02% total return for Class B. The third bar represents the 18.98% total return for Class C. The fourth bar represents the 20.46% 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."] Top 10 holdings 4.4% ExxonMobil 4.2% Citigroup 2.5% Fannie Mae 2.4% SBC Communications 2.3% Philip Morris 2.3% Verizon Communications 2.1% American International Group 2.1% Johnson & Johnson 2.0% Merck 1.6% Bank of America As a percentage of net assets on February 28, 2001. BY JOHN C. FORELLI FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock Core Value Fund MANAGERS' REPORT While most areas of the stock market tumbled over the past year, value stocks enjoyed a rebound that began last spring when high-priced technology growth stocks fell from favor. Concerns about rising interest rates and slowing economic growth sent investors searching for stocks with reasonable prices, consistent earnings growth and achievable earnings expectations. As investors moved into safer-haven names, traditional value sectors like utilities, industrials, financials, health care and energy benefited. In the fall, signs that the economy was slowing faster than expected led to a broad downturn in the market. While growth sectors fell sharply, most value stocks held steady. In an effort to restore consumer confidence and revive economic growth, the Federal Reserve cut short-term interest rates early in the New Year, briefly buoying the hopes of investors. But growing concerns that companies would have difficulty meeting earnings expectations kept pressure on the market. For the year ended February 28, 2001, the Russell 1000 Value Index returned 16.63%, compared to a -31.12% return for the Russell 1000 Growth Index and a -8.19% return for the Standard & Poor's 500 Index. "...value stocks enjoyed a rebound that began last spring when high-priced technology growth stocks fell from favor." PERFORMANCE REVIEW In this environment, John Hancock Core Value Fund benefited from a diversified strategy and strong stock selection that targeted cheap names with improving prospects. For the year ended February 28, 2001, the Fund's Class A, Class B, Class C and Class I shares returned 20.02%, 19.02%, 18.98% and 20.46%, respectively, at net asset value. By comparison, the average multi-cap value fund returned 18.78%, according to Lipper, Inc.1 Keep in mind that your net asset value return will differ from these results if you were not invested for the exact same period and did not reinvest all distributions. For historical performance information, please see pages six and seven. STRONG STOCK PICKING The Fund gained ground from owning top-performing stocks in the utility sector such as Duke Energy, an electric utility company that gained over 80% for the period as investors began recognizing the value of its unregulated assets. In the health-care sector, Baxter International, which previously sold off its non core businesses to focus on its core blood and dialysis product businesses, did exceptionally well. Large diversified drug companies like Merck and Abbott Laboratories also charged ahead as earnings beat expectations. About 26% of the Fund's assets were in financials, which rallied as interest rates stabilized and then headed down. Among our best picks were AXA Financial, a diversified financial services company that was bought during the period by its parent; Washington Mutual, a solid banking and thrift company on the West Coast; and Fannie Mae, which benefited as lower interest rates stimulated mortgage activity. FleetBoston Financial and Citigroup also continued to produce steady returns. Other strong performers included El Paso Energy Corp., a leading natural gas company that benefited from rising gas prices, as well as quintessential defensive names like tobacco giant Philip Morris and energy leader ExxonMobil. "Sprint, WorldCom and AT&T were among our worst performers for the year..." TELECOM AND TECHNOLOGY DISAPPOINTMENTS Sprint, WorldCom and AT&T were among our worst performers for the year as competition and pricing pressures increased for long distance services. We sold all three stocks, starting in the fourth quarter. Our focus shifted toward telephone companies with strong local presences, including SBC Communications in the Southwest, Qwest Communications International in the West and Verizon Communications on the East Coast. We believe these companies will benefit from expanding their businesses to include long distance services. In the technology area, we managed to sidestep some of the carnage by focusing on transaction-processing companies like First Data, SunGard Data Systems and Fiserv. All did well, thanks to steady business and consistent earnings growth. Unfortunately, we also owned names like Motorola and Hewlett-Packard, which suffered as demand for their products weakened during the second half of the period. [Table at top left-hand side of page entitled "Top five standard industry classifications." The first listing is Finance 11%, the second is Medical 9%, the third Telecommunications 9%, the fourth Oil & gas 8%, and the fifth Insurance 8%.] [Pie chart at bottom of page with heading "Types of investments in the Fund As of February 28, 2001." The chart is divided into two sections (from top to left): Domestic common stocks 97% and Short-term investments 3%.] BUYS AND SELLS We repositioned the Fund for an economic downturn starting last fall. In the financial area, we cut or sold our stakes in companies like J.P. Morgan Chase, Merrill Lynch and Stilwell Financial, all of which have businesses that are closely tied to the capital markets. We expect the stock market's slowdown to make it tougher for companies like these to meet earnings expectations. In their place, we bought insurance companies like American International Group and St. Paul that are more likely to generate steady earnings growth. We also eliminated several pharmaceutical names whose stock prices had had strong runs, including Alza, American Home Products and Pharmacia. In their place, we added to our stakes in more defensive names that should do well in a slower growth environment. Among our additions were consumer noncyclicals like Sara Lee and Kimberly-Clark, as well as capital goods companies like General Electric and Tyco International. [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 Fannie Mae followed by an up arrow with the phrase "Lower interest rates stimulate refinancing activity." The second listing is First Data followed by an up arrow with the phrase "Rapid growth overseas in Western Union subsidiary." The third listing is Stilwell Financial followed by a down arrow with the phrase "Eroding prospects at growth money manager subsidiary."] VALUE STOCK ADVANTAGE Going forward, we expect the economy to weaken further as both consumer and corporate spending slows. The Federal Reserve will most likely respond by aggressively lowering interest rates. No one knows how long it will take for these rate cuts to work their way through the system and revive the economy. Given this uncertainty, we expect the stock market to remain volatile near term. In this environment, we believe defensive value stocks remain attractive. Their prices are still more reasonable than those of most technology stocks, even at current levels. Plus, many value stocks are economically sensitive, which means they will participate positively in any kind of economic recovery. "In this environment, we believe defensive value stocks remain attractive." This commentary reflects the views of the portfolio management team through the end of the Fund's period discussed in this report. Of course, the team's 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 ending February 28, 2001. The index used for comparison is the Russell 1000 Value Index, an unmanaged index, which measures the performance of those Russell 1000 companies with lower price-to-book ratios and higher forecasted growth values. It is not possible to invest directly in an index. The returns reflect past results and should not be consid ered indicative of future performance.
Class A Class B Class C Class I* Index Inception date 10-2-95 7-1-99 7-1-99 7-1-99 -- Average annual returns with maximum sales charge (POP) One year 14.05% 14.02% 16.78% 20.46% 16.63% Five years 13.19% -- -- -- 15.46% Since inception 14.61% -4.65% -2.90% -1.26% -- Cumulative total returns with maximum sales charge (POP) One year 14.05% 14.02% 16.78% 20.46% 16.63% Five years 85.80% -- -- -- 105.18% Since inception 109.03% -7.62% -4.77% -2.08% --
Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 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. Sales charge is not applicable for Class I shares. 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 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. * For certain institutional investors. GROWTH OF $10,000 This chart shows what happened to a hypothetical $10,000 investment of Class A shares for the period indicated. For comparison, we've shown the same investment in the Russell 1000 Value Index. Line chart with the heading "GROWTH OF $10,000." Within the chart are three lines. The first line represents the Russell 1000 Value Index and is equal to $22,732 as of February 28, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Core Value Fund, before sales charge, and is equal to $22,010 as of February 28, 2001. The third line represents the same hypothetical investment made in the John Hancock Core Value Fund, after sales charge, and is equal to $20,903 as of February 28, 2001. Class B Class C Class I* Inception date 7-1-99 7-1-99 7-1-99 Without sales charge $9,618 $9,615 $244,801 With maximum sales charge $9,234 $9,519 -- Index $9,933 $9,933 $248,318 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, and a $250,000 investment in the Fund's Class I shares, as of February 28, 2001. Performance will vary based on the difference in sales charges paid by shareholders investing in the different classes and the fee structure of those classes. * For certain institutional investors. FUND'S INVESTMENTS Securities owned by the Fund on February 28, 2001. This schedule is 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.
SHARES ISSUER VALUE COMMON STOCKS 97.33% $29,639,184 (Cost $27,045,842) Advertising 0.94% $285,354 3,400 Lamar Advertising Co.* 140,250 1,600 Omnicom Group, Inc. 145,104 Aerospace 2.38% 725,109 3,500 Boeing Co. (The) 217,700 2,300 General Dynamics Corp. 156,814 4,500 United Technologies Corp. 350,595 Automobile / Trucks 2.02% 615,717 13,700 Ford Motor Co. 380,997 16,300 Visteon Corp. 234,720 Banks -- United States 7.24% 2,203,701 9,900 Bank of America Corp. 494,505 7,800 Bank of New York Co., Inc. (The) 403,884 3,300 Comerica, Inc. 210,045 11,400 FleetBoston Financial Corp. 470,250 4,700 Mellon Financial Corp. 217,657 9,000 U.S. Bancorp 208,800 4,000 Wells Fargo & Co. 198,560 Beverages 1.44% 439,922 4,900 Anheuser-Busch Cos., Inc. 214,130 4,900 PepsiCo, Inc. 225,792 Building 1.75% 534,095 4,100 Black & Decker Corp. (The) 170,191 1,900 Centex Corp. 78,204 3,000 Danaher Corp. 190,320 3,800 Sherwin-Williams Co. 95,380 Chemicals 2.95% 898,342 5,000 Air Products & Chemicals, Inc. 202,750 5,500 Dow Chemical Co. 180,455 4,300 Du Pont (E.I.) de Nemours & Co. 187,867 2,200 Eastman Chemical Co. 113,190 4,800 Praxair, Inc. 214,080 Computers 3.53% 1,075,121 4,700 Cadence Design Systems, Inc.* 119,145 2,000 DST Systems, Inc.* 122,000 7,600 First Data Corp. 469,376 2,200 International Business Machines Corp. 219,780 2,600 SunGard Data Systems, Inc.* 144,820 Cosmetics & Personal Care 0.47% 144,364 3,400 Avon Products, Inc. 144,364 Diversified Operations 2.42% 736,986 2,800 Honeywell International, Inc. 130,788 2,300 Minnesota Mining & Manufacturing Co. 259,325 2,600 Parker-Hannifin Corp. 111,878 4,300 Tyco International Ltd. 234,995 Electronics 1.36% 413,825 5,700 Motorola, Inc. 86,469 3,700 Sanmina Corp.* 110,306 5,700 Solectron Corp.* 155,325 2,500 Tektronix, Inc.* 61,725 Finance 10.56% 3,215,046 26,100 Citigroup, Inc. 1,283,598 9,600 Fannie Mae 765,120 8,500 General Electric Co. 395,250 5,500 J.P. Morgan Chase & Co. 256,630 2,600 Stilwell Financial, Inc.* 82,940 8,400 Washington Mutual, Inc. 431,508 Food 1.71% 519,965 7,600 Archer-Daniels-Midland Co. 114,380 10,800 ConAgra, Inc. 212,544 8,900 Sara Lee Corp. 193,041 Insurance 8.18% 2,491,775 6,200 Allstate Corp. (The) 247,132 7,800 American International Group, Inc. 638,040 2,500 Chubb Corp. (The) 179,375 600 CIGNA Corp. 65,802 6,800 Hartford Financial Services Group, Inc. (The) 434,180 7,100 Lincoln National Corp. 311,477 1,200 Marsh & McLennan Cos., Inc. 128,400 1,600 PartnerRe Ltd. (United Kingdom) 84,496 6,900 St. Paul Cos., Inc. (The) 319,401 2,400 Torchmark Corp. 83,472 Leisure 1.14% 346,640 11,200 Disney (Walt) Co. (The) 346,640 Machinery 0.59% 179,095 1,700 Caterpillar, Inc. 70,720 2,500 Ingersoll-Rand Co. 108,375 Media 3.11% 948,456 28,300 AT&T Corp. -- Liberty Media Corp. (Class A)* 416,010 3,000 Clear Channel Communications, Inc.* 171,450 1,900 Gannett Co., Inc. 125,666 4,735 Viacom, Inc. (Class B)* 235,330 Medical 8.75% 2,663,732 7,500 Abbott Laboratories 367,425 3,300 Baxter International, Inc. 303,897 3,300 Bristol-Myers Squibb Co. 209,253 6,400 Johnson & Johnson 622,912 2,400 Lincare Holdings, Inc.* 141,450 7,700 Merck & Co., Inc. 617,540 1,600 Tenet Healthcare Corp.* 73,808 3,800 Trigon Healthcare, Inc.* 228,722 1,100 Universal Health Services, Inc. (Class B) 98,725 Metal 1.36% 413,552 9,300 AK Steel Holding Corp. 88,629 6,800 Alcoa, Inc. 243,168 8,300 Worthington Industries, Inc. 81,755 Office 0.56% 169,600 3,200 Avery Dennison Corp. 169,600 Oil & Gas 8.30% 2,527,832 1,100 Apache Corp. 64,570 4,300 Baker Hughes, Inc. 168,560 3,300 Chevron Corp. 282,678 3,300 Conoco Inc. (Class A)* 93,225 3,800 El Paso Energy Corp. 267,140 16,500 Exxon Mobil Corp. 1,337,325 2,000 Kerr-McGee Corp. 129,280 6,700 USX -- Marathon Group 185,054 Paper & Paper Products 1.13% 343,200 4,800 Kimberly-Clark Corp. 343,200 Printing -- Commercial 0.25% 77,090 2,600 Donnelley (R.R.) & Sons 77,090 Retail 5.08% 1,546,481 3,400 Brinker International, Inc.* 100,504 3,700 CVS Corp. 225,700 4,800 Family Dollar Stores, Inc. 126,048 2,600 Kohl's Corp.* 171,366 4,700 Limited, Inc. (The) 82,955 2,300 Lowe's Cos., Inc. 128,524 6,700 RadioShack Corp. 286,760 2,400 Safeway, Inc.* 130,344 6,000 TJX Cos., Inc. 183,480 2,500 Walgreen Co. 110,800 Soap & Cleaning Preparations 0.79% 239,700 3,400 Procter & Gamble Co. (The) 239,700 Telecommunications 8.74% 2,662,929 3,700 AT&T Wireless Group* 77,737 10,000 BellSouth Corp. 419,600 5,900 Broadwing, Inc.* 138,768 6,500 General Motors Corp. (Class H)* 147,355 9,200 Qwest Communications International, Inc.* 340,124 15,300 SBC Communications, Inc. 729,810 1,300 Telephone and Data Systems, Inc. 121,485 13,900 Verizon Communications 688,050 Tobacco 2.33% 708,246 14,700 Philip Morris Cos., Inc. 708,246 Transportation 1.17% 357,001 5,400 Burlington Northern Santa Fe Corp. 162,054 1,900 FedEx Corp.* 77,767 6,300 Southwest Airlines Co. 117,180 Utilities 7.08% 2,156,308 2,900 Allegheny Energy, Inc. 137,605 4,000 Constellation Energy Group, Inc. 170,800 3,800 Dominion Resources, Inc. 249,128 7,600 Duke Energy Corp. 309,700 1,800 Dynegy, Inc. (Class A) 84,600 5,400 Exelon Corp. 352,998 3,600 Mirant Corp. * 90,000 2,600 Pinnacle West Capital Corp. 120,770 8,700 Reliant Energy, Inc. 365,487 6,600 Williams Cos., Inc. (The) 275,220 INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s omitted) VALUE SHORT-TERM INVESTMENTS 2.77% $843,000 (Cost $843,000) Joint Repurchase Agreement 2.77% 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% $843 $843,000 TOTAL INVESTMENTS 100.10% $30,482,184 OTHER ASSETS AND LIABILITIES, NET (0.10%) ($29,246) TOTAL NET ASSETS 100.00% $30,452,938 * Non-income-producing security. The percentages 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.
FINANCIAL STATEMENTS ASSETS AND LIABILITIES February 28, 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 $27,888,842) $30,482,184 Cash 346 Receivable for shares sold 8,649 Dividends and interest receivable 56,987 Other assets 954 Total assets 30,549,120 LIABILITIES Payable for shares repurchased 39,136 Payable to affiliates 17,640 Other payables and accrued expenses 39,406 Total liabilities 96,182 NET ASSETS Capital paid-in 28,415,780 Accumulated net realized loss on investments (571,295) Net unrealized appreciation of investments 2,593,342 Undistributed net investment income 15,111 Net assets $30,452,938 NET ASSET VALUE PER SHARE Based on net asset values and shares outstanding Class A ($11,266,405 [DIV] 886,713 shares) $12.71 Class B ($14,811,330 [DIV] 1,167,050 shares) $12.69 Class C ($2,230,701 [DIV] 175,780 shares) $12.69 Class I ($2,144,502 [DIV] 168,639 shares) $12.72 MAXIMUM OFFERING PRICE PER SHARE Class A 1 ($12.71 [DIV] 95.0%) $13.38 Class C ($12.69 [DIV] 99.0%) $12.82 1 On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales, the offering price is reduced. See notes to financial statements. OPERATIONS For the year ended February 28, 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 Dividends (net of foreign withholding taxes of $93) $500,818 Interest (including securities lending income of $335) 40,520 Total investment income 541,338 EXPENSES Investment management fee 212,117 Class A distribution and service fee 30,560 Class B distribution and service fee 106,822 Class C distribution and service fee 11,198 Transfer agent fee 54,951 Registration and filing fees 38,856 Custodian fee 31,017 Auditing fee 18,950 Printing 12,608 Accounting and legal services fee 5,064 Miscellaneous 1,558 Organization expense 1,022 Trustees' fees 974 Legal fees 644 Interest expense 244 Total expenses 526,585 Less expense reductions (96,308) Net expenses 430,277 Net investment income 111,061 REALIZED AND UNREALIZED GAIN (LOSS) Net realized loss on investments sold (517,363) Change in net unrealized appreciation (depreciation) of investments 4,528,761 Net realized and unrealized gain 4,011,398 Increase in net assets from operations $4,122,459 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 and any increase or decrease in money shareholders invested in the Fund. YEAR YEAR ENDED ENDED 2-29-00 2-28-01 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income $111,434 $111,061 Net realized gain (loss) 533,950 (517,363) Change in net unrealized appreciation (depreciation) (2,969,929) 4,528,761 Increase (decrease) in net assets resulting from operations (2,324,545) 4,122,459 Distributions to shareholders From net investment income Class A (74,593) (74,887) Class B (8,743) (4,857) Class C (270) (157) Class I (3,333) (52,569) From net realized gain Class A (435,361) (20,026) Class B (54,266) (26,828) Class C (1,677) (3,088) Class I (4,252) (10,427) (582,495) (192,839) From fund share transactions 16,193,047 6,552,580 NET ASSETS Beginning of period 6,684,731 19,970,738 End of period 1 $19,970,738 $30,452,938 1 Includes undistributed net investment income of $36,324 and of $15,111, respectively. See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS A SHARES 1 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 2-28-97 2-28-98 2-28-99 2-29-00 2-28-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $9.47 $10.88 $13.93 $12.36 $10.70 Net investment income 2 0.23 0.21 0.15 0.13 0.10 Net realized and unrealized gain (loss) on investments 1.77 3.33 1.23 (1.01) 2.04 Total from investment operations 2.00 3.54 1.38 (0.88) 2.14 Distributions to shareholders From net investment income (0.19) (0.13) (0.18) (0.08) (0.10) From net realized gain (0.40) (0.36) (2.77) (0.70) (0.03) (0.59) (0.49) (2.95) (0.78) (0.13) Net asset value, end of period $10.88 $13.93 $12.36 $10.70 $12.71 Total return 3,4 (%) 21.36 32.97 9.87 (8.08) 20.02 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $1 $8 $7 $12 $11 Ratio of expenses to average net assets (%) 0.95 0.95 0.95 0.95 1.30 Ratio of adjusted expenses to average net assets 5,6 (%) 6.39 1.90 1.88 1.89 1.62 Ratio of net investment income to average net assets (%) 2.26 1.60 1.03 1.09 0.79 Portfolio turnover (%) 66 119 61 76 131 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS B SHARES PERIOD ENDED 2-29-00 7 2-28-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $13.35 $10.69 Net investment income (loss) 2 0.02 (0.01) Net realized and unrealized gain (loss) on investments (2.56) 2.05 Total from investment operations (2.54) 2.04 Distributions to shareholders From net investment income (0.02) (0.01) From net realized gain (0.10) (0.03) (0.12) (0.04) Net asset value, end of period $10.69 12.69 Total return 3,4 (%) (19.19) 8 19.02 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $8 $15 Ratio of expenses to average net assets (%) 1.95 9 2.09 Ratio of adjusted expenses to average net assets 5,6 (%) 2.59 9 2.41 Ratio of net investment income (loss) to average net assets (%) 0.19 9 (0.05) Portfolio turnover (%) 76 131 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS C SHARES PERIOD ENDED 2-29-00 7 2-28-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $13.35 $10.69 Net investment income (loss) 2 0.02 (0.01) Net realized and unrealized gain (loss) on investments (2.56) 2.04 Total from investment operations (2.54) 2.03 Distributions to shareholders From net investment income (0.02) -- 10 From net realized gain (0.10) (0.03) (0.12) (0.03) Net asset value, end of period $10.69 $12.69 Total return 3,4 (%) (19.19) 8 18.98 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $0.2 $2 Ratio of expenses to average net assets (%) 1.95 9 2.18 Ratio of adjusted expenses to average net assets 5,6 (%) 2.59 9 2.50 Ratio of net investment income (loss) to average net assets (%) 0.21 9 (0.16) Portfolio turnover (%) 76 131 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS I SHARES PERIOD ENDED 2-29-00 7 2-28-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $13.35 $10.70 Net investment income 2 0.09 0.12 Net realized and unrealized gain (loss) on investments (2.56) 2.07 Total from investment operations (2.47) 2.19 Distributions to shareholders From net investment income (0.08) (0.14) From net realized gain (0.10) (0.03) (0.18) (0.17) Net asset value, end of period $10.70 $12.72 Total return 3,4 (%) (18.71) 8 20.46 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $0.7 $2 Ratio of expenses to average net assets (%) 0.95 9 0.95 Ratio of adjusted expenses to average net assets 5,6 (%) 1.59 9 1.27 Ratio of net investment income to average net assets (%) 1.09 9 0.97 Portfolio turnover (%) 76 131 1 Effective July 1, 1999, existing shares of the Fund were designated Class A shares. The Fund, which had previously only been sold to institutional investors, also became available for sale to individual investors. 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 The 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 Class B, Class C and Class I shares began operations on July 1, 1999. 8 Not annualized. 9 Annualized. 10 Less than $0.01. See notes to financial statements.
NOTES TO STATEMENTS NOTE A Accounting policies John Hancock Core Value Fund ("the Fund") is a diversified series of John Hancock Institutional Series Trust, an open-end management investment company, registered under the Investment Company Act of 1940. The investment objective of the Fund is to seek above-average total return through investments in large-capitalization stocks that appear largely undervalued. 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 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. Capital gains realized on some foreign securities are subject to foreign taxes, which are accrued as applicable. 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. Organization expense Expenses incurred in connection with the organization of the Fund have been capitalized and are being charged to the Fund's operations ratably over a five-year period that began with the commencement of the investment operations of the Fund. 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 February 28, 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. There were no securities loaned as of February 28, 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 $86,884 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 carryfor wards expire on February 28, 2009. Additionally, net capital losses of $321,608 attributable to security transactions incurred after October 31, 2000 are treated as arising on the first day (March 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 or, in the case of some foreign securities, on the date thereafter when the Fund identifies 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 Fund records 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. Dividends 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) 0.80% of the first $500,000,000 of the Fund's average daily net asset value and (b) 0.75% of the Fund's average daily net asset value in excess of $500,000,000. The Fund and the Adviser have a subadvisory contract with Independence Investment LLC ("IIL," formerly Independence Investment Associates, Inc.) IIL is a wholly owned indirect subsidiary of John Hancock Life Insurance Company ("JHLICo"). The Fund is not responsible for payment of subadviser's fees. The Adviser has agreed to limit the Fund's expenses (excluding 12b-1 fee and the transfer agent fee) to 0.90% of the Fund's average daily net assets at least until June 30, 2001. Accordingly, the reduction in the Fund's expenses amounted to $84,228 for the year ended February 28, 2001. The Adviser reserves the right to terminate this limitation in the future. 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. JH Funds agreed not to impose the Fund's Class A 12b-1 fee until July 1, 2000. Accordingly, the reduction in the distribution and service fee amounted to $12,080 for the year ended February 28, 2001. This limitation was terminated on July 1, 2000. A maximum of 0.25% of distribution and service fee 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 February 28, 2001, JH Funds received net up-front sales charges of $71,320 with regard to sales of Class A shares. Of this amount, $7,999 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $52,688 was paid as sales commissions to unrelated broker-dealers and $10,633 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. The Adviser's indirect parent, JHLICo, is the indirect sole shareholder of Signator Investors. During the year ended February 28, 2001, JH Funds received net up-front sales charges of $21,380 with regard to sales of Class C shares. Of this amount, $19,646 was paid as sales commissions to unrelated broker-dealers and $1,734 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 will be 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 February 28, 2001, CDSCs received by JH Funds amounted to $31,518 for Class B shares and $798 for Class C shares. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc. ("Signature Services"), an indirect subsidiary of JHLICo. The Fund paid Signature Services a monthly transfer agent fee equivalent, on an annual basis, to 0.05% of its average daily net assets, through June 30, 2000. Effective July 1, 2000, Class A, Class B and Class C shares pay monthly transfer agent fees based on the number of shareholder accounts for Class A, Class B and Class C shares, plus certain out-of-pocket expenses. For Class I shares, the Fund pays Signature Services a monthly transfer agent fee equivalent, on an annual basis, to 0.05% of the average daily net assets attributable to Class I shares. 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 less than 0.02% of the average net assets of the 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 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 Compensation 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 February 28, 2001, aggregated $39,712,657 and $33,865,159, respectively. The cost of investments owned at February 28, 2001 for federal income tax purposes was $28,051,645. Gross unrealized appreciation and depreciation of investments aggregated $3,739,301 and $1,308,762, respectively, resulting in net unrealized appreciation of $2,430,539. NOTE D Fund share transactions The 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 2-29-00 YEAR ENDED 2-28-01 SHARES AMOUNT SHARES AMOUNT CLASS A SHARES Sold 983,090 $11,856,359 969,558 $11,902,659 Distributions reinvested 39,669 510,527 6,795 86,275 Repurchased (488,368) (5,886,379) (1,164,788) (14,110,468) Net increase (decrease) 534,391 $6,480,507 (188,435) ($2,121,534) CLASS B SHARES 1 Sold 795,287 $9,680,255 831,628 $10,273,196 Distributions reinvested 4,377 49,054 2,251 28,477 Repurchased (94,215) (1,095,387) (372,278) (4,562,772) Net increase 705,449 $8,633,922 461,601 $5,738,901 CLASS C SHARES 1 Sold 32,121 $391,553 181,694 $2,251,192 Distributions reinvested 120 1,264 217 2,761 Repurchased (8,107) (91,269) (30,265) (374,467) Net increase 24,134 $301,548 151,646 $1,879,486 CLASS I SHARES 1 Sold 62,785 $783,431 515,685 $6,276,886 Distributions reinvested 603 7,855 4,964 62,996 Repurchased (1,163) (14,216) (414,235) (5,284,155) Net increase 62,225 $777,070 106,414 $1,055,727 NET INCREASE 1,326,199 $16,193,047 531,226 $6,552,580 1 Class B, Class C and Class I shares commenced operations on July 1, 1999.
NOTE E Reclassification of accounts During the year ended February 28, 2001, the Fund has reclassified amounts to reflect a decrease in net realized loss on investments of $140, an increase in undistributed net investment income of $196 and a decrease in capital paid-in of $336. This represents the amount necessary 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 Fund, are primarily attributable to certain differences in computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles and the Fund's use of the tax accounting practice known as equalization. The calculation of net investment income (loss) per share in the financial highlights excludes these adjustments. AUDITORS' REPORT Report of Deloitte & Touche LLP, Independent Auditors To the Board of Trustees and Shareholders, We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of John Hancock Core Value Fund (the "Fund") as of February 28, 2001, the related statement of operations for the year then ended, the statement 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 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 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 at February 28, 2001 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 the Fund at February 28, 2001, the results of its operations, the changes in its net assets, and its 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 30, 2001 TAX INFORMATION Unaudited. For federal income tax purposes, the following information is furnished with respect to the taxable distributions of the Fund for the fiscal year ended February 28, 2001. With respect to the ordinary dividends paid by the Fund for the fiscal year ended February 28, 2001, 100.00% of the dividends qualify for the corporate dividends received deduction. FOR YOUR INFORMATION 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 the 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 INVESTMENT ADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 SUBADVISER Independence Investment Associates, Inc. 53 State Street Boston, Massachusetts 02109 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 Deloitte & Touche LLP 200 Berkeley Street Boston, Massachusetts 02116 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."] 101 Huntington Avenue Boston, MA 02199-7603 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 Core Value Fund. 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. 8800A 2/01 4/01 John Hancock Core Growth Fund SEMI ANNUAL REPORT 8.31.01 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 12 For your information page 25 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 YOUR FUND AT A GLANCE The Fund seeks capital apprecia- tion by investing in large-capitaliza- tion stocks with high potential earnings growth. Over the last six months * Stock prices declined across nearly all sectors, as the economy slowed significantly. * Semiconductor stocks were positive contributors to performance. * The Fund focused on stocks with consistent earnings growth even in a weak economy. [Bar chart with heading "John Hancock Core Growth Fund." Under the heading is a note that reads "Fund performance for the six months ended August 31, 2001." The chart is scaled in increments of 5% with -15% at the bottom and 0% at the top. The first bar represents the -12.61% total return for Class A. The second bar represents the -12.83% total return for Class B. The third bar represents the -12.90% total return for Class C. The fourth bar represents the -12.20 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."] Top 10 holdings 9.1% General Electric 6.8% Pfizer 4.9% Microsoft 4.2% Intel 2.9% IBM 2.6% Wal-Mart Stores 2.5% Merck 2.3% Cisco Systems 2.2% Exelon 2.1% Dominion Resources As a percentage of net assets on August 31, 2001. MANAGERS' REPORT BY COREEN KRAYSLER FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock Core Growth Fund Volatility plagued the stock market throughout the spring and summer months, leaving investors with few places to hide. Early on, stock prices sagged as investors worried about economic uncertainty and disappointing corporate earnings. By April, however, the market was in a turnaround mode, buoyed by the Federal Reserve's aggressive stance in lowering short-term interest rates. Unfortunately, the rally was short-lived, as prospects for an economic recovery were pushed further out and second-quarter earnings for many companies fell below expectations. Most sectors declined throughout the summer. Investors renewed their focus on reasonable valuations, economic sensitivity and stable earnings, leaving large-cap growth stocks well behind both small-cap and value stocks. The Russell 1000 Growth Index closed the six months ended August 31, 2001, with a -13.50% return, compared with a - -3.08% return for the Russell 1000 Value Index. "Volatility plagued the stock market throughout the spring and summer months, leaving investors with few places to hide." PERFORMANCE REVIEW In this unfavorable environment, John Hancock Core Growth Fund held fast to its disciplined strategy. The Fund's industry diversification and risk characteristics continued to parallel those of the Russell 1000 Growth Index. Our stock selection, however, differed from the index, as we concentrated on finding large-cap stocks with cheap valuations and strong earnings growth prospects. For the six months ended August 31, 2001, the Fund's Class A, Class B, Class C and Class I shares returned - -12.61%, -12.83%, -12.90% and -12.20%, respectively, at net asset value. While disappointing, these returns outpaced the average large-cap growth fund, which returned -15.16% over the same period, according to Lipper, Inc.1 Keep in mind that your net asset value return will differ from the Fund's if you were not invested for the exact same period and did not reinvest all distributions. See pages six and seven for historical performance information. "Our focus is on companies that we believe can meet earnings expectations even if the economy remains weak..." STRONG SELECTIONS The Fund benefited from having sizable stakes in Microsoft and IBM, both of which did well as investors searched for safe havens in a tumultuous time. Several investments in the semiconductor area also rallied nicely amid expectations of an impending upturn in the semiconductor cycle. Among them were Analog Devices and Texas Instruments, both of which make semiconductors for communications products. Cabot Microelectronics, which supplies materials used in the manufacture of semiconductors, also produced strong gains. In the telecom sector, QUALCOMM, which pioneered the new technology used in digital wireless communications, did quite well after signing an agreement to supply Nokia, the cell phone manufacturer. In addition, Lowe's, the home-improvement retailer, saw its stock price climb as sales and profits outpaced the competition. ALZA, a pharmaceutical company, benefited from being acquired at a nice premium by Johnson & Johnson. And Concord EFS, a financial transaction processor, did well as investors rewarded its steady revenue stream. NEAR-TERM DISAPPOINTMENTS Our losses in other areas, however, overshadowed these gains. In the technology sector, Cisco Systems faltered as telecom companies cut back on capital expenditures, while EMC lost its price advantage as demand weakened in the storage market. We held on to Cisco, which has the ability to gain market share even in a weak economic environment, but sold EMC. Telecom stocks continued to sink amid stiff competition, financing problems among new entrants and a glut of bandwidth. Qwest Communications International, a leading voice and data provider; Comverse Technology, which makes software for telecom companies; and Nokia all dropped sharply. With little prospect of near-term improvement, we eliminated most of our stakes in these names. Some of our retail investments also took hard hits, including CVS, a pharmacy chain struggling with an industry-wide shortage of pharmacists, and RadioShack, which lost money on its satellite television contracts. In the health-care sector, Waters and Applera Corp -- Applied Biosystems, which make medical instruments for biotech companies, suffered as demand slowed. Pfizer and Merck, large pharmaceuticals, posted somewhat less severe declines as investors abandoned health-care names. General Electric tumbled as well, hurt by management succession issues and the expectation that demand for its power turbines would slow. [Table at top left-hand side of page entitled "Top five industry groups." The first listing is Medical 23%, the second is Computers 19%, the third Retail 11%, the fourth Electronics 11%, and the fifth Utilities 4%.] [Pie chart at middle of page with heading "Portfolio diversification As a percentage of net assets on Aug. 31, 2001." The chart is divided into two sections (from top to left): Common stock 98% and Short-term investments 2%. ] CURRENT CONCENTRATION Our focus is on companies that we believe can meet earnings expectations even if the economy remains weak, or that will benefit early on in an economic recovery. We recently added American International Group (AIG), a leading global financial service provider, and Verizon Communications, an established telecom company, to the portfolio. Both have a history of stable earnings growth. We also have sizable stakes in Exelon and Dominion Resources, well-managed electric utilities that should fare well regardless of the economy. Another portfolio stalwart is Wal-Mart Stores, which has gained market share in the midst of a weak economy by expanding into the food business as well as into international markets. Our more economically sensitive investments include Intel and Dell Computer, both of which should benefit as corporations begin upgrading their personal computers, as expected, next year. We also recently added to our stake in Oracle, believing it will benefit from easier fourth-quarter year-over-year earnings comparisons. [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 Lowe's followed by an up arrow with the phrase "Strong sales, growing market share." The second listing is RadioShack followed by a down arrow with the phrase "Problems with satellite TV contracts." The third listing is Waters followed by a down arrow with the phrase "Slowdown in demand from biotech customers."] "We also plan to monitor carefully both consumer spending and confidence, as well as the Fed's moves and unemployment levels." A LOOK AHEAD We expect the Fed's numerous interest-rate cuts this past year along with recent tax cuts will eventually jumpstart the economy. The prospect of a recovery should in turn boost stock prices, which typically move up ahead of the economy. Days after the period ended, the nation was struck by horrific acts of terrorism. We plan to keep a close eye on potential repercussions to the markets and the economy of these events. We also plan to monitor carefully both consumer spending and confidence, as well as the Fed's moves and unemployment levels. This commentary reflects the views of the portfolio management team through the end of the Fund's period discussed in this report. Of course, the team's 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 August 31, 2001. The index used for comparison is the Russell 1000 Growth Index, an unmanaged capitalization- weighted price-only index, which is com- prised of 1,000 of the largest capitalized U.S.- domiciled companies whose common stock is traded on the New York Stock Exchange. The securities in this index have a greater- than-average growth orientation. It is not possible to invest directly in an index. Class A Class B Class C Class I 1 Index Inception date 7-1-99 7-1-99 7-1-99 10-2-95 -- Average annual returns with maximum sales charge (POP) One year -46.90% -47.24% -45.61% -43.73% -45.32% Five years -- -- -- 10.86% 10.31% Since inception -16.93% -16.67% -15.90% 10.80% -- Cumulative total returns with maximum sales charge (POP) Six months -17.01% -17.19% -14.61% -12.20% -13.50% One year -46.90% -47.24% -45.61% -43.73% -45.32% Five years -- -- -- 67.41% 63.30% Since inception -33.10% -32.64% -31.28% 83.46% -- Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 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. Sales charge is not applicable for Class I shares. 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. 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. 1 For certain types of investors, as described in the Fund's prospectus for Class I shares. GROWTH OF $10,000 This chart shows what happened to a hypothetical $10,000 investment in Class I1 shares for the period indicated. For comparison, we've shown the same investment in the Russell 1000 Growth Index. Line chart with the heading "GROWTH OF $10,000." Within the chart are two lines. The first line represents the Index and is equal to $20,894 as of August 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Core Growth Fund Class I1, before sales charge, and is equal to $18,479 as of August 31, 2001. Class A Class B Class C 2 Inception date 7-1-99 7-1-99 7-1-99 Without sales charge $7,040 $6,940 $6,940 With maximum sales charge $6,690 $6,732 $6,871 Index $7,181 $7,181 $7,181 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 A, Class B and Class C shares, as of August 31, 2001. Performance 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 For certain types of investors, as described in the Fund's prospectus for Class I shares. 2 No contingent deferred sales charge applicable. FINANCIAL STATEMENTS FUND'S INVESTMENTS Securities owned by the Fund on August 31, 2001 (unaudited). This schedule is 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.
SHARES ISSUER VALUE COMMON STOCKS 98.47% $46,489,629 (Cost $49,597,464) Advertising 1.37% $645,657 8,300 Omnicom Group, Inc. 645,657 Aerospace 0.29% 136,800 2,000 United Technologies Corp. 136,800 Banks -- United States 0.54% 256,944 10,600 U.S. Bancorp 256,944 Building 0.59% 279,243 7,100 Black & Decker Corp. (The) 279,243 Chemicals 0.90% 425,484 900 Cabot Microelectronics Corp.* 63,045 7,700 Praxair, Inc. 362,439 Computers -- Services 2.58% 1,218,277 6,200 Electronic Data Systems Corp. 365,676 2,700 First Data Corp. 177,795 7,700 Sabre Holdings Corp.* 324,786 14,800 SunGard Data Systems, Inc.* 350,020 Computers -- Software 8.61% 4,066,189 8,000 Adobe Systems, Inc. 268,880 400 BEA Systems, Inc.* 6,468 4,600 BMC Software, Inc.* 73,600 15,100 Cadence Design Systems, Inc.* 331,898 5,200 Citrix Systems, Inc.* 171,340 7,600 Intuit, Inc.* 287,128 40,800 Microsoft Corp.* 2,327,640 42,300 Oracle Corp.* 516,483 2,400 PeopleSoft, Inc.* 82,752 Computers 8.29% 3,912,860 3,100 CDW Computer Centers, Inc.* 126,480 67,100 Cisco Systems, Inc.* 1,095,743 30,400 Dell Computer Corp.* 649,952 13,900 International Business Machines Corp. 1,390,000 10,400 Lexmark International, Inc.* 541,320 6,900 Networks Associates, Inc.* 109,365 Cosmetics & Personal Care 0.42% 198,359 4,300 Avon Products, Inc. 198,359 Diversified Operations 9.87% 4,661,736 104,629 General Electric Co. 4,287,696 7,200 Tyco International Ltd. 374,040 Electronics 10.53% 4,971,106 6,500 Altera Corp.* 184,600 6,100 Analog Devices, Inc.* 291,458 7,600 Applied Materials, Inc.* 327,484 70,800 Intel Corp. 1,979,568 9,300 KLA-Tencor Corp.* 457,002 6,900 Linear Technology Corp. 283,452 6,100 Maxim Integrated Products, Inc.* 281,881 2,900 Novellus Systems, Inc.* 128,499 6,200 Tektronix, Inc.* 121,148 19,300 Texas Instruments, Inc. 638,830 7,100 Xilinx, Inc.* 277,184 Energy 0.29% 135,382 4,100 Calpine Corp.* 135,382 Finance 1.65% 779,583 9,700 Citigroup, Inc. 443,775 6,400 Concord EFS, Inc.* 335,808 Food 1.47% 695,118 12,700 General Mills, Inc. 563,118 6,000 Sara Lee Corp. 132,000 Instruments -- Scientific 0.39% 185,528 5,600 Waters Corp.* 185,528 Insurance 1.39% 654,440 5,800 American International Group, Inc. 453,560 3,100 Hartford Financial Services Group, Inc. (The) 200,880 Manufacturing 0.84% 394,547 7,100 Danaher Corp. 394,547 Media 3.01% 1,418,895 20,100 AOL Time Warner, Inc.* 750,735 5,500 EchoStar Communications Corp.* 154,880 20,100 Liberty Media Corp. (Class A)* 305,520 4,900 Viacom, Inc. (Class B)* 207,760 Medical 22.91% 10,817,935 5,900 Allergan, Inc. 426,275 16,300 American Home Products Corp. 912,800 10,400 Bristol-Myers Squibb Co. 583,856 3,700 Cephalon, Inc. 219,114 3,800 CV Therapeutics, Inc.* 189,126 5,600 Invitrogen Corp.* 380,968 16,500 Johnson & Johnson 869,715 12,400 Lincare Holdings, Inc.* 352,284 7,600 Medtronic, Inc. 346,104 17,800 Merck & Co., Inc. 1,158,780 83,400 Pfizer, Inc. 3,195,054 15,400 Pharmacia Corp. 609,840 20,300 Schering-Plough Corp. 774,039 5,200 Trigon Healthcare, Inc.* 336,700 5,000 UnitedHealth Group, Inc. 340,300 2,600 Universal Health Services, Inc. (Class B)* 122,980 Mortgage Banking 0.36% 167,662 2,200 Fannie Mae 167,662 Oil & Gas 1.51% 714,100 3,300 Baker Hughes, Inc. 108,702 9,400 BJ Services Co.* 210,842 8,400 Enron Corp. 293,916 3,700 Noble Drilling Corp.* 100,640 Retail 10.97% 5,179,624 5,300 Abercrombie & Fitch Co. (Class A)* 160,802 8,700 CVS Corp. 314,157 12,000 Family Dollar Stores, Inc. 360,000 16,000 Home Depot, Inc. (The) 735,200 12,000 Kohl's Corp.* 666,000 23,000 Lowe's Cos., Inc. 855,600 6,500 Target Corp. 225,225 8,000 TJX Cos., Inc. 280,800 10,800 Walgreen Co. 370,980 25,200 Wal-Mart Stores, Inc. 1,210,860 Telecommunications 4.29% 2,023,963 14,000 Broadwing, Inc.* 251,440 19,000 General Motors Corp. (Class H)* 354,350 11,200 Nokia Corp., American Depositary Receipts (ADR) (Finland) 176,288 9,300 QUALCOMM, Inc.* 547,305 21,000 Sprint Corp.* 524,580 3,400 Verizon Communications, Inc. 170,000 Tobacco 1.06% 502,440 10,600 Philip Morris Cos., Inc. 502,440 Utilities 4.34% 2,047,757 15,400 Dominion Resources, Inc. 969,430 1,100 Dynegy, Inc. (Class A) 46,387 18,900 Exelon Corp. 1,031,940 INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE SHORT-TERM INVESTMENTS 1.89% $893,000 (Cost $893,000) Joint Repurchase Agreement 1.89% 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% $893 893,000 TOTAL INVESTMENTS 100.36% $47,382,629 OTHER ASSETS AND LIABILITIES, NET (0.36%) ($168,564) TOTAL NET ASSETS 100.00% $47,214,065 * 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.
ASSETS AND LIABILITIES August 31, 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 $50,490,464) $47,382,629 Cash 498 Receivable for investments sold 14,732 Receivable for shares sold 44,027 Dividends and interest receivable 50,866 Other assets 8,227 Total assets 47,500,979 LIABILITIES Payable for shares repurchased 272,646 Payable to affiliates 14,268 Total liabilities 286,914 NET ASSETS Capital paid-in 74,208,692 Accumulated net realized loss on investments (23,516,176) Net unrealized depreciation of investments (3,107,835) Accumulated net investment loss (370,616) Net assets $47,214,065 NET ASSET VALUE PER SHARE Based on net asset values and shares outstanding Class A ($23,575,693 [DIV] 1,879,991 shares) $12.54 Class B ($19,917,489 [DIV] 1,611,855 shares) $12.36 Class C ($1,868,887 [DIV] 151,228 shares) $12.36 Class I ($1,851,996 [DIV] 146,195 shares) $12.67 MAXIMUM OFFERING PRICE PER SHARE Class A1 ($12.54 [DIV] 95%) $13.20 Class C ($12.36 [DIV] 99%) $12.48 1 On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the offering price is reduced. See notes to financial statements. OPERATIONS For the period ended August 31, 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 Dividends $194,708 Interest (including income on securities loaned of $333) 19,393 Total investment income 214,101 EXPENSES Investment management fee 237,708 Class A distribution and service fee 48,448 Class B distribution and service fee 113,644 Class C distribution and service fee 9,435 Class A, B and C transfer agent fee 144,848 Class I transfer agent fee 628 Registration and filing fee 36,656 Custodian fee 21,362 Printing 9,060 Auditing fee 8,948 Accounting and legal services fee 5,955 Miscellaneous 2,883 Trustees' fee 1,760 Legal fee 401 Interest expense 17 Total expenses 641,753 Less expense reductions (57,330) Net expenses 584,423 Net investment loss (370,322) REALIZED AND UNREALIZED GAIN (LOSS) Net realized loss on investments (15,763,572) Change in net unrealized appreciation (depreciation) on investments 9,082,097 Net realized and unrealized loss (6,681,475) Decrease in net assets from operations ($7,051,797) 1 Semiannual period from 3-01-01 through 8-31-01. 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 and any increase or decrease in money share- holders invested in the Fund. YEAR PERIOD ENDED ENDED 2-28-01 8-31-01 1 INCREASE (DECREASE) IN NET ASSETS From operations Net investment loss ($813,677) ($370,322) Net realized loss (6,132,232) (15,763,572) Change in net unrealized appreciation (depreciation) (17,794,404) 9,082,097 Decrease in net assets resulting from operations (24,740,313) (7,051,797) Distributions to shareholders From net realized gain on investments sold Class A (668,487) -- Class B (515,655) -- Class C (34,612) -- Class I (89,326) -- (1,308,080) -- From fund share transactions 41,418,025 (14,086,668) NET ASSETS Beginning of period 52,982,898 68,352,530 End of period 2 $68,352,530 $47,214,065 1 Semiannual period from 3-01-01 through 8-31-01. Unaudited. 2 Includes accumulated net investment loss of $294 and $370,616, 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 2-29-00 1 2-28-01 8-31-01 2 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $18.14 $19.80 $14.35 Net investment loss 3 (0.05) (0.18) (0.07) Net realized and unrealized gain (loss) on investments 1.73 (4.95) (1.74) Total from investment operations 1.68 (5.13) (1.81) Less distributions From net realized gain (0.02) (0.32) -- Net asset value, end of period $19.80 $14.35 $12.54 Total return 4,5 (%) 9.25 6 (26.26) (12.61)6 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $21 $40 $24 Ratio of expenses to average net assets (%) 1.25 7 1.49 1.71 7 Ratio of adjusted expenses to average net assets 8,9 (%) 1.63 7 1.58 1.90 7 Ratio of net investment loss to average net assets (%) (0.39)7 (0.91) (0.99)7 Portfolio turnover (%) 72 115 46 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS B SHARES PERIOD ENDED 2-29-00 1 2-28-01 8-31-01 2 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $18.14 $19.73 $14.18 Net investment loss 3 (0.13) (0.31) (0.12) Net realized and unrealized gain (loss) on investments 1.74 (4.92) (1.70) Total from investment operations 1.61 (5.23) (1.82) Less distributions From net realized gain (0.02) (0.32) -- Net asset value, end of period $19.73 $14.18 $12.36 Total return 4,5 (%) 8.86 6 (26.86) (12.83)6 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $23 $23 $20 Ratio of expenses to average net assets (%) 1.95 7 2.19 2.41 7 Ratio of adjusted expenses to average net assets 8,9 (%) 2.33 7 2.28 2.60 7 Ratio of net investment loss to average net assets (%) (1.09)7 (1.60) (1.68)7 Portfolio turnover (%) 72 115 46 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS C SHARES PERIOD ENDED 2-29-00 1 2-28-01 8-31-01 2 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $18.14 $19.73 $14.19 Net investment loss 3 (0.13) (0.31) (0.12) Net realized and unrealized gain (loss) on investments 1.74 (4.91) (1.71) Total from investment operations 1.61 (5.22) (1.83) Less distributions From net realized gain (0.02) (0.32) -- Net asset value, end of period $19.73 $14.19 $12.36 Total return 4,5 (%) 8.86 6 (26.81) (12.90)6 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $1 $2 $2 Ratio of expenses to average net assets (%) 1.95 7 2.19 2.41 7 Ratio of adjusted expenses to average net assets 8,9 (%) 2.33 7 2.28 2.60 7 Ratio of net investment loss to average net assets (%) (1.09)7 (1.61) (1.68)7 Portfolio turnover (%) 72 115 46 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS I SHARES 10 PERIOD ENDED 2-28-97 2-28-98 2-28-99 2-29-00 2-28-01 8-31-01 2 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $9.29 $11.01 $14.88 $17.65 $19.83 $14.43 Net investment income (loss) 3 0.05 0.04 0.01 (0.01) (0.07) (0.02) Net realized and unrealized gain (loss) on investments 2.16 4.34 3.40 3.31 (5.01) (1.74) Total from investment operations 2.21 4.38 3.41 3.30 (5.08) (1.76) Less distributions From net investment income (0.04) (0.03) (0.02) -- -- -- In excess of net investment income -- -- -- 11 -- -- -- From net realized gain (0.45) (0.48) (0.62) (1.12) (0.32) -- Net asset value, end of period $11.01 $14.88 $17.65 $19.83 $14.43 $12.67 Total return 4,5 (%) 24.19 40.52 22.92 19.67 (25.96) (12.20)6 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $1 $5 $8 $9 $3 $2 Ratio of expenses to average net assets (%) 0.95 0.95 0.95 0.95 0.95 0.95 7 Ratio of adjusted expenses to average net assets 8,9 (%) 7.74 3.52 1.98 1.33 1.04 1.14 7 Ratio of net investment income (loss) to average net assets (%) 0.49 0.34 0.06 (0.06) (0.35) (0.26)7 Portfolio turnover (%) 142 91 54 72 115 46 1 Class A, Class B and Class C shares began operations on 7-1-99. 2 Semiannual period from 3-01-01 through 8-31-01. 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 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. 10 Effective 7-1-99, existing shares of the Fund were designated Class I shares. 11 Less than $0.01 per share.
See notes to financial statements. NOTES TO STATEMENTS Unaudited. NOTE A Accounting policies John Hancock Core Growth Fund (the "Fund") is a diversified series of John Hancock Institutional Series Trust (the "Trust"), an open-end investment management company registered under the Investment Company Act of 1940. The investment objective of the Fund is to seek capital appreciation by investing in large-capitalization stocks with high potential earnings growth. 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 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. Capital gains realized on some foreign securities are subject to foreign taxes, which are accrued as applicable. 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 August 31, 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. There were no securities loaned as of August 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. 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 Fund identifies 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 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) 0.80% of the first $500,000,000 of the Fund's average daily net asset value and (b) 0.75% of the Fund's average daily net asset value in excess of $500,000,000. The Adviser has a subadvisory agreement with Independence Investment LLC, a wholly owned indirect subsidiary of John Hancock Life Insurance Company ("JHLICo"), the Adviser's indirect parent company. The Fund is not responsible for the payment of the subadviser's fees. The Adviser has agreed to limit the Fund's expenses, (excluding the distribution and service fee and the transfer agent fee) to 0.90% of the Fund's average daily net assets at least until June 30, 2002. Accordingly, the expense reduction amounted to $57,330 for the period ended August 31, 2001. The Adviser reserves the right to terminate this limitation in the future. 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 period ended August 31, 2001, JH Funds received net up-front sales charges of $67,389 with regard to sales of Class A shares. Of this amount, $14,200 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $42,690 was paid as sales commissions to unrelated broker-dealers and $10,499 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. JHLICo is the indirect sole shareholder of Signator Investors. During the period ended August 31, 2001, JH Funds received net up-front sales charges of $42,009 with regard to sales of Class C shares. Of this amount, $35,028 was paid as sales commissions to unrelated broker-dealers and $6,981 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 August 31, 2001, CDSCs received by JH Funds amounted to $132,943 for Class B shares and $969 for Class C shares. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc. ("Signature Services"), an indirect subsidiary of JHLICo. The Fund pays monthly transfer agent fees to Signature Services for Class A, Class B and Class C shares based on the number of shareholder accounts, plus certain out-of-pocket expenses, based on relative net asset values of the classes. 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 Compen-sation 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 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 2-28-01 PERIOD ENDED 8-31-01 1 SHARES AMOUNT SHARES AMOUNT CLASS A SHARES Sold 4,170,090 $78,607,221 866,328 $12,721,030 Distributions reinvested 35,641 656,530 91 1,388 Repurchased (2,465,202) (45,602,022) (1,778,637) (25,700,675) Net increase (decrease) 1,740,529 $33,661,729 (912,218) ($12,978,257) CLASS B SHARES Sold 923,333 $18,569,923 282,320 $3,862,724 Distributions reinvested 22,936 418,902 -- -- Repurchased (423,938) (8,285,894) (344,850) (4,653,004) Net increase (decrease) 522,331 $10,702,931 (62,530) ($790,280) CLASS C SHARES Sold 112,707 $2,276,333 75,507 $1,017,503 Distributions reinvested 1,834 33,680 -- -- Repurchased (32,838) (649,067) (52,347) (722,770) Net increase 81,703 $1,660,946 23,160 $294,733 CLASS I SHARES Sold 170,572 $3,426,290 43,280 $597,340 Distributions reinvested 4,818 89,090 -- -- Repurchased (415,813) (8,122,961) (86,394) (1,210,204) Net decrease (240,423) ($4,607,581) (43,114) ($612,864) NET INCREASE (DECREASE) 2,104,140 $41,418,025 (994,702) ($14,086,668) 1 Semiannual period from 3-01-01 through 8-31-01. Unaudited. 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 August 31, 2001, aggregated $26,699,723 and $39,948,180, respectively. The cost of investments owned at August 31, 2001 (including short-term investments), for federal income tax purposes was $51,780,931. Gross unrealized appreciation and depreciation of investments aggregated $3,236,401 and $7,634,703, respectively, resulting in net unrealized depreciation of $4,398,302. FOR YOUR INFORMATION 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 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 SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 PRINCIPAL DISTRIBUTOR John Hancock Funds, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 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 Core Growth Fund. 790SA 8/01 10/01 John Hancock Core Value Fund SEMI ANNUAL REPORT 8.31.01 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 13 For your information page 25 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 magnitude 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 YOUR FUND AT A GLANCE The Fund seeks above-average total return through investments in large- capitalization stocks that appear relatively undervalued. Over the last six months * Value stocks beat growth stocks as investors renewed their focus on valuation measures in the midst of continued economic weakness. * Basic materials, health-care and financial stocks were among the Fund's strongest contributors. * The Fund remained defensively positioned with a well-diversified portfolio of attractively priced stocks. [Bar chart with heading "John Hancock Core Value Fund." Under the heading is a note that reads "Fund performance for the six months ended August 31, 2001." The chart is scaled in increments of 2% with -6% at the bottom and 0% at the top. The first bar represents the -5.35% total return for Class A. The second bar represents the -5.67% total return for Class B. The third bar represents the -5.67% total return for Class C. The fourth bar represents the -5.11% 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."] Top 10 holdings 4.5% Citigroup 4.5% ExxonMobil 3.0% Verizon Communications 2.8% Bank of America 2.7% Fannie Mae 2.1% Washington Mutual 2.1% Wells Fargo 2.0% Philip Morris 2.0% Dominion Resources 1.9% SBC Communications As a percentage of net assets on August 31, 2001. MANAGERS' REPORT BY JOHN C. FORELLI FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock Core Value Fund The stock market continued its slide over the summer, despite the Federal Reserve's aggressive efforts to stimulate economic growth. The market rallied briefly in April and early May. But growing concerns that the economy was still deteriorating, along with a barrage of negative earnings announcements, soon sent stock prices tumbling. In this environment, investors favored safe-haven stocks with high dividend yields and little overseas exposure. Lower interest rates and cheaper capital especially helped small companies, which beat large-cap stocks. Value stocks outperformed growth sectors like technology and telecommunications, as investors renewed their focus on valuation. Defensive sectors, such as basic materials and health care, did particularly well. For the six months ended August 31, 2001, the Russell 1000 Value Index returned -3.08%, compared with the -13.50% return of the Russell 1000 Growth Index. "The stock market contin- ued its slide over the summer, despite the Federal Reserve's aggres- sive efforts to stimulate economic growth." PERFORMANCE REVIEW John Hancock Core Value Fund's strategy is to mirror the industry weightings and risk characteristics of the Russell 1000 Value Index, while focusing on stocks that are cheaper than the market average but that have improving prospects. Some of our stock selections were disappointments that caused the Fund's Class A, Class B, Class C and Class I shares to return -5.35%, -5.67%, -5.67% and -5.11%, respectively, at net asset value, during the six-month period ended August 31, 2001. The average multi-cap value fund, which includes investments in the better- performing small-cap sector, returned -2.42%, according to Lipper, Inc.1 Keep in mind that your net asset value return will differ from these results if you were not invested for the exact same period and did not reinvest all distributions. For historical performance information, please see pages six and seven. LOSSES IN TELECOM AND ENERGY Among our biggest disappointments were Qwest Communications International, a telecom service provider dogged with accounting problems during the period, and SBC Communications, a local phone operator whose Latin American investments scared away investors. A number of our energy-related names also tumbled, as oil and natural gas prices pulled back over the summer. They included Enron, an energy trader; BJ Services, an oil services company, and El Paso, a natural gas distributor. Our largest energy investment, ExxonMobil, however, benefited from being broadly diversified in a tough market. The Fund also sustained sizable losses from retailers like CVS, a drugstore chain whose expansion plans were postponed by an industry wide shortage of pharmacists, and RadioShack, which had shortfalls related to the sale of its satellite television contracts. Finally, Ford Motor Co. fell as the company cut back on production and laid off workers in the slow economy, causing investors to worry about the potential for future dividend cuts. "We boosted our stake in electric and gas utilities..." STRENGTH IN BASIC MATERIALS, HEALTH CARE Some of the Fund's strongest gains came from the basic materials sector. Excellent cost controls and improving balance sheets boosted the stock of specialty metal producers such as AK Steel Holding and Worthington Industries. Chemicals stocks, including Dow Chemical, Air Products & Chemicals and Praxair, also contributed positively to performance. These stocks benefited from reasonable valuations, attractive dividend yields and falling energy prices, which lowered their production costs. Investors also flocked to health-care stocks as health-care insurance prices went up. Companies like Trigon Healthcare, a health management organization, and Tenet Healthcare, a hospital management company, did well because of their consistent earnings growth in a weak economy. Johnson & Johnson, which we sold, rallied in anticipation of strong sales for a new product. Another good performer was Lowe's, the home-improvement retailer, which generated strong earnings growth through efficient operation and aggressive expansion. [Table at top left-hand side of page entitled "Top five industry groups." The first listing is Oil & gas 10%, the second is U.S. banks 10%, the third Utilities 8%, the fourth Telecommunications 8%, and the fifth Finance 8%.] [Pie chart at middle of page with heading "Portfolio diversification As a percentage of net assets on Aug. 31, 2001." The chart is divided into two sections (from top to left): Common stock 99% and Short-term investments 1%.] MIXED RESULTS FOR FINANCIALS Financial stocks, including banks, finance, asset managers and insurance companies, accounted for 26% of the Fund's assets. Among our largest investments were Bank of America, Washington Mutual and U.S. Bancorp. These stocks benefited as interest rates came down, boosting the difference between what banks pay on deposits and what they charge for loans. Lower rates also helped them by stimulating mortgage refinancing activity. Lincoln National rallied as pricing for property and casualty insurance began to improve. By contrast, some of our other top financial investments, including Wells Fargo, Citigroup and Fannie Mae, had posted strong gains earlier in the cycle and saw flat or modestly negative returns during the period. SECTOR SHIFTS We boosted our stake in electric and gas utilities, adding to our investments in Dominion Resources and Exelon, while also purchasing new names like UtiliCorp United. Our focus was on undervalued companies with non-regulated assets that could be spun out as separate entities. We also increased our stake in technology names, buying stocks like Apple Computer and KLA-Tencor (a semiconductor equipment company) that appear reasonably priced and offer strong growth opportunities. We cut back on retail, eliminating weak performers like RadioShack and cutting back on CVS. We also reduced our health-care stake because of concerns about increasing regulation in the pharmaceutical area and a dwindling supply of new products. In the telecom area, we shifted toward conservative names with more predicable earnings growth like Verizon Communications and SBC Communications, while moving out of newer entrants like Qwest. [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 Lowe's followed by an up arrow with the phrase "Aggressive expansion, strong operating results." The second listing is CVS followed by a down arrow with the phrase "Pharmacist shortage, disappointing same-store sales." The third listing is Ford Motor Co. followed by a down arrow with the phrase "Lower production, lower earnings in slow economy."] "We believe the market will remain volatile near term..." STAYING THE COURSE We believe the market will remain volatile near term as investors worry about the economic outlook, the possibility of a slowdown in consumer spending, and, above all, the repercussions from the tragic acts of terrorism that occurred shortly after the end of the period. Third-quarter earnings were already expected to be weak due to the soft economy and seasonal slowdowns in business. What will happen further out to both the economy and the market is less clear. Once justice is restored, however, we are confident the market will return to a more normal course. We believe the best way to be prepared for that eventuality is to stay fully invested now. In our opinion, value stocks offer both attractive valuations and diversification that will continue to serve long-term investors well. This commentary reflects the views of the portfolio management team through the end of the Fund's period discussed in this report. Of course, the team's 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 August 31, 2001. The index used for comparison is the Russell 1000 Value Index, an unmanaged index, which measures the performance of those Russell 1000 companies with lower price-to-book ratios and higher forecasted growth values. It is not possible to invest directly in an index. Class A Class B Class C Class I 1 Index Inception date 10-2-95 7-1-99 7-1-99 7-1-99 -- Average annual returns with maximum sales charge (POP) One year -8.40% -9.00% -6.18% -3.09% -1.12% Five years 11.51% -- -- -- 14.20% Since inception 12.23% -5.71% -4.83% -3.33% -- Cumulative total returns with maximum sales charge (POP) Six months -10.09% -10.39% -7.56% -5.11% -3.08% One year -8.40% -9.00% -6.18% -3.09% -1.12% Five years 72.40% -- -- -- 94.21% Since inception 97.85% -11.96% -10.18% -7.08% -- Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 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. Sales charge is not applicable for Class I shares. 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. 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. 1 For certain types of investors, as described in the Fund's prospectus for Class I 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 Russell 1000 Value 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 $22,031 as of August 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Core Value Fund Class A, before sales charge, and is equal to $20,832 as of August 31, 2001. The third line represents the same hypothetical $10,000 investment made in the John Hancock Core Value Fund Class A, after sales charge, and is equal to $19,785 as of August 31, 2001. Class B Class C 1 Class I 2 Inception date 7-1-99 7-1-99 7-1-99 Without sales charge $9,073 $9,070 $9,292 With maximum sales charge $8,800 $8,979 -- Index $9,627 $9,627 $9,627 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 as of August 31, 2001. Performance 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. FINANCIAL STATEMENTS FUND'S INVESTMENTS Securities owned by the Fund on August 31, 2001 (unaudited). This schedule is 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.
SHARES ISSUER VALUE COMMON STOCKS 98.59% $33,225,789 (Cost $32,019,793) Aerospace 2.54% $857,086 3,500 Boeing Co. (The) 179,200 2,300 General Dynamics Corp. 181,608 2,700 Precision Castparts Corp. 92,718 5,900 United Technologies Corp. 403,560 Automobile / Trucks 2.71% 914,299 21,400 Ford Motor Co. 425,218 4,900 General Motors Corp. 268,275 4,400 Ryder System, Inc. 99,396 7,100 Visteon Corp. 121,410 Banks -- United States 9.85% 3,320,634 15,200 Bank of America Corp. 934,800 8,200 Bank of New York Co., Inc. (The) 325,540 3,300 Comerica, Inc. 197,175 5,800 FleetBoston Financial Corp. 213,614 4,700 Mellon Financial Corp. 165,675 3,600 TCF Financial Corp. 163,440 26,000 U.S. Bancorp 630,240 15,000 Wells Fargo & Co. 690,150 Beverages 1.32% 445,896 4,900 Anheuser-Busch Cos., Inc. 210,896 5,000 PepsiCo, Inc. 235,000 Building 1.61% 542,304 4,800 Black & Decker Corp. (The) 188,784 2,300 Centex Corp. 100,740 3,000 Danaher Corp. 166,710 3,800 Sherwin-Williams Co. 86,070 Chemicals 3.66% 1,232,615 7,600 Air Products & Chemicals, Inc. 322,240 14,000 Dow Chemical Co. 490,840 2,200 Eastman Chemical Co. 85,338 7,100 Praxair, Inc. 334,197 Computers 5.53% 1,864,192 5,000 Apple Computer, Inc.* 92,750 4,900 Cadence Design Systems, Inc.* 107,702 3,000 Electronic Data Systems Corp. 176,940 4,600 First Data Corp. 302,910 3,500 International Business Machines Corp. 350,000 3,100 Intuit, Inc.* 117,118 4,700 Lexmark International, Inc.* 244,635 6,900 Network Associates, Inc.* 109,365 4,900 Sabre Holdings Corp.* 206,682 6,600 SunGard Data Systems, Inc.* 156,090 Cosmetics & Personal Care 0.74% 249,102 5,400 Avon Products, Inc. 249,102 Diversified Operations 1.74% 586,185 1,400 Johnson Controls, Inc. 102,550 2,500 Minnesota Mining & Manufacturing Co. 260,250 4,300 Tyco International Ltd. 223,385 Electronics 2.76% 929,262 4,100 Advanced Micro Devices, Inc.* 55,555 4,500 General Electric Co. 184,410 4,700 KLA-Tencor Corp.* 230,958 14,200 Motorola, Inc. 247,080 5,200 Tektronix, Inc.* 101,608 4,700 Vishay Intertechnology, Inc.* 109,651 Finance 8.03% 2,705,399 33,300 Citigroup, Inc. 1,523,475 5,500 J.P. Morgan Chase & Co. 216,700 9,400 Stilwell Financial, Inc. 268,840 18,600 Washington Mutual, Inc. 696,384 Food 1.17% 394,712 12,915 Archer Daniels Midland Co. 173,448 2,600 Heinz (H.J.) Co. 117,468 4,718 Sara Lee Corp. 103,796 Insurance 5.73% 1,931,795 6,100 Allstate Corp. (The) 206,973 5,500 American International Group, Inc. 430,100 6,200 Hartford Financial Services Group, Inc. (The) 401,760 6,900 Lincoln National Corp. 344,034 1,600 PartnerRe Ltd. (United Kingdom) 78,960 6,400 St. Paul Cos., Inc. (The) 268,992 2,400 Torchmark Corp. 101,376 1,200 XL Capital Ltd. (Class A) (Bermuda) 99,600 Leisure 1.08% 365,222 11,200 Disney (Walt) Co. (The) 284,816 1,800 Eastman Kodak Co. 80,406 Media 2.43% 817,454 2,000 Clear Channel Communications, Inc.* 100,540 1,900 Gannett Co., Inc. 117,154 28,300 Liberty Media Corp. (Class A)* 430,160 4,000 Viacom, Inc. (Class B)* 169,600 Medical 5.21% 1,755,167 3,400 Abbott Laboratories 168,980 4,100 American Home Products Corp. 229,600 2,600 Baxter International, Inc. 134,160 2,600 Lincare Holdings, Inc.* 73,866 7,500 Merck & Co., Inc. 488,250 3,800 Tenet Healthcare Corp.* 210,596 4,900 Trigon Healthcare, Inc.* 317,275 2,800 Universal Health Services, Inc. (Class B)* 132,440 Metal 1.52% 511,712 4,400 Alcan, Inc. (Canada) 159,808 4,200 Alcoa, Inc. 160,104 13,700 Worthington Industries, Inc. 191,800 Mortgage Banking 2.74% 922,141 12,100 Fannie Mae 922,141 Office 1.07% 361,801 3,400 Avery Dennison Corp. 174,794 4,300 Pitney Bowes, Inc. 187,007 Oil & Gas 9.88% 3,329,394 3,400 Ashland, Inc. 144,160 4,400 Baker Hughes, Inc. 144,936 6,000 BJ Services Co.* 134,580 2,800 BP Amoco Plc, American Depositary Receipts (United Kingdom) 142,464 3,600 Chevron Corp. 326,700 3,300 Conoco, Inc. (Class A)* 97,845 7,700 El Paso Corp. 374,143 4,800 Enron Corp. 167,952 37,600 Exxon Mobil Corp. 1,509,640 2,000 Kerr-McGee Corp. 116,820 5,400 USX -- Marathon Group 170,154 Paper & Paper Products 0.91% 307,720 2,800 Kimberly-Clark Corp. 173,740 4,400 Westvaco Corp. 133,980 Retail 4.69% 1,579,216 3,200 Brinker International, Inc.* 85,120 3,600 CVS Corp. 129,996 4,800 Family Dollar Stores, Inc. 144,000 2,700 Kohl's Corp.* 149,850 10,400 Lowe's Cos., Inc. 386,880 5,400 May Department Stores Co. (The) 181,710 8,400 Target Corp. 291,060 6,000 TJX Cos., Inc. 210,600 Soap & Cleaning Preparations 1.44% 484,125 3,600 Colgate-Palmolive Co. 194,940 3,900 Procter & Gamble Co. (The) 289,185 Steel 0.83% 280,512 9,600 AK Steel Holding Corp. 124,992 3,200 Nucor Corp. 155,520 Telecommunications 8.11% 2,733,521 8,000 Broadwing, Inc.* 143,680 7,100 General Motors Corp. (Class H)* 132,415 15,600 SBC Communications, Inc. 638,196 11,600 Sprint Corp. (PCS Group)* 289,768 6,700 Sprint Corp. (FON Group) 156,378 19,900 Verizon Communications, Inc. 995,000 29,400 WorldCom, Inc.* 378,084 Tobacco 2.01% 677,820 14,300 Philip Morris Cos., Inc. 677,820 Transportation 0.86% 288,922 6,500 Burlington Northern Santa Fe Corp. 176,215 6,300 Southwest Airlines Co. 112,707 Utilities 8.42% 2,837,581 7,200 Allegheny Energy, Inc. 317,376 10,600 Dominion Resources, Inc. 667,270 7,800 Duke Energy Corp. 306,618 9,900 Energy East Corp. 208,494 8,900 Exelon Corp. 485,940 5,000 Mirant Corp.* 143,250 7,900 Sempra Energy 214,011 8,700 UtiliCorp United, Inc. 279,792 6,600 Williams Cos., Inc. (The) 214,830 INTEREST PAR VALUE ISSUER, DESCRIPTION, MATURITY DATE RATE (000s OMITTED) VALUE SHORT-TERM INVESTMENTS 1.32% $444,000 (Cost $444,000) Joint Repurchase Agreement (1.32%) 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% $444 $444,000 TOTAL INVESTMENTS 99.91% $33,669,789 OTHER ASSETS AND LIABILITIES, NET 0.09% $29,921 TOTAL NET ASSETS 100.00% $33,699,710 * 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.
ASSETS AND LIABILITIES August 31, 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 $32,463,793) $33,669,789 Cash 729 Receivable for shares sold 16,963 Dividends and interest receivable 69,028 Other assets 1,520 Total assets 33,758,029 LIABILITIES Payable for shares repurchased 26,758 Payable to affiliates 18,810 Other payables and accrued expenses 12,751 Total liabilities 58,319 NET ASSETS Capital paid-in 33,610,115 Accumulated net realized loss on investments (1,117,511) Net unrealized appreciation of investments 1,205,996 Undistributed net investment income 1,110 Net assets $33,699,710 NET ASSET VALUE PER SHARE Based on net asset values and shares outstanding Class A ($12,140,245 [DIV] 1,009,565 shares) $12.03 Class B ($17,290,065 [DIV] 1,444,499 shares) $11.97 Class C ($2,591,441 [DIV] 216,503 shares) $11.97 Class I ($1,677,959 [DIV] 139,025 shares) $12.07 MAXIMUM OFFERING PRICE PER SHARE Class A1 ($12.03 [DIV] 95%) $12.66 Class C ($11.97 [DIV] 99%) $12.09 1 On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the offering price is reduced. See notes to financial statements. OPERATIONS For the period ended August 31, 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 Dividends (net of foreign withholding taxes of $300) $293,058 Interest 13,292 Total investment income 306,350 EXPENSES Investment management fee 137,150 Class A distribution and service fee 18,751 Class B distribution and service fee 85,888 Class C distribution and service fee 13,220 Class A, B and C transfer agent fee 47,832 Class I transfer agent fee 491 Registration and filing fee 31,032 Custodian fee 16,870 Auditing fee 10,007 Printing 6,070 Accounting and legal services fee 3,451 Miscellaneous 831 Trustees' fee 791 Legal fee 218 Total expenses 372,602 Less expense reductions (52,251) Net expenses 320,351 Net investment loss (14,001) REALIZED AND UNREALIZED GAIN (LOSS) Net realized loss on investments sold (546,216) Change in net unrealized appreciation (depreciation) on investments (1,387,346) Net realized and unrealized loss (1,933,562) Decrease in net assets from operations ($1,947,563) 1 Semiannual period from 3-01-01 through 8-31-01. 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 and any increase or decrease in money share- holders invested in the Fund. YEAR PERIOD ENDED ENDED 2-28-01 8-31-01 1 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income (loss) $111,061 ($14,001) Net realized loss (517,363) (546,216) Change in net unrealized appreciation (depreciation) 4,528,761 (1,387,346) Increase (decrease) in net assets resulting from operations 4,122,459 (1,947,563) Distributions to shareholders From net investment income Class A (74,887) -- Class B (4,857) -- Class C (157) -- Class I (52,569) -- From net realized gain Class A (20,026) -- Class B (26,828) -- Class C (3,088) -- Class I (10,427) -- (192,839) -- From fund share transactions 6,552,580 5,194,335 NET ASSETS Beginning of period 19,970,738 30,452,938 End of period 2 $30,452,938 $33,699,710 1 Semiannual period from 3-01-01 through 8-31-01. Unaudited. 2 Includes undistributed net investment income of $15,111 and $1,110, respectively. See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS A SHARES 1 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 2-28-97 2-28-98 2-28-99 2-29-00 2-28-01 8-31-01 2 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $9.47 $10.88 $13.93 $12.36 $10.70 $12.71 Net investment income 3 0.23 0.21 0.15 0.13 0.10 0.02 Net realized and unrealized gain (loss) on investments 1.77 3.33 1.23 (1.01) 2.04 (0.70) Total from investment operations 2.00 3.54 1.38 (0.88) 2.14 (0.68) Less distributions From net investment income (0.19) (0.13) (0.18) (0.08) (0.10) -- From net realized gain (0.40) (0.36) (2.77) (0.70) (0.03) -- (0.59) (0.49) (2.95) (0.78) (0.13) -- Net asset value, end of period $10.88 $13.93 $12.36 $10.70 $12.71 $12.03 Total return 4,5 (%) 21.36 32.97 9.87 (8.08) 20.02 (5.35)6 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $1 $8 $7 $12 $11 $12 Ratio of expenses to average net assets (%) 0.95 0.95 0.95 0.95 1.30 1.50 7 Ratio of adjusted expenses to average net assets 8,9 (%) 6.39 1.90 1.88 1.89 1.62 1.80 7 Ratio of net investment income to average net assets (%) 2.26 1.60 1.03 1.09 0.79 0.29 7 Portfolio turnover (%) 66 119 61 76 131 36 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS B SHARES PERIOD ENDED 2-29-00 10 2-28-01 8-31-01 2 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $13.35 $10.69 $12.69 Net investment income (loss) 3 0.02 (0.01) (0.03) Net realized and unrealized gain (loss) on investments (2.56) 2.05 (0.69) Total from investment operations (2.54) 2.04 (0.72) Less distributions From net investment income (0.02) (0.01) -- From net realized gain (0.10) (0.03) -- (0.12) (0.04) -- Net asset value, end of period $10.69 $12.69 $11.97 Total return 4,5 (%) (19.19)6 19.02 (5.67)6 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $8 $15 $17 Ratio of expenses to average net assets (%) 1.95 7 2.09 2.20 7 Ratio of adjusted expenses to average net assets 8,9 (%) 2.59 7 2.41 2.50 7 Ratio of net investment income (loss) to average net assets (%) 0.19 7 (0.05) (0.40)7 Portfolio turnover (%) 76 131 36 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS C SHARES PERIOD ENDED 2-29-00 10 2-28-01 8-31-01 2 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $13.35 $10.69 $12.69 Net investment income (loss) 3 0.02 (0.01) (0.03) Net realized and unrealized gain (loss) on investments (2.56) 2.04 (0.69) Total from investment operations (2.54) 2.03 (0.72) Less distributions From net investment income (0.02) -- 11 -- From net realized gain (0.10) (0.03) -- (0.12) (0.03) -- Net asset value, end of period $10.69 $12.69 $11.97 Total return 4,5 (%) (19.19)6 18.98 (5.67)6 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) -- 12 $2 $3 Ratio of expenses to average net assets (%) 1.95 7 2.18 2.20 7 Ratio of adjusted expenses to average net assets 8,9 (%) 2.59 7 2.50 2.50 7 Ratio of net investment income (loss) to average net assets (%) 0.21 7 (0.16) (0.41)7 Portfolio turnover (%) 76 131 36 See notes to financial statements.
FINANCIAL HIGHLIGHTS CLASS I SHARES PERIOD ENDED 2-29-00 10 2-28-01 8-31-01 2 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $13.35 $10.70 $12.72 Net investment income 3 0.09 0.12 0.05 Net realized and unrealized gain (loss) on investments (2.56) 2.07 (0.70) Total from investment operations (2.47) 2.19 (0.65) Less distributions From net investment income (0.08) (0.14) -- From net realized gain (0.10) (0.03) -- (0.18) (0.17) -- Net asset value, end of period $10.70 $12.72 $12.07 Total return 4,5 (%) (18.71)6 20.46 (5.11)6 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $1 $2 $2 Ratio of expenses to average net assets (%) 0.95 10 0.95 0.95 7 Ratio of adjusted expenses to average net assets 8,9 (%) 1.59 10 1.27 1.25 7 Ratio of net investment income to average net assets (%) 1.09 10 0.97 0.83 7 Portfolio turnover (%) 76 131 36 1 Effective 7-1-99, existing shares of the Fund were designated Class A shares. The Fund, which had previously only been sold to institutional investors, also became available for sale to individual investors. 2 Semiannual period from 3-01-01 through 8-31-01. 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 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. 10 Class B, Class C and Class I shares began operations on 7-1-99. 11 Less than $0.01 per share. 12 Less than $500,000. See notes to financial statements.
NOTES TO STATEMENTS Unaudited. NOTE A Accounting policies John Hancock Core Value Fund (the "Fund") is a diversified series of John Hancock Institutional Series Trust, an open-end investment management company registered under the Investment Company Act of 1940. The investment objective of the Fund is to seek above-average total return through investments in large-capitalization stocks that appear relatively undervalued. 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 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. 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 August 31, 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 August 31, 2001, the Fund loaned securities having a market value of $104,420 collateralized by securities in the amount of $106,508. 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 $86,884 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 carryforwards expire on February 28, 2009. 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 Fund identifies 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 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) 0.80% of the first $500,000,000 of the Fund's average daily net asset value and (b) 0.75% of the Fund's average daily net asset value in excess of $500,000,000. The Fund and the Adviser have a subadvisory contract with Independence Investment LLC, a wholly owned indirect subsidiary of John Hancock Life Insurance company ("JHLICo"), the Adviser's indirect parent company. The Fund is not responsible for the payment of the subadviser's fees. The Adviser had agreed to limit the Fund's expenses, (excluding the distribution and service fee and the transfer agent fee) to 0.90% of the Fund's average daily net assets, at least until June 30, 2002. Accordingly, the expense reduction amounted to $52,251 for the period ended August 31, 2001. The Adviser reserves the right to terminate this limitation in the future. 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 period ended August 31, 2001, JH Funds received net up-front sales charges of $40,324 with regard to sales of Class A shares. Of this amount, $5,525 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $26,432 was paid as sales commissions to unrelated broker-dealers and $8,367 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. JHLICo is the indirect sole shareholder of Signator Investors. During the period ended August 31, 2001, JH Funds received net up-front sales charges of $27,367 with regard to sales of Class C shares. Of this amount, $24,791 was paid as sales commissions to unrelated broker-dealers and $2,576 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 August 31, 2001, CDSCs received by JH Funds amounted to $51,443 for Class B shares and $840 for Class C shares. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc. ("Signature Services"), an indirect subsidiary of JHLICo. The Fund pays monthly transfer agent fees to Signature Services for Class A, Class B and Class C shares, based on the number of shareholder accounts plus certain out-of-pocket expenses, based on relative net asset values of the Classes. 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 Compen-sation 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 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 2-28-01 PERIOD ENDED 8-31-01 1 SHARES AMOUNT SHARES AMOUNT CLASS A SHARES Sold 969,558 $11,902,659 628,417 $7,987,589 Distributions reinvested 6,795 86,275 -- -- Repurchased (1,164,788) (14,110,468) (505,565) (6,441,270) Net increase (decrease) (188,435) ($2,121,534) 122,852 $1,546,319 CLASS B SHARES Sold 831,628 $10,273,196 476,001 $5,997,646 Distributions reinvested 2,251 28,477 -- -- Repurchased (372,278) (4,562,772) (198,552) (2,491,599) Net increase 461,601 $5,738,901 277,449 $3,506,047 CLASS C SHARES Sold 181,694 $2,251,192 70,399 $888,454 Distributions reinvested 217 2,761 -- -- Repurchased (30,265) (374,467) (29,676) (368,932) Net increase 151,646 $1,879,486 40,723 $519,522 CLASS I SHARES Sold 515,685 $6,276,886 8,495 $108,658 Distributions reinvested 4,964 62,996 -- -- Repurchased (414,235) (5,284,155) (38,109) (486,211) Net increase (decrease) 106,414 $1,055,727 (29,614) ($377,553) NET INCREASE 531,226 $6,552,580 411,410 $5,194,335 1 Semiannual period from 3-01-01 through 8-31-01. Unaudited. 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 August 31, 2001, aggregated $17,675,222 and $12,155,055, respectively. The cost of investments owned at August 31, 2001 (including short-term investments) for federal income tax purposes was $32,583,933. Gross unrealized appreciation and depreciation of investments aggregated $3,218,427 and $2,132,571, respectively, resulting in net unrealized appreciation of $1,085,856. FOR YOUR INFORMATION 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 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 SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 PRINCIPAL DISTRIBUTOR John Hancock Funds, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 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 Core Value Fund. 880SA 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 Capital Series (the "Registrant") on Form N-1A under the Securities Act of 1933 and the Investment company Act of 1940 (File Nos. 2-29502 and 811-1677), which information is incorporated herein by reference.
ITEM 16. EXHIBITS: 1 Registrant's Amended and Restated Filed as Exhibit 99.a to Registrant's Declaration of Trust Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 54 (file nos. 811-1677 and 2-29502 on February 29, 2000; accession no. 0001010521-00-000204) ("PEA 54 ") 1.1 Amendment to Declaration of Trust Filed as Exhibit 99.a.1 to PEA 54 and incorporated herein by reference 1.2 Amendment to Declaration of Trust Filed as Exhibit 99.a.2 to Registrant's Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 58 (file nos. 811-1677 and 2-29502 on December 28, 2001; accession no. 0001010521-01-500304) ("PEA 58") 1.3 Amendment to Declaration of Trust Filed herewith as Exhibit 1. 2 Amended and Restated By-Laws of Filed as Exhibit 99.b to Registrant's Registrant Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 48 (file nos. 811-1677 and 2-29502 on February 27, 1997; accession no. 0001010521-97-000229) ("PEA 48 ") 2.1 Amendment to Amended and Restated Filed 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 Core Equity Fund and John Registration Statement on Form N-1A and Hancock Advisers, LLC incorporated herein by reference to post-effective amendment no. 52 (file nos. 811-1677 and 2-29502 on February 22,1999; accession no. 0001010521-99-000135) ("PEA 52") 6.1 Sub-Investment Advisory Contract Filed as Exhibit 99.d.1 to PEA 48 and between Core Equity Fund, incorporated herein by reference Independence Investment LLC and John Hancock Advisers, LLC 6.2 Form of Investment Management Filed as Exhibit 99.d.2 to Registrant's Contract between John Hancock U.S. Registration Statement on Form N-1A and Global Leaders Growth Fund and John incorporated herein by reference to Hancock Advisers, LLC post-effective amendment no. 60 (file nos. 811-1677 and 2-29502 on February 27,2002; accession no. 0001010521-02-000114) ("PEA 60") 6.3 Form of Sub-Investment Advisory Filed as Exhibit 99.d.3 to PEA 60 and Contract between U.S. Global Leaders incorporated herein by reference Growth Fund, Yeager, Wood & Marshall, Inc. and John Hancock Advisers, LLC 7 Distribution Agreement between the Filed as Exhibit 99.e to Registrant's Registrant and John Hancock Funds, Registration Statement on Form N-1A and LLC. (formerly named John Hancock incorporated herein by reference to Broker Distribution Services, Inc post-effective amendment no. 44 (file nos. 811-1677 and 2-29502 on April 26, 1995; accession no.0000950146-95-000180) ("PEA 44 ") 7.1 Amendment to Distribution Agreement Filed as Exhibit 99.e.1 to PEA 44 and between the Registrant and John incorporated herein by reference Hancock Funds, LLC 7.2 Form of Soliciting Dealer Agreement Filed as Exhibit 99.e.2 to PEA 52 and between John Hancock Funds, LLC and incorporated herein by reference Selected Dealers 7.3 Form of Financial Institution Sales Filed as Exhibit 99.e.3 to PEA 44 and and Services Agreement incorporated herein by reference 7.4 Amendment to Distribution Agreement Filed as Exhibit 99.e.4 to PEA 48 and between the Registrant and John incorporated herein by reference Hancock Funds, LLC 8 Not applicable. 9 Master Custodian Agreement between Filed as Exhibit 99.g to PEA 58 and John Hancock Mutual Funds (including incorporated herein by reference Registrant) and The Bank of New York 10 Amended & Restate Master Transfer Filed as Exhibit 99.h to PEA 52 and Agent Service Agreement between John incorporated herein by reference Hancock Mutual Funds (including Registrant) and John Hancock Funds, LLC 10.1 Class A and Class B Distribution Filed as Exhibit 99.m to PEA 48 and Plans between Registrant and John incorporated herein by reference Hancock Funds, LLC 10.2 Class C Distribution Plans between Filed as Exhibit 99.m.1 to PEA 52 and Registrant and John Hancock Funds, LLC incorporated herein by reference 10.3 John Hancock Funds Class A, Class B Filed as Exhibit 99.o to PEA 52 and and Class C Amended and restated incorporated herein by reference Multiple Class Plan pursuant to Rule 18f-3 10.4 John Hancock Funds Class A, Class B, Filed as Exhibit 99.p to PEA 53 and Class C and Class I Amended and incorporated herein by reference restated Multiple Class Plan pursuant to Rule 18f-3 11 Opinion as to legality of shares and Filed herewith as Exhibit 14 consent 12 Form of opinion as to tax matters and Filed herewith as Exhibit 15 consent 13 Accounting and Legal Services Filed as Exhibit 99.h.1 to Registrant's Agreement between John Hancock Registration Statement on Form N-1A and Advisers, LLC and Registrant. incorporated herein by reference to post-effective amendment no. 46 (file nos. 811-1677 and 2-29502 on June 14, 1996; accession no. 0001010521-96-000095) ("PEA 46") 13.1 Amended and Restated Master Transfer Filed as Exhibit 99.h to PEA 52 and Agent Service Agreement between John incorporated herein by reference Hancock Mutual Funds (including Registrant) and John Hancock Funds, LLC 14 Consents of Deloitte & Touche LLP Filed herewith as Exhibit 17 regarding the audited financial statement of Core Growth Fund and Core Value Fund. Consents of PricewaterhouseCoopers regarding the audited financial statement of Core Equity Fund 15 Not applicable 16 Powers of Attorney Filed as addendum to signature pages and incorporated herein by reference 17 Code of Ethics- John Hancock Funds, Filed as Exhibit 99.p to Registrant's LLC and Independence Investment LLC Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 55 (file nos. 811-1677 and 2-29502 on June 14, 1996; accession no. 0001010521-00-000251) ("PEA 55") 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 CAPITAL SERIES 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 Maureen R. Ford and Chief Executive Officer * Senior Vice President and - ------------------------ Chief Financial Officer Richard A. Brown /s/William H. King Vice President, Treasurer March 8, 2002 - ------------------------ (Chief Accounting Officer) William H. King ________*_______________ Trustee Dennis S. Aronowitz ________*_______________ Trustee Richard P. Chapman, Jr. ________*_______________ Trustee William J. Cosgrove ________*_______________ Trustee John M. DeCiccio ________*_______________ 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 4 Agreement and Plan of Reorganization between the John Hancock Core Equity Fund (the "Acquiring Fund") and John Hancock Core Growth Fund and John Hancock Core Value Fund (the "Acquired Funds") (filed as EXHIBIT A to Part A of this Registration Statement). 14 Opinion as to legality of shares and consent. 15 Form of opinion as to tax matters and consent. 17 Consent of PricewaterhouseCoopers LLP regarding the audited financial statements and highlights of the John Hancock Core Equity Fund. Consent of Deloitte & Touche LLP regarding the audited financial statements and highlights of the John Hancock Core Growth Fund and John Hancock Core Value Fund. EX-99 3 ex1.txt AMENDED AND RESTATED DECLARATION OF TRUST AMENDED AND RESTATED DECLARATION OF TRUST OF JOHN HANCOCK INVESTMENT TRUST 101 Huntington Avenue Boston, Massachusetts 02199 Dated March 1, 2002 AMENDED AND RESTATED DECLARATION OF TRUST made this 1st day of March, 2002 by the undersigned (together with all other persons from time to time duly elected, qualified and serving as Trustees in accordance with the provisions of Article II hereof, the "Trustees"); WHEREAS, pursuant to an amended and restated declaration of trust executed and delivered on July 1, 1996 (the "Original Declaration"), the Trustees established a trust for the investment and reinvestment of funds contributed thereto; WHEREAS, the Trustees divided the beneficial interest in the trust assets into transferable shares of beneficial interest, as provided therein; WHEREAS, the Trustees declared that all money and property contributed to the trust established thereunder be held and managed in trust for the benefit of the holders, from time to time, of the shares of beneficial interest issued thereunder and subject to the provisions thereof; WHEREAS, the Trustees desire to amend and restate the Original Declaration; NOW, THEREFORE, in consideration of the foregoing premises and the agreements contained herein, the undersigned, being all of the Trustees of the trust, hereby amend and restate the Original Declaration as follows: ARTICLE I NAME AND DEFINITIONS Section 1.1. Name. The name of the trust created hereby is "John Hancock Investment Trust" (the "Trust"). Section 1.2. Definitions. Wherever they are used herein, the following terms have the following respective meanings: (a) "Administrator" means the party, other than the Trust, to the contract described in Section 3.3 hereof. (b) "By-laws" means the By-laws referred to in Section 2.8 hereof, as amended from time to time. (c) "Class" means any division of shares within a Series in accordance with the provisions of Article V. (d) The terms "Commission" and "Interested Person" have the meanings given them in the 1940 Act. Except as such term may be otherwise defined by the Trustees in conjunction with the establishment of any Series, the term "vote of a majority of the Outstanding Shares entitled to vote" shall have the same meaning as is assigned to the term "vote of a majority of the outstanding voting securities" in the 1940 Act. (e) "Custodian" means any Person other than the Trust who has custody of any Trust Property as required by Section 17(f) of the 1940 Act, but does not include a system for the central handling of securities described in said Section 17(f). (f) "Declaration" means this Declaration of Trust as amended from time to time. Reference in this Declaration of Trust to "Declaration," "hereof," "herein," and "hereunder" shall be deemed to refer to this Declaration rather than exclusively to the article or section in which such words appear. (g) "Distributor" means the party, other than the Trust, to the contract described in Section 3.1 hereof. (h) "Fund" or "Funds" individually or collectively, means the separate Series of the Trust, together with the assets and liabilities assigned thereto. (i) "Fundamental Restrictions" means the investment restrictions set forth in the Prospectus and Statement of Additional Information for any Series and designated as fundamental restrictions therein with respect to such Series. (j) "His" shall include the feminine and neuter, as well as the masculine, genders. (k) "Investment Adviser" means the party, other than the Trust, to the contract described in Section 3.2 hereof. (l) The "1940 Act" means the Investment Company Act of 1940, as amended from time to time. (m) "Person" means and includes individuals, corporations, partnerships, trusts, associations, joint ventures and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof. (n) "Prospectus" means the Prospectuses and Statements of Additional Information included in the Registration Statement of the Trust under the Securities Act of 1933, as amended, as such Prospectuses and Statements of Additional Information may be amended or supplemented and filed with the Commission from time to time. (o) "Series" individually or collectively means the separately managed component(s) of the Trust (or, if the Trust shall have only one such component, then that one) as may be established and designated from time to time by the Trustees pursuant to Section 5.11 hereof. 2 (p) "Shareholder" means a record owner of Outstanding Shares. (q) "Shares" means the equal proportionate units of interest into which the beneficial interest in the Trust shall be divided from time to time, including the Shares of any and all Series or of any Class within any Series (as the context may require) which may be established by the Trustees, and includes fractions of Shares as well as whole Shares. "Outstanding" Shares means those Shares shown from time to time on the books of the Trust or its Transfer Agent as then issued and outstanding, but shall not include Shares which have been redeemed or repurchased by the Trust and which are at the time held in the treasury of the Trust. (r) "Transfer Agent" means any Person other than the Trust who maintains the Shareholder records of the Trust, such as the list of Shareholders, the number of Shares credited to each account, and the like. (s) "Trust" means John Hancock Investment Trust. (t) "Trustees" means the persons who have signed this Declaration, so long as they shall continue in office in accordance with the terms hereof, and all other persons who now serve or may from time to time be duly elected, qualified and serving as Trustees in accordance with the provisions of Article II hereof, and reference herein to a Trustee or the Trustees shall refer to such person or persons in this capacity or their capacities as trustees hereunder. (u) "Trust Property" means any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of the Trust or the Trustees, including any and all assets of or allocated to any Series or Class, as the context may require. ARTICLE II TRUSTEES Section 2.1. General Powers. The Trustees shall have exclusive and absolute control over the Trust Property and over the business of the Trust to the same extent as if the Trustees were the sole owners of the Trust Property and business in their own right, but with such powers of delegation as may be permitted by this Declaration. The Trustees shall have power to conduct the business of the Trust and carry on its operations in any and all of its branches and maintain offices both within and without The Commonwealth of Massachusetts, in any and all states of the United States of America, in the District of Columbia, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments, and to do all such other things and execute all such instruments as they deem necessary, proper or desirable in order to promote the interests of the Trust although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration, the presumption shall be in favor of a grant of power to the Trustees. 3 The enumeration of any specific power herein shall not be construed as limiting the aforesaid powers. Such powers of the Trustees may be exercised without order of or resort to any court. Section 2.2. Investments. The Trustees shall have the power: (a) To operate as and carry on the business of an investment company, and exercise all the powers necessary and appropriate to the conduct of such operations. (b) To invest in, hold for investment, or reinvest in, cash; securities, including common, preferred and preference stocks; warrants; subscription rights; profit-sharing interests or participations and all other contracts for or evidence of equity interests; bonds, debentures, bills, time notes and all other evidences of indebtedness; negotiable or non-negotiable instruments; government securities, including securities of any state, municipality or other political subdivision thereof, or any governmental or quasi-governmental agency or instrumentality; and money market instruments including bank certificates of deposit, finance paper, commercial paper, bankers' acceptances and all kinds of repurchase agreements, of any corporation, company, trust, association, firm or other business organization however established, and of any country, state, municipality or other political subdivision, or any governmental or quasi-governmental agency or instrumentality; any other security, instrument or contract the acquisition or execution of which is not prohibited by any Fundamental Restriction; and the Trustees shall be deemed to have the foregoing powers with respect to any additional securities in which the Trust may invest should the Fundamental Restrictions be amended. (c) To acquire (by purchase, subscription or otherwise), to hold, to trade in and deal in, to acquire any rights or options to purchase or sell, to sell or otherwise dispose of, to lend and to pledge any such securities, to enter into repurchase agreements, reverse repurchase agreements, firm commitment agreements, forward foreign currency exchange contracts, interest rate, mortgage or currency swaps, and interest rate caps, floors and collars, to purchase and sell options on securities, indices, currency, swaps or other financial assets, futures contracts and options on futures contracts of all descriptions and to engage in all types of hedging, risk management or income enhancement transactions. (d) To exercise all rights, powers and privileges of ownership or interest in all securities and repurchase agreements included in the Trust Property, including the right to vote thereon and otherwise act with respect thereto and to do all acts for the preservation, protection, improvement and enhancement in value of all such securities and repurchase agreements. (e) To acquire (by purchase, lease or otherwise) and to hold, use, maintain, develop and dispose of (by sale or otherwise) any property, real or personal, including cash or foreign currency, and any interest therein. (f) To borrow money and in this connection issue notes or other evidence of indebtedness; to secure borrowings by mortgaging, pledging or otherwise subjecting as security the Trust Property; and to endorse, guarantee, or undertake the performance of any obligation or engagement of any other Person and to lend Trust Property. (g) To aid by further investment any corporation, company, trust, association or firm, any obligation of or interest in which is included in the Trust Property or in the affairs of which 4 the Trustees have any direct or indirect interest; to do all acts and things designed to protect, preserve, improve or enhance the value of such obligation or interest; and to guarantee or become surety on any or all of the contracts, stocks, bonds, notes, debentures and other obligations of any such corporation, company, trust, association or firm. (h) To enter into a plan of distribution and any related agreements whereby the Trust may finance directly or indirectly any activity which is primarily intended to result in the distribution and/or servicing of Shares. (i) To adopt on behalf of the Trust or any Series thereof an alternative purchase plan providing for the issuance of multiple Classes of Shares (as authorized herein at Section 5.11). (j) In general to carry on any other business in connection with or incidental to any of the foregoing powers, to do everything necessary, suitable or proper for the accomplishment of any purpose or the attainment of any object or the furtherance of any power hereinbefore set forth, either alone or in association with others, and to do every other act or thing incidental or appurtenant to or arising out of or connected with the aforesaid business or purposes, objects or powers. The foregoing clauses shall be construed both as objects and powers, and the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the general powers of the Trustees. Notwithstanding any other provision herein, the Trustees shall have full power in their discretion as contemplated in Section 8.5, without any requirement of approval by Shareholders, to invest part or all of the Trust Property (or part or all of the assets of any Series), or to dispose of part or all of the Trust Property (or part or all of the assets of any Series) and invest the proceeds of such disposition, in securities issued by one or more other investment companies registered under the 1940 Act. Any such other investment company may (but need not) be a trust (formed under the laws of any state) which is classified as a partnership or corporation for federal income tax purposes. The Trustees shall not be limited to investing in obligations maturing before the possible termination of the Trust, nor shall the Trustees be limited by any law limiting the investments which may be made by fiduciaries. Section 2.3. Legal Title. Legal title to all the Trust Property shall be vested in the Trustees as joint tenants except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust or any Series of the Trust, or in the name of any other Person as nominee, on such terms as the Trustees may determine, provided that the interest of the Trust therein is deemed appropriately protected. The right, title and interest of the Trustees in the Trust Property and the Property of each Series of the Trust shall vest automatically in each Person who may hereafter become a Trustee. Upon the termination of the term of office, resignation, removal or death of a Trustee he shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered. 5 Section 2.4. Issuance and Repurchase of Shares. The Trustees shall have the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in Shares and, subject to the provisions set forth in Articles VI and VII and Section 5.11 hereof, to apply to any such repurchase, redemption, retirement, cancellation or acquisition of Shares any funds or property of the Trust or of the particular Series with respect to which such Shares are issued, whether capital or surplus or otherwise, to the full extent now or hereafter permitted by the laws of The Commonwealth of Massachusetts governing business corporations. Section 2.5. Delegation; Committees. The Trustees shall have power, consistent with their continuing exclusive authority over the management of the Trust and the Trust Property, to delegate from time to time to such of their number or to officers, employees or agents of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or any Series of the Trust or the names of the Trustees or otherwise as the Trustees may deem expedient, to the same extent as such delegation is permitted by the 1940 Act. Section 2.6. Collection and Payment. The Trustees shall have power to collect all property due to the Trust; to pay all claims, including taxes, against the Trust Property; to prosecute, defend, compromise or abandon any claims relating to the Trust Property; to foreclose any security interest securing any obligations, by virtue of which any property is owed to the Trust; and to enter into releases, agreements and other instruments. Section 2.7. Expenses. The Trustees shall have the power to incur and pay any expenses which in the opinion of the Trustees are necessary or incidental to carry out any of the purposes of this Declaration, and to pay reasonable compensation from the funds of the Trust to themselves as Trustees. The Trustees shall fix the compensation of all officers, employees and Trustees. Section 2.8. Manner of Acting; By-laws. Except as otherwise provided herein or in the By-laws, any action to be taken by the Trustees may be taken by a majority of the Trustees present at a meeting of Trustees, including any meeting held by means of a conference telephone circuit or similar communications equipment by means of which all persons participating in the meeting can hear each other, or by written consents of a majority of Trustees then in office. The Trustees may adopt By-laws not inconsistent with this Declaration to provide for the conduct of the business of the Trust and may amend or repeal such By-laws to the extent such power is not reserved to the Shareholders. Notwithstanding the foregoing provisions of this Section 2.8 and in addition to such provisions or any other provision of this Declaration or of the By-laws, the Trustees may by resolution appoint a committee consisting of less than the whole number of Trustees then in office, which committee may be empowered to act for and bind the Trustees and the Trust, as if the acts of such committee were the acts of all the Trustees then in office, with respect to the institution, prosecution, dismissal, settlement, review or investigation of any action, suit or proceeding which shall be pending or threatened to be brought before any court, administrative agency or other adjudicatory body. Section 2.9. Miscellaneous Powers. The Trustees shall have the power to: (a) employ or contract with such Persons as the Trustees may deem desirable for the transaction of the business of the Trust or any Series thereof; (b) enter into joint ventures, partnerships and any other 6 combinations or associations; (c) remove Trustees, fill vacancies in, add to or subtract from their number, elect and remove such officers and appoint and terminate such agents or employees as they consider appropriate, and appoint from their own number, and terminate, any one or more committees which may exercise some or all of the power and authority of the Trustees as the Trustees may determine; (d) purchase, and pay for out of Trust Property or the property of the appropriate Series of the Trust, insurance policies insuring the Shareholders, Trustees, officers, employees, agents, investment advisers, administrators, distributors, selected dealers or independent contractors of the Trust against all claims arising by reason of holding any such position or by reason of any action taken or omitted by any such Person in such capacity, whether or not constituting negligence, or whether or not the Trust would have the power to indemnify such Person against such liability; (e) establish pension, profit-sharing, share purchase, and other retirement, incentive and benefit plans for any Trustees, officers, employees and agents of the Trust; (f) to the extent permitted by law, indemnify any person with whom the Trust or any Series thereof has dealings, including the Investment Adviser, Administrator, Distributor, Transfer Agent and selected dealers, to such extent as the Trustees shall determine; (g) guarantee indebtedness or contractual obligations of others; (h) determine and change the fiscal year and taxable year of the Trust or any Series thereof and the method by which its or their accounts shall be kept; and (i) adopt a seal for the Trust, but the absence of such seal shall not impair the validity of any instrument executed on behalf of the Trust. Section 2.10. Principal Transactions. Except for transactions not permitted by the 1940 Act or rules and regulations adopted, or orders issued, by the Commission thereunder, the Trustees may, on behalf of the Trust, buy any securities from or sell any securities to, or lend any assets of the Trust or any Series thereof to any Trustee or officer of the Trust or any firm of which any such Trustee or officer is a member acting as principal, or have any such dealings with the Investment Adviser, Distributor or Transfer Agent or with any Interested Person of such Person; and the Trust or a Series thereof may employ any such Person, or firm or company in which such Person is an Interested Person, as broker, legal counsel, registrar, transfer agent, dividend disbursing agent or custodian upon customary terms. Section 2.11. Litigation. The Trustees shall have the power to engage in and to prosecute, defend, compromise, abandon, or adjust by arbitration, or otherwise, any actions, suits, proceedings, disputes, claims, and demands relating to the Trust, and out of the assets of the Trust or any Series thereof to pay or to satisfy any debts, claims or expenses incurred in connection therewith, including those of litigation, and such power shall include without limitation the power of the Trustees or any appropriate committee thereof, in the exercise of their or its good faith business judgment, to dismiss any action, suit, proceeding, dispute, claim, or demand, derivative or otherwise, brought by any person, including a Shareholder in its own name or the name of the Trust, whether or not the Trust or any of the Trustees may be named individually therein or the subject matter arises by reason of business for or on behalf of the Trust. Section 2.12. Number of Trustees. The initial Trustees shall be the persons signing this Declaration. The number of Trustees shall be such number as shall be fixed from time to time by vote of a majority of the Trustees, provided, however, that the number of Trustees shall in no event be less than one (1). Section 2.13. Election and Term. Except for the Trustees named herein or appointed to fill vacancies pursuant to Section 2.15 hereof, the Trustees may succeed themselves and shall be 7 elected by the Shareholders owning of record a plurality of the Shares voting at a meeting of Shareholders on a date fixed by the Trustees. Except in the event of resignations or removals pursuant to Section 2.14 hereof, each Trustee shall hold office until such time as less than a majority of the Trustees holding office has been elected by Shareholders. In such event the Trustees then in office shall call a Shareholders' meeting for the election of Trustees. Except for the foregoing circumstances, the Trustees shall continue to hold office and may appoint successor Trustees. Section 2.14. Resignation and Removal. Any Trustee may resign his trust (without the need for any prior or subsequent accounting) by an instrument in writing signed by him and delivered to the other Trustees and such resignation shall be effective upon such delivery, or at a later date according to the terms of the instrument. Any of the Trustees may be removed (provided the aggregate number of Trustees after such removal shall not be less than one) with cause, by the action of two-thirds of the remaining Trustees or by action of two-thirds of the outstanding Shares of the Trust (for purposes of determining the circumstances and procedures under which any such removal by the Shareholders may take place, the provisions of Section 16(c) of the 1940 Act (or any successor provisions) shall be applicable to the same extent as if the Trust were subject to the provisions of that Section). Upon the resignation or removal of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and deliver such documents as the remaining Trustees shall require for the purpose of conveying to the Trust or the remaining Trustees any Trust Property held in the name of the resigning or removed Trustee. Upon the incapacity or death of any Trustee, his legal representative shall execute and deliver on his behalf such documents as the remaining Trustees shall require as provided in the preceding sentence. Section 2.15. Vacancies. The term of office of a Trustee shall terminate and a vacancy shall occur in the event of his death, retirement, resignation, removal, bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office of a Trustee. No such vacancy shall operate to annul the Declaration or to revoke any existing agency created pursuant to the terms of the Declaration. In the case of an existing vacancy, including a vacancy existing by reason of an increase in the number of Trustees, subject to the provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall fill such vacancy by the appointment of such other person as they in their discretion shall see fit, made by vote of a majority of the Trustees then in office. Any such appointment shall not become effective, however, until the person named in the vote approving the appointment shall have accepted in writing such appointment and agreed in writing to be bound by the terms of the Declaration. An appointment of a Trustee may be made in anticipation of a vacancy to occur at a later date by reason of retirement, resignation or increase in the number of Trustees, provided that such appointment shall not become effective prior to such retirement, resignation or increase in the number of Trustees. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in this Section 2.15, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by the Declaration. The vote by a majority of the Trustees in office, fixing the number of Trustees shall be conclusive evidence of the existence of such vacancy. Section 2.16. Delegation of Power to Other Trustees. Any Trustee may, by power of attorney, delegate his power for a period not exceeding six (6) months at any one time to any other Trustee or Trustees; provided that in no case shall fewer than two (2) Trustees personally exercise the powers granted to the Trustees under this Declaration except as herein otherwise expressly provided. 8 ARTICLE III CONTRACTS Section 3.1. Distribution Contract. The Trustees may in their discretion from time to time enter into an exclusive or non-exclusive distribution contract or contracts providing for the sale of the Shares to net the Trust or the applicable Series of the Trust not less than the amount provided for in Section 7.1 of Article VII hereof, whereby the Trustees may either agree to sell the Shares to the other party to the contract or appoint such other party as their sales agent for the Shares, and in either case on such terms and conditions, if any, as may be prescribed in the By-laws, and such further terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Article III or of the By-laws; and such contract may also provide for the repurchase of the Shares by such other party as agent of the Trustees. Section 3.2. Advisory or Management Contract. The Trustees may in their discretion from time to time enter into one or more investment advisory or management contracts or, if the Trustees establish multiple Series, separate investment advisory or management contracts with respect to one or more Series whereby the other party or parties to any such contracts shall undertake to furnish the Trust or such Series management, investment advisory, administration, accounting, legal, statistical and research facilities and services, promotional or marketing activities, and such other facilities and services, if any, as the Trustees shall from time to time consider desirable and all upon such terms and conditions as the Trustees may in their discretion determine. Notwithstanding any provisions of the Declaration, the Trustees may authorize the Investment Advisers, or any of them, under any such contracts (subject to such general or specific instructions as the Trustees may from time to time adopt) to effect purchases, sales, loans or exchanges of portfolio securities and other investments of the Trust on behalf of the Trustees or may authorize any officer, employee or Trustee to effect such purchases, sales, loans or exchanges pursuant to recommendations of such Investment Advisers, or any of them (and all without further action by the Trustees). Any such purchases, sales, loans and exchanges shall be deemed to have been authorized by all of the Trustees. The Trustees may, in their sole discretion, call a meeting of Shareholders in order to submit to a vote of Shareholders at such meeting the approval or continuance of any such investment advisory or management contract. If the Shareholders of any one or more of the Series of the Trust should fail to approve any such investment advisory or management contract, the Investment Adviser may nonetheless serve as Investment Adviser with respect to any Series whose Shareholders approve such contract. Section 3.3. Administration Agreement. The Trustees may in their discretion from time to time enter into an administration agreement or, if the Trustees establish multiple Series or Classes, separate administration agreements with respect to each Series or Class, whereby the other party to such agreement shall undertake to manage the business affairs of the Trust or of a Series or Class thereof and furnish the Trust or a Series or a Class thereof with office facilities, and shall be responsible for the ordinary clerical, bookkeeping and recordkeeping services at such office facilities, and other facilities and services, if any, and all upon such terms and conditions as the Trustees may in their discretion determine. Section 3.4. Service Agreement. The Trustees may in their discretion from time to time enter into Service Agreements with respect to one or more Series or Classes thereof whereby the 9 other parties to such Service Agreements will provide administration and/or support services pursuant to administration plans and service plans, and all upon such terms and conditions as the Trustees in their discretion may determine. Section 3.5. Transfer Agent. The Trustees may in their discretion from time to time enter into a transfer agency and shareholder service contract whereby the other party to such contract shall undertake to furnish transfer agency and shareholder services to the Trust. The contract shall have such terms and conditions as the Trustees may in their discretion determine not inconsistent with the Declaration. Such services may be provided by one or more Persons. Section 3.6. Custodian. The Trustees may appoint or otherwise engage one or more banks or trust companies, each having an aggregate capital, surplus and undivided profits (as shown in its last published report) of at least two million dollars ($2,000,000) to serve as Custodian with authority as its agent, but subject to such restrictions, limitations and other requirements, if any, as may be contained in the By-laws of the Trust. The Trustees may also authorize the Custodian to employ one or more sub-custodians, including such foreign banks and securities depositories as meet the requirements of applicable provisions of the 1940 Act, and upon such terms and conditions as may be agreed upon between the Custodian and such sub-custodian, to hold securities and other assets of the Trust and to perform the acts and services of the Custodian, subject to applicable provisions of law and resolutions adopted by the Trustees. Section 3.7. Affiliations of Trustees or Officers, Etc. The fact that: (i) any of the Shareholders, Trustees or officers of the Trust or any Series thereof is a shareholder, director, officer, partner, trustee, employee, manager, adviser or distributor of or for any partnership, corporation, trust, association or other organization or of or for any parent or affiliate of any organization, with which a contract of the character described in Sections 3.1, 3.2, 3.3 or 3.4 above or for services as Custodian, Transfer Agent or disbursing agent or for providing accounting, legal and printing services or for related services may have been or may hereafter be made, or that any such organization, or any parent or affiliate thereof, is a Shareholder of or has an interest in the Trust, or that (ii) any partnership, corporation, trust, association or other organization with which a contract of the character described in Sections 3.1, 3.2, 3.3 or 3.4 above or for services as Custodian, Transfer Agent or disbursing agent or for related services may have been or may hereafter be made also has any one or more of such contracts with one or more other partnerships, corporations, trusts, associations or other organizations, or has other business or interests, shall not affect the validity of any such contract or disqualify any Shareholder, Trustee or officer of the Trust from voting upon or executing the same or create any liability or accountability to the Trust or its Shareholders. Section 3.8. Compliance with 1940 Act. Any contract entered into pursuant to Sections 3.1 or 3.2 shall be consistent with and subject to the requirements of Section 15 of the 1940 Act (including any amendment thereof or other applicable Act of Congress hereafter enacted), as modified by any applicable order or orders of the Commission, with respect to its continuance in 10 effect, its termination and the method of authorization and approval of such contract or renewal thereof. ARTICLE IV LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS Section 4.1. No Personal Liability of Shareholders, Trustees, Etc. No Shareholder shall be subject to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust or any Series thereof. No Trustee, officer, employee or agent of the Trust or any Series thereof shall be subject to any personal liability whatsoever to any Person, other than to the Trust or its Shareholders, in connection with Trust Property or the affairs of the Trust, except to the extent arising from bad faith, willful misfeasance, gross negligence or reckless disregard of his duties with respect to such Person; and all such Persons shall look solely to the Trust Property, or to the Property of one or more specific Series of the Trust if the claim arises from the conduct of such Trustee, officer, employee or agent with respect to only such Series, for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee, officer, employee, or agent, as such, of the Trust or any Series thereof, is made a party to any suit or proceeding to enforce any such liability of the Trust or any Series thereof, he shall not, on account thereof, be held to any personal liability. The Trust shall indemnify and hold each Shareholder harmless from and against all claims and liabilities, to which such Shareholder may become subject by reason of his being or having been a Shareholder, and shall reimburse such Shareholder or former Shareholder (or his or her heirs, executors, administrators or other legal representatives or in the case of a corporation or other entity, its corporate or other general successor) out of the Trust Property for all legal and other expenses reasonably incurred by him in connection with any such claim or liability. The indemnification and reimbursement required by the preceding sentence shall be made only out of assets of the one or more Series whose Shares were held by said Shareholder at the time the act or event occurred which gave rise to the claim against or liability of said Shareholder. The rights accruing to a Shareholder under this Section 4.1 shall not impair any other right to which such Shareholder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust or any Series thereof to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein. Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer, employee or agent of the Trust or any Series thereof shall be liable to the Trust, its Shareholders, or to any Shareholder, Trustee, officer, employee, or agent thereof for any action or failure to act (including without limitation the failure to compel in any way any former or acting Trustee to redress any breach of trust) except for his own bad faith, willful misfeasance, gross negligence or reckless disregard of the duties involved in the conduct of his office. Section 4.3. Mandatory Indemnification. (a) Subject to the exceptions and limitations contained in paragraph (b) below: (i) every person who is, or has been, a Trustee, officer, employee or agent of the Trust (including any individual who serves at its request as director, officer, partner, trustee or the like of another organization in which it has any interest as a shareholder, creditor or otherwise) shall be indemnified by the Trust, or by one or more Series thereof 11 if the claim arises from his or her conduct with respect to only such Series, to the fullest extent permitted by law against all liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee or officer and against amounts paid or incurred by him in the settlement thereof; (ii) the words "claim," "action," "suit," or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal, or other, including appeals), actual or threatened; and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. (b) No indemnification shall be provided hereunder to a Trustee or officer: (i) against any liability to the Trust, a Series thereof or the Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office; (ii) with respect to any matter as to which he shall have been finally adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust or a Series thereof; (iii) in the event of a settlement or other disposition not involving a final adjudication as provided in paragraph (b)(ii) resulting in a payment by a Trustee or officer, unless there has been a determination that such Trustee or officer did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office: (A) by the court or other body approving the settlement or other disposition; (B) based upon a review of readily available facts (as opposed to a full trial-type inquiry) by (x) vote of a majority of the Non-interested Trustees acting on the matter (provided that a majority of the Non-interested Trustees then in office act on the matter) or (y) written opinion of independent legal counsel; or (C) by a vote of a majority of the Shares outstanding and entitled to vote (excluding Shares owned of record or beneficially by such individual). (c) The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Trustee or officer may now or hereafter be entitled, shall continue as to a person who has ceased to be such Trustee or officer and shall inure to the benefit of the heirs, executors, administrators and assigns of such a person. Nothing contained herein shall affect any rights to indemnification to which personnel of the Trust or any Series thereof other than Trustees and officers may be entitled by contract or otherwise under law. 12 (d) Expenses of preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in paragraph (a) of this Section 4.3 may be advanced by the Trust or a Series thereof prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he is not entitled to indemnification under this Section 4.3, provided that either: (i) such undertaking is secured by a surety bond or some other appropriate security provided by the recipient, or the Trust or Series thereof shall be insured against losses arising out of any such advances; or (ii) a majority of the Non-interested Trustees acting on the matter (provided that a majority of the Non-interested Trustees act on the matter) or an independent legal counsel in a written opinion shall determine, based upon a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the recipient ultimately will be found entitled to indemnification. As used in this Section 4.3, a "Non-interested Trustee" is one who (i) is not an "Interested Person" of the Trust (including anyone who has been exempted from being an "Interested Person" by any rule, regulation or order of the Commission), and (ii) is not involved in the claim, action, suit or proceeding. Section 4.4. No Bond Required of Trustees. No Trustee shall be obligated to give any bond or other security for the performance of any of his duties hereunder. Section 4.5. No Duty of Investigation; Notice in Trust Instruments, Etc. No purchaser, lender, transfer agent or other Person dealing with the Trustees or any officer, employee or agent of the Trust or a Series thereof shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned, or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obligation, contract, instrument, certificate, Share, other security of the Trust or a Series thereof or undertaking, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively presumed to have been executed or done by the executors thereof only in their capacity as Trustees under this Declaration or in their capacity as officers, employees or agents of the Trust or a Series thereof. Every written obligation, contract, instrument, certificate, Share, other security of the Trust or a Series thereof or undertaking made or issued by the Trustees may recite that the same is executed or made by them not individually, but as Trustees under the Declaration, and that the obligations of the Trust or a Series thereof under any such instrument are not binding upon any of the Trustees or Shareholders individually, but bind only the Trust Property or the Trust Property of the applicable Series, and may contain any further recital which they may deem appropriate, but the omission of such recital shall not operate to bind the Trustees individually. The Trustees shall at all times maintain insurance for the protection of the Trust Property or the Trust Property of the applicable Series, its Shareholders, Trustees, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable. Section 4.6. Reliance on Experts, Etc. Each Trustee, officer or employee of the Trust or a Series thereof shall, in the performance of his duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon 13 the books of account or other records of the Trust or a Series thereof, upon an opinion of counsel, or upon reports made to the Trust or a Series thereof by any of its officers or employees or by the Investment Adviser, the Administrator, the Distributor, Transfer Agent, selected dealers, accountants, appraisers or other experts or consultants selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee. ARTICLE V SHARES OF BENEFICIAL INTEREST Section 5.1. Beneficial Interest. The interest of the beneficiaries hereunder shall be divided into transferable Shares of beneficial interest without par value. The number of such Shares of beneficial interest authorized hereunder is unlimited. The Trustees shall have the exclusive authority without the requirement of Shareholder approval to establish and designate one or more Series of shares and one or more Classes thereof as the Trustees deem necessary or desirable. Each Share of any Series shall represent an equal proportionate Share in the assets of that Series with each other Share in that Series. Subject to the provisions of Section 5.11 hereof, the Trustees may also authorize the creation of additional Series of Shares (the proceeds of which may be invested in separate, independently managed portfolios) and additional Classes of Shares within any Series. All Shares issued hereunder including, without limitation, Shares issued in connection with a dividend in Shares or a split in Shares, shall be fully paid and nonassessable. Section 5.2. Rights of Shareholders. The ownership of the Trust Property of every description and the right to conduct any business hereinbefore described are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust nor can they be called upon to share or assume any losses of the Trust or suffer an assessment of any kind by virtue of their ownership of Shares. The Shares shall be personal property giving only the rights specifically set forth in this Declaration. The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights, except as the Trustees may determine with respect to any Series or Class of Shares. Section 5.3. Trust Only. It is the intention of the Trustees to create only the relationship of Trustee and beneficiary between the Trustees and each Shareholder from time to time. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment or any form of legal relationship other than a trust. Nothing in this Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association. Section 5.4. Issuance of Shares. The Trustees in their discretion may, from time to time without a vote of the Shareholders, issue Shares, in addition to the then issued and outstanding Shares and Shares held in the treasury, to such party or parties and for such amount and type of consideration, including cash or property, at such time or times and on such terms as the Trustees may deem best, except that only Shares previously contracted to be sold may be issued during any period when the right of redemption is suspended pursuant to Section 6.9 hereof, and may in such manner acquire other assets (including the acquisition of assets subject to, and in connection 14 with the assumption of, liabilities) and businesses. In connection with any issuance of Shares, the Trustees may issue fractional Shares and Shares held in the treasury. The Trustees may from time to time divide or combine the Shares of the Trust or, if the Shares be divided into Series or Classes, of any Series or any Class thereof of the Trust, into a greater or lesser number without thereby changing the proportionate beneficial interests in the Trust or in the Trust Property allocated or belonging to such Series or Class. Contributions to the Trust or Series thereof may be accepted for, and Shares shall be redeemed as, whole Shares and/or 1/1000ths of a Share or integral multiples thereof. Section 5.5. Register of Shares. A register shall be kept at the principal office of the Trust or an office of the Transfer Agent which shall contain the names and addresses of the Shareholders and the number of Shares held by them respectively and a record of all transfers thereof. Such register shall be conclusive as to who are the holders of the Shares and who shall be entitled to receive dividends or distributions or otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive payment of any dividend or distribution, nor to have notice given to him as provided herein or in the By-laws, until he has given his address to the Transfer Agent or such other officer or agent of the Trustees as shall keep the said register for entry thereon. It is not contemplated that certificates will be issued for the Shares; however, the Trustees, in their discretion, may authorize the issuance of share certificates and promulgate appropriate rules and regulations as to their use. Section 5.6. Transfer of Shares. Shares shall be transferable on the records of the Trust only by the record holder thereof or by his agent thereunto duly authorized in writing, upon delivery to the Trustees or the Transfer Agent of a duly executed instrument of transfer, together with such evidence of the genuineness of each such execution and authorization and of other matters as may reasonably be required. Upon such delivery the transfer shall be recorded on the register of the Trust. Until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereunder and neither the Trustees nor any transfer agent or registrar nor any officer, employee or agent of the Trust shall be affected by any notice of the proposed transfer. Any person becoming entitled to any Shares in consequence of the death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the register of Shares as the holder of such Shares upon production of the proper evidence thereof to the Trustees or the Transfer Agent, but until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereunder and neither the Trustees nor any Transfer Agent or registrar nor any officer or agent of the Trust shall be affected by any notice of such death, bankruptcy or incompetence, or other operation of law. Section 5.7. Notices. Any and all notices to which any Shareholder may be entitled and any and all communications shall be deemed duly served or given if mailed, postage prepaid, addressed to any Shareholder of record at his last known address as recorded on the register of the Trust. Section 5.8. Treasury Shares. Shares held in the treasury shall, until resold pursuant to Section 5.4, not confer any voting rights on the Trustees, nor shall such Shares be entitled to any dividends or other distributions declared with respect to the Shares. 15 Section 5.9. Voting Powers. The Shareholders shall have power to vote only (i) for the election of Trustees as provided in Section 2.13; (ii) with respect to any investment advisory contract entered into pursuant to Section 3.2; (iii) with respect to termination of the Trust or a Series or Class thereof as provided in Section 8.2; (iv) with respect to any amendment of this Declaration to the limited extent and as provided in Section 8.3; (v) with respect to a merger, consolidation or sale of assets as provided in Section 8.4; (vi) with respect to incorporation of the Trust to the extent and as provided in Section 8.5; (vii) to the same extent as the stockholders of a Massachusetts business corporation as to whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or a Series thereof or the Shareholders of either; (viii) with respect to any plan adopted pursuant to Rule 12b-1 (or any successor rule) under the 1940 Act, and related matters; and (ix) with respect to such additional matters relating to the Trust as may be required by this Declaration, the By-laws or any registration of the Trust as an investment company under the 1940 Act with the Commission (or any successor agency) or as the Trustees may consider necessary or desirable. As determined by the Trustees without the vote or consent of shareholders, on any matter submitted to a vote of Shareholders either (i) each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote or (ii) each dollar of net asset value (number of Shares owned times net asset value per share of such Series or Class, as applicable) shall be entitled to one vote on any matter on which such Shares are entitled to vote and each fractional dollar amount shall be entitled to a proportionate fractional vote. The Trustees may, in conjunction with the establishment of any further Series or any Classes of Shares, establish conditions under which the several Series or Classes of Shares shall have separate voting rights or no voting rights. There shall be no cumulative voting in the election of Trustees. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, this Declaration or the By-laws to be taken by Shareholders. The By-laws may include further provisions for Shareholders' votes and meetings and related matters. Section 5.10. Meetings of Shareholders. No annual or regular meetings of Shareholders are required. Special meetings of the Shareholders, including meetings involving only the holders of Shares of one or more but less than all Series or Classes thereof, may be called at any time by the Chairman of the Board, President, or any Vice-President of the Trust, and shall be called by the President or the Secretary at the request, in writing or by resolution, of a majority of the Trustees, or at the written request of the holder or holders of ten percent (10%) or more of the total number of Outstanding Shares of the Trust entitled to vote at such meeting. Meetings of the Shareholders of any Series shall be called by the President or the Secretary at the written request of the holder or holders of ten percent (10%) or more of the total number of Outstanding Shares of such Series of the Trust entitled to vote at such meeting. Any such request shall state the purpose of the proposed meeting. Section 5.11. Series or Class Designation. (a) Without limiting the authority of the Trustees set forth in Section 5.1 to establish and designate any further Series or Classes, the Trustees hereby establish the following Series: John Hancock Large Cap Equity Fund, John Hancock Sovereign Investors Fund, and John Hancock Balanced Fund, each of which consists of Class A Shares, Class B Shares, Class C Shares, and Class I Shares; and John Hancock Fundamental Value Fund, and John Hancock Strategic Growth Fund, each of which consists of Class A Shares, Class B Shares, and Class C Shares (the "Existing Series"). 16 (b) The Shares of the Existing Series and Class thereof herein established and designated and any Shares of any further Series and Classes thereof that may from time to time be established and designated by the Trustees shall be established and designated, and the variations in the relative rights and preferences as between the different Series shall be fixed and determined, by the Trustees (unless the Trustees otherwise determine with respect to further Series or Classes at the time of establishing and designating the same); provided, that all Shares shall be identical except that there may be variations so fixed and determined between different Series or Classes thereof as to investment objective, policies and restrictions, purchase price, payment obligations, distribution expenses, right of redemption, special and relative rights as to dividends and on liquidation, conversion rights, exchange rights, and conditions under which the several Series or Classes shall have separate voting rights, all of which are subject to the limitations set forth below. All references to Shares in this Declaration shall be deemed to be Shares of any or all Series or Classes as the context may require. (c) As to any Existing Series and Classes herein established and designated and any further division of Shares of the Trust into additional Series or Classes, the following provisions shall be applicable: (i) The number of authorized Shares and the number of Shares of each Series or Class thereof that may be issued shall be unlimited. The Trustees may classify or reclassify any unissued Shares or any Shares previously issued and reacquired of any Series or Class into one or more Series or one or more Classes that may be established and designated from time to time. The Trustees may hold as treasury shares (of the same or some other Series or Class), reissue for such consideration and on such terms as they may determine, or cancel any Shares of any Series or Class reacquired by the Trust at their discretion from time to time. (ii) All consideration received by the Trust for the issue or sale of Shares of a particular Series or Class, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to that Series for all purposes, subject only to the rights of creditors of such Series and except as may otherwise be required by applicable tax laws, and shall be so recorded upon the books of account of the Trust. In the event that there are any assets, income, earnings, profits, and proceeds thereof, funds, or payments which are not readily identifiable as belonging to any particular Series, the Trustees shall allocate them among any one or more of the Series established and designated from time to time in such manner and on such basis as they, in their sole discretion, deem fair and equitable. Each such allocation by the Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes. No holder of Shares of any Series shall have any claim on or right to any assets allocated or belonging to any other Series. (iii) The assets belonging to each particular Series shall be charged with the liabilities of the Trust in respect of that Series or the appropriate Class or Classes thereof and all expenses, costs, charges and reserves attributable to that Series or Class or Classes thereof, and any general liabilities, expenses, costs, charges or reserves of the Trust which are not readily identifiable as belonging to any particular Series shall be allocated and charged by the Trustees to and among any one or more of the Series established and designated from time to time in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive 17 and binding upon the Shareholders of all Series and Classes for all purposes. The Trustees shall have full discretion, to the extent not inconsistent with the 1940 Act, to determine which items are capital; and each such determination and allocation shall be conclusive and binding upon the Shareholders. The assets of a particular Series of the Trust shall under no circumstances be charged with liabilities attributable to any other Series or Class thereof of the Trust. All persons extending credit to, or contracting with or having any claim against a particular Series or Class of the Trust shall look only to the assets of that particular Series for payment of such credit, contract or claim. (iv) The power of the Trustees to pay dividends and make distributions shall be governed by Section 7.2 of this Declaration. With respect to any Series or Class, dividends and distributions on Shares of a particular Series or Class may be paid with such frequency as the Trustees may determine, which may be daily or otherwise, pursuant to a standing resolution or resolutions adopted only once or with such frequency as the Trustees may determine, to the holders of Shares of that Series or Class, from such of the income and capital gains, accrued or realized, from the assets belonging to that Series, as the Trustees may determine, after providing for actual and accrued liabilities belonging to that Series or Class. All dividends and distributions on Shares of a particular Series or Class shall be distributed pro rata to the Shareholders of that Series or Class in proportion to the number of Shares of that Series or Class held by such Shareholders at the time of record established for the payment of such dividends or distribution. (v) Each Share of a Series of the Trust shall represent a beneficial interest in the net assets of such Series. Each holder of Shares of a Series or Class thereof shall be entitled to receive his pro rata share of distributions of income and capital gains made with respect to such Series or Class net of expenses. Upon redemption of his Shares or indemnification for liabilities incurred by reason of his being or having been a Shareholder of a Series or Class, such Shareholder shall be paid solely out of the funds and property of such Series of the Trust. Upon liquidation or termination of a Series or Class thereof of the Trust, Shareholders of such Series or Class thereof shall be entitled to receive a pro rata share of the net assets of such Series. A Shareholder of a particular Series of the Trust shall not be entitled to participate in a derivative or class action on behalf of any other Series or the Shareholders of any other Series of the Trust. (vi) On each matter submitted to a vote of Shareholders, all Shares of all Series and Classes shall vote as a single class; provided, however, that (1) as to any matter with respect to which a separate vote of any Series or Class is required by the 1940 Act or is required by attributes applicable to any Series or Class or is required by any Rule 12b-1 plan, such requirements as to a separate vote by that Series or Class shall apply, (2) to the extent that a matter referred to in clause (1) above, affects more than one Class or Series and the interests of each such Class or Series in the matter are identical, then, subject to clause (3) below, the Shares of all such affected Classes or Series shall vote as a single Class; (3) as to any matter which does not affect the interests of a particular Series or Class, only the holders of Shares of the one or more affected Series or Classes shall be entitled to vote; and (4) the provisions of the following sentence shall apply. On any matter that pertains to any particular Class of a particular Series or to any Class expenses with respect to any Series which matter may be submitted to a vote of Shareholders, only Shares of the affected Class or that Series, as the case may be, shall be entitled to vote except that: (i) to the extent said matter affects Shares of another Class or Series, such other Shares shall also be entitled to vote, and in such cases Shares of the affected Class, as the case may be, of such Series shall be voted in the aggregate together with such other Shares; 18 and (ii) to the extent that said matter does not affect Shares of a particular Class of such Series, said Shares shall not be entitled to vote (except where otherwise required by law or permitted by the Trustees acting in their sole discretion) even though the matter is submitted to a vote of the Shareholders of any other Class or Series. (vii) Except as otherwise provided in this Article V, the Trustees shall have the power to determine the designations, preferences, privileges, payment obligations, limitations and rights, including voting and dividend rights, of each Class and Series of Shares. Subject to compliance with the requirements of the 1940 Act, the Trustees shall have the authority to provide that the holders of Shares of any Series or Class shall have the right to convert or exchange said Shares into Shares of one or more Series or Classes of Shares in accordance with such requirements, conditions and procedures as may be established by the Trustees. (viii) The establishment and designation of any Series or Classes of Shares shall be effective upon the execution by a majority of the then Trustees of an instrument setting forth such establishment and designation and the relative rights and preferences of such Series or Classes, or as otherwise provided in such instrument. At any time that there are no Shares outstanding of any particular Series or Class previously established and designated, the Trustees may by an instrument executed by a majority of their number abolish that Series or Class and the establishment and designation thereof. Each instrument referred to in this section shall have the status of an amendment to this Declaration. Section 5.12. Assent to Declaration of Trust. Every Shareholder, by virtue of having become a Shareholder, shall be held to have expressly assented and agreed to the terms hereof and to have become a party hereto. ARTICLE VI REDEMPTION AND REPURCHASE OF SHARES Section 6.1. Redemption of Shares. (a) All Shares of the Trust shall be redeemable, at the redemption price determined in the manner set out in this Declaration. Redeemed or repurchased Shares may be resold by the Trust. The Trust may require any Shareholder to pay a sales charge to the Trust, the underwriter, or any other person designated by the Trustees upon redemption or repurchase of Shares in such amount and upon such conditions as shall be determined from time to time by the Trustees. (b) The Trust shall redeem the Shares of the Trust or any Series or Class thereof at the price determined as hereinafter set forth, upon the appropriately verified written application of the record holder thereof (or upon such other form of request as the Trustees may determine) at such office or agency as may be designated from time to time for that purpose by the Trustees. The Trustees may from time to time specify additional conditions, not inconsistent with the 1940 Act, regarding the redemption of Shares in the Trust's then effective Prospectus. Section 6.2. Price. Shares shall be redeemed at a price based on their net asset value determined as set forth in Section 7.1 hereof as of such time as the Trustees shall have theretofore prescribed by resolution. In the absence of such resolution, the redemption price of Shares deposited shall be based on the net asset value of such Shares next determined as set forth 19 in Section 7.1 hereof after receipt of such application. The amount of any contingent deferred sales charge or redemption fee payable upon redemption of Shares may be deducted from the proceeds of such redemption. Section 6.3. Payment. Payment of the redemption price of Shares of the Trust or any Series or Class thereof shall be made in cash or in property to the Shareholder at such time and in the manner, not inconsistent with the 1940 Act or other applicable laws, as may be specified from time to time in the Trust's then effective Prospectus(es), subject to the provisions of Section 6.4 hereof. Notwithstanding the foregoing, the Trustees may withhold from such redemption proceeds any amount arising (i) from a liability of the redeeming Shareholder to the Trust or (ii) in connection with any Federal or state tax withholding requirements. Section 6.4. Effect of Suspension of Determination of Net Asset Value. If, pursuant to Section 6.9 hereof, the Trustees shall declare a suspension of the determination of net asset value with respect to Shares of the Trust or of any Series or Class thereof, the rights of Shareholders (including those who shall have applied for redemption pursuant to Section 6.1 hereof but who shall not yet have received payment) to have Shares redeemed and paid for by the Trust or a Series or Class thereof shall be suspended until the termination of such suspension is declared. Any record holder who shall have his redemption right so suspended may, during the period of such suspension, by appropriate written notice of revocation at the office or agency where application was made, revoke any application for redemption not honored and withdraw any Share certificates on deposit. The redemption price of Shares for which redemption applications have not been revoked shall be based on the net asset value of such Shares next determined as set forth in Section 7.1 after the termination of such suspension, and payment shall be made within seven (7) days after the date upon which the application was made plus the period after such application during which the determination of net asset value was suspended. Section 6.5. Repurchase by Agreement. The Trust may repurchase Shares directly, or through the Distributor or another agent designated for the purpose, by agreement with the owner thereof at a price not exceeding the net asset value per share determined as of the time when the purchase or contract of purchase is made or the net asset value as of any time which may be later determined pursuant to Section 7.1 hereof, provided payment is not made for the Shares prior to the time as of which such net asset value is determined. Section 6.6. Redemption of Shareholder's Interest. The Trustees, in their sole discretion, may cause the Trust to redeem all of the Shares of one or more Series or Class thereof held by any Shareholder if the value of such Shares held by such Shareholder is less than the minimum amount established from time to time by the Trustees. Section 6.7. Redemption of Shares in Order to Qualify as Regulated Investment Company; Disclosure of Holding. (a) If the Trustees shall, at any time and in good faith, be of the opinion that direct or indirect ownership of Shares or other securities of the Trust has or may become concentrated in any Person to an extent which would disqualify the Trust or any Series of the Trust as a regulated investment company under the Internal Revenue Code of 1986, then the Trustees shall have the power by lot or other means deemed equitable by them (i) to call for redemption by any such Person a number, or principal amount, of Shares or other securities of the Trust or any Series of the Trust sufficient to maintain or bring the direct or indirect ownership of Shares or other securities of the Trust or any Series of the Trust into conformity with the requirements for such qualification and (ii) to refuse to transfer or issue Shares or other securities of the Trust or any Series of the Trust to any Person whose acquisition of the Shares or other securities 20 of the Trust or any Series of the Trust in question would result in such disqualification. The redemption shall be effected at the redemption price and in the manner provided in Section 6.1. (b) The holders of Shares or other securities of the Trust or any Series of the Trust shall upon demand disclose to the Trustees in writing such information with respect to direct and indirect ownership of Shares or other securities of the Trust or any Series of the Trust as the Trustees deem necessary to comply with the provisions of the Internal Revenue Code of 1986, as amended, or to comply with the requirements of any other taxing authority. Section 6.8. Reductions in Number of Outstanding Shares Pursuant to Net Asset Value Formula. The Trust may also reduce the number of outstanding Shares of the Trust or of any Series of the Trust pursuant to the provisions of Section 7.3. Section 6.9. Suspension of Right of Redemption. The Trust may declare a suspension of the right of redemption or postpone the date of payment or redemption for the whole or any part of any period (i) during which the New York Stock Exchange is closed other than customary weekend and holiday closings, (ii) during which trading on the New York Stock Exchange is restricted, (iii) during which an emergency exists as a result of which disposal by the Trust or a Series thereof of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Trust or a Series thereof fairly to determine the value of its net assets, or (iv) during any other period when the Commission may for the protection of Shareholders of the Trust by order permit suspension of the right of redemption or postponement of the date of payment or redemption; provided that applicable rules and regulations of the Commission shall govern as to whether the conditions prescribed in clauses (ii), (iii), or (iv) exist. Such suspension shall take effect at such time as the Trust shall specify but not later than the close of business on the business day next following the declaration of suspension, and thereafter there shall be no right of redemption or payment on redemption until the Trust shall declare the suspension at an end, except that the suspension shall terminate in any event on the first day on which said stock exchange shall have reopened or the period specified in (ii) or (iii) shall have expired (as to which in the absence of an official ruling by the Commission, the determination of the Trust shall be conclusive). In the case of a suspension of the right of redemption, a Shareholder may either withdraw his request for redemption or receive payment based on the net asset value existing after the termination of the suspension. ARTICLE VII DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS Section 7.1. Net Asset Value. The net asset value of each outstanding Share of the Trust or of each Series or Class thereof shall be determined on such days and at such time or times as the Trustees may determine. The value of the assets of the Trust or any Series thereof may be determined (i) by a pricing service which utilizes electronic pricing techniques based on general institutional trading, (ii) by appraisal of the securities owned by the Trust or any Series of the Trust, (iii) in certain cases, at amortized cost, or (iv) by such other method as shall be deemed to reflect the fair value thereof, determined in good faith by or under the direction of the Trustees. 21 From the total value of said assets, there shall be deducted all indebtedness, interest, taxes, payable or accrued, including estimated taxes on unrealized book profits, expenses and management charges accrued to the appraisal date, net income determined and declared as a distribution and all other items in the nature of liabilities which shall be deemed appropriate, as incurred by or allocated to the Trust or any Series or Class of the Trust. The resulting amount which shall represent the total net assets of the Trust or Series or Class thereof shall be divided by the number of Shares of the Trust or Series or Class thereof outstanding at the time and the quotient so obtained shall be deemed to be the net asset value of the Shares of the Trust or Series or Class thereof. The net asset value of the Shares shall be determined at least once on each business day, as of the close of regular trading on the New York Stock Exchange or as of such other time or times as the Trustees shall determine. The power and duty to make the daily calculations may be delegated by the Trustees to the Investment Adviser, the Administrator, the Custodian, the Transfer Agent or such other Person as the Trustees by resolution may determine. The Trustees may suspend the daily determination of net asset value to the extent permitted by the 1940 Act. It shall not be a violation of any provision of this Declaration if Shares are sold, redeemed or repurchased by the Trust at a price other than one based on net asset value if the net asset value is affected by one or more errors inadvertently made in the pricing of portfolio securities or in accruing income, expenses or liabilities. Section 7.2. Distributions to Shareholders. (a) The Trustees shall from time to time distribute ratably among the Shareholders of the Trust or of a Series or Class thereof such proportion of the net profits, surplus (including paid-in surplus), capital, or assets of the Trust or such Series held by the Trustees as they may deem proper. Such distributions may be made in cash or property (including without limitation any type of obligations of the Trust or Series or Class or any assets thereof), and the Trustees may distribute ratably among the Shareholders of the Trust or Series or Class thereof additional Shares of the Trust or Series or Class thereof issuable hereunder in such manner, at such times, and on such terms as the Trustees may deem proper. Such distributions may be among the Shareholders of the Trust or Series or Class thereof at the time of declaring a distribution or among the Shareholders of the Trust or Series or Class thereof at such other date or time or dates or times as the Trustees shall determine. The Trustees may in their discretion determine that, solely for the purposes of such distributions, Outstanding Shares shall exclude Shares for which orders have been placed subsequent to a specified time on the date the distribution is declared or on the next preceding day if the distribution is declared as of a day on which Boston banks are not open for business, all as described in the then effective Prospectus under the Securities Act of 1933. The Trustees may always retain from the net profits such amount as they may deem necessary to pay the debts or expenses of the Trust or a Series or Class thereof or to meet obligations of the Trust or a Series or Class thereof, or as they may deem desirable to use in the conduct of its affairs or to retain for future requirements or extensions of the business. The Trustees may adopt and offer to Shareholders such dividend reinvestment plans, cash dividend payout plans or related plans as the Trustees shall deem appropriate. The Trustees may in their discretion determine that an account administration fee or other similar charge may be deducted directly from the income and other distributions paid on Shares to a Shareholder's account in each Series or Class. (b) Inasmuch as the computation of net income and gains for Federal income tax purposes may vary from the computation thereof on the books, the above provisions shall be interpreted to give the Trustees the power in their discretion to distribute for any fiscal year as ordinary dividends and as capital gains distributions, respectively, additional amounts sufficient to enable the Trust or a Series or Class thereof to avoid or reduce liability for taxes. 22 Section 7.3. Determination of Net Income; Constant Net Asset Value; Reduction of Outstanding Shares. Subject to Section 5.11 hereof, the net income of the Series and Classes thereof of the Trust shall be determined in such manner as the Trustees shall provide by resolution. Expenses of the Trust or of a Series or Class thereof, including the advisory or management fee, shall be accrued each day. Each Class shall bear only expenses relating to its Shares and an allocable share of Series expenses in accordance with such policies as may be established by the Trustees from time to time and as are not inconsistent with the provisions of this Declaration or of any applicable document filed by the Trust with the Commission or of the Internal Revenue Code of 1986, as amended. Such net income may be determined by or under the direction of the Trustees as of the close of regular trading on the New York Stock Exchange on each day on which such market is open or as of such other time or times as the Trustees shall determine, and, except as provided herein, all the net income of any Series or Class, as so determined, may be declared as a dividend on the Outstanding Shares of such Series or Class. If, for any reason, the net income of any Series or Class determined at any time is a negative amount, or for any other reason, the Trustees shall have the power with respect to such Series or Class (i) to offset each Shareholder's pro rata share of such negative amount from the accrued dividend account of such Shareholder, or (ii) to reduce the number of Outstanding Shares of such Series or Class by reducing the number of Shares in the account of such Shareholder by that number of full and fractional Shares which represents the amount of such excess negative net income, or (iii) to cause to be recorded on the books of the Trust an asset account in the amount of such negative net income, which account may be reduced by the amount, provided that the same shall thereupon become the property of the Trust with respect to such Series or Class and shall not be paid to any Shareholder, of dividends declared thereafter upon the Outstanding Shares of such Series or Class on the day such negative net income is experienced, until such asset account is reduced to zero. The Trustees shall have full discretion to determine whether any cash or property received shall be treated as income or as principal and whether any item of expense shall be charged to the income or the principal account, and their determination made in good faith shall be conclusive upon the Shareholders. In the case of stock dividends received, the Trustees shall have full discretion to determine, in the light of the particular circumstances, how much if any of the value thereof shall be treated as income, the balance, if any, to be treated as principal. Section 7.4. Power to Modify Foregoing Procedures. Notwithstanding any of the foregoing provisions of this Article VII, but subject to Section 5.11 hereof, the Trustees may prescribe, in their absolute discretion, such other bases and times for determining the per Share net asset value of the Shares of the Trust or a Series or Class thereof or net income of the Trust or a Series or Class thereof, or the declaration and payment of dividends and distributions as they may deem necessary or desirable. Without limiting the generality of the foregoing, the Trustees may establish several Series or Classes of Shares in accordance with Section 5.11, and declare dividends thereon in accordance with Section 5.11(d)(iv). ARTICLE VIII DURATION; TERMINATION OF TRUST OR A SERIES OR CLASS; AMENDMENT; MERGERS, ETC. 23 Section 8.1. Duration. The Trust shall continue without limitation of time but subject to the provisions of this Article VIII. Section 8.2. Termination of the Trust or a Series or a Class. The Trust or any Series or Class thereof may be terminated by (i) the affirmative vote of the holders of not less than two-thirds of the Outstanding Shares entitled to vote and present in person or by proxy at any meeting of Shareholders of the Trust or the appropriate Series or Class thereof, (ii) by an instrument or instruments in writing without a meeting, consented to by the holders of two-thirds of the Outstanding Shares of the Trust or a Series or Class thereof; provided, however, that, if such termination as described in clauses (i) and (ii) is recommended by the Trustees, the vote or written consent of the holders of a majority of the Outstanding Shares of the Trust or a Series or Class thereof entitled to vote shall be sufficient authorization, or (iii) notice to Shareholders by means of an instrument in writing signed by a majority of the Trustees, stating that a majority of the Trustees has determined that the continuation of the Trust or a Series or a Class thereof is not in the best interest of such Series or a Class, the Trust or their respective shareholders as a result of factors or events adversely affecting the ability of such Series or a Class or the Trust to conduct its business and operations in an economically viable manner. Such factors and events may include (but are not limited to) the inability of a Series or Class or the Trust to maintain its assets at an appropriate size, changes in laws or regulations governing the Series or Class or the Trust or affecting assets of the type in which such Series or Class or the Trust invests or economic developments or trends having a significant adverse impact on the business or operations of such Series or Class or the Trust. Upon the termination of the Trust or the Series or Class, (i) The Trust, Series or Class shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust, Series or Class and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust, Series or Class shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, Series or Class, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Property or Trust Property allocated or belonging to such Series or Class to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business; provided that any sale, conveyance, assignment, exchange, transfer or other disposition of all or substantially all the Trust Property or Trust Property allocated or belonging to such Series or Class that requires Shareholder approval in accordance with Section 8.4 hereof shall receive the approval so required. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property or the remaining property of the terminated Series or Class, in cash or in kind or partly each, among the Shareholders of the Trust or the Series or Class according to their respective rights. 24 (b) After termination of the Trust, Series or Class and distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust and file with the Office of the Secretary of The Commonwealth of Massachusetts an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties with respect to the Trust or the terminated Series or Class, and the rights and interests of all Shareholders of the Trust or the terminated Series or Class shall thereupon cease. Section 8.3. Amendment Procedure. (a) This Declaration may be amended by a vote of the holders of a majority of the Shares outstanding and entitled to vote or by any instrument in writing, without a meeting, signed by a majority of the Trustees and consented to by the holders of a majority of the Shares outstanding and entitled to vote. (b) This Declaration may be amended by a vote of a majority of Trustees, without approval or consent of the Shareholders, except that no amendment can be made by the Trustees to impair any voting or other rights of shareholders prescribed by Federal or state law. Without limiting the foregoing, the Trustees may amend this Declaration without the approval or consent of Shareholders (i) to change the name of the Trust or any Series, (ii) to add to their duties or obligations or surrender any rights or powers granted to them herein; (iii) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provisions with respect to matters or questions arising under this Declaration which will not be inconsistent with the provisions of this Declaration; and (iv) to eliminate or modify any provision of this Declaration which (a) incorporates, memorializes or sets forth an existing requirement imposed by or under any Federal or state statute or any rule, regulation or interpretation thereof or thereunder or (b) any rule, regulation, interpretation or guideline of any Federal or state agency, now or hereafter in effect, including without limitation, requirements set forth in the 1940 Act and the rules and regulations thereunder (and interpretations thereof), to the extent any change in applicable law liberalizes, eliminates or modifies any such requirements, but the Trustees shall not be liable for failure to do so. (c) The Trustees may also amend this Declaration without the approval or consent of Shareholders if they deem it necessary to conform this Declaration to the requirements of applicable Federal or state laws or regulations or the requirements of the regulated investment company provisions of the Internal Revenue Code of 1986, as amended, or if requested or required to do so by any Federal agency or by a state Blue Sky commissioner or similar official, but the Trustees shall not be liable for failing so to do. (d) Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessments upon Shareholders. (e) A certificate signed by a majority of the Trustees setting forth an amendment and reciting that it was duly adopted by the Trustees or by the Shareholders as aforesaid or a copy of the Declaration, as amended, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust. Section 8.4. Merger, Consolidation and Sale of Assets. The Trust or any Series may merge or consolidate into any other corporation, association, trust or other organization or may 25 sell, lease or exchange all or substantially all of the Trust Property or Trust Property allocated or belonging to such Series, including its good will, upon such terms and conditions and for such consideration when and as authorized at any meeting of Shareholders called for the purpose by the affirmative vote of the holders of two-thirds of the Shares of the Trust or such Series outstanding and entitled to vote and present in person or by proxy at a meeting of Shareholders, or by an instrument or instruments in writing without a meeting, consented to by the holders of two-thirds of the Shares of the Trust or such Series; provided, however, that, if such merger, consolidation, sale, lease or exchange is recommended by the Trustees, the vote or written consent of the holders of a majority of the Outstanding Shares of the Trust or such Series entitled to vote shall be sufficient authorization; and any such merger, consolidation, sale, lease or exchange shall be deemed for all purposes to have been accomplished under and pursuant to Massachusetts law. Section 8.5. Incorporation. The Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction or any other trust, partnership, association or other organization to take over all or any portion of the Trust Property or the Trust Property allocated or belonging to such Series or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer all or any portion of the Trust Property or the Trust Property allocated or belonging to such Series to any such corporation, trust, association or organization in exchange for the shares or securities thereof or otherwise, and to lend money to, subscribe for the shares or securities of, and enter into any contracts with any such corporation, trust, partnership, association or organization, or any corporation, partnership, trust, association or organization in which the Trust or such Series holds or is about to acquire shares or any other interest. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any such corporation, trust, partnership, association or other organization if and to the extent permitted by law, as provided under the law then in effect. Nothing contained herein shall be construed as requiring approval of Shareholders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations and selling, conveying or transferring all or a portion of the Trust Property to such organization or entities. ARTICLE IX REPORTS TO SHAREHOLDERS The Trustees shall at least semi-annually submit to the Shareholders of each Series a written financial report of the transactions of the Trust and Series thereof, including financial statements which shall at least annually be certified by independent public accountants. ARTICLE X MISCELLANEOUS Section 10.1. Execution and Filing. This Declaration and any amendment hereto shall be filed in the office of the Secretary of The Commonwealth of Massachusetts and in such other places as may be required under the laws of Massachusetts and may also be filed or recorded in such other places as the Trustees deem appropriate. Each amendment so filed shall be 26 accompanied by a certificate signed and acknowledged by a Trustee stating that such action was duly taken in a manner provided herein, and unless such amendment or such certificate sets forth some later time for the effectiveness of such amendment, such amendment shall be effective upon its execution. A restated Declaration, integrating into a single instrument all of the provisions of the Declaration which are then in effect and operative, may be executed from time to time by a majority of the Trustees and filed with the Secretary of The Commonwealth of Massachusetts. A restated Declaration shall, upon execution, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments thereto. Section 10.2. Governing Law. This Declaration is executed by the Trustees and delivered in The Commonwealth of Massachusetts and with reference to the laws thereof, and the rights of all parties and the validity and construction of every provision hereof shall be subject to and construed according to the laws of said Commonwealth. Section 10.3. Counterparts. This Declaration may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart. Section 10.4. Reliance by Third Parties. Any certificate executed by an individual who, according to the records of the Trust appears to be a Trustee hereunder, certifying (a) the number or identity of Trustees or Shareholders, (b) the due authorization of the execution of any instrument or writing, (c) the form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or Shareholders present at any meeting or executing any written instrument satisfies the requirements of this Declaration, (e) the form of any By-laws adopted by or the identity of any officers elected by the Trustees, or (f) the existence of any fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any Person dealing with the Trustees and their successors. Section 10.5. Provisions in Conflict with Law or Regulations. (a) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the regulated investment company provisions of the Internal Revenue Code of 1986 or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of this Declaration; provided, however, that such determination shall not affect any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted prior to such determination. (b) If any provision of this Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration in any jurisdiction. 27 IN WITNESS WHEREOF, the undersigned have executed this instrument as of the 26th of February, 2002. /s/ James F. Carlin ------------------- James F. Carlin as Trustee and not individually, 576 Gulf Boulevard PO Box 1174 Boca Grande, Florida 33921 /s/ William H. Cunningham ------------------------- William H. Cunningham as Trustee and not individually, 5601 Creek Road PO Box 1220 Dripping Springs, Texas 78620-1220 -------------------- John M. DeCiccio as Trustee and not individually, 37 Mount Vernon Street, Apt. 3 Boston, Massachusetts 02108 /s/ Ronald R. Dion ------------------ Ronald R. Dion as Trustee and not individually, 66 Orchard Road Swampscott, Massachusetts 01907 /s/ Maureen R. Ford ------------------- Maureen R. Ford as Trustee and not individually, 314 Beacon Street, #4 Boston, Massachusetts 02116 28 /s/ Charles L. Ladner --------------------- Charles L. Ladner as Trustee and not individually, 444 Chandlee Drive PO Box 697 Berwyn, Pennsylvania 19312 /s/ Steven R. Pruchansky ------------------------ Steven R. Pruchansky as Trustee and not individually, 6920 Daniels Road Naples, Florida 33999 /s/ Norman H. Smith ------------------- Norman H. Smith as Trustee and not individually, 243 Mount Oriole Lane Linden, Virginia 22642 /s/ John P. Toolan ------------------ John P. Toolan as Trustee and not individually, 13 Chadwell Place Morristown, New Jersey 07960 29 EX-99 4 ex2.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 5 ex14.txt LEGAL OPINION March 8, 2002 John Hancock Capital Series on behalf of John Hancock Core Equity 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 Core Equity Fund (the "Fund"), a series of John Hancock Capital Series, 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 Capital Series, on behalf of John Hancock Core Equity Fund 101 Huntington Avenue Boston, MA 02199 John Hancock Institutional Series Trust, on behalf of John Hancock Core Value 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 Capital Series, on behalf of John Hancock Core Equity Fund ("Acquiring Fund"), and John Hancock Institutional Series Trust on behalf of John Hancock Core Value 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 Capital Series, 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 Capital Series, 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 -------------------- 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 Capital Series, on behalf of John Hancock Core Equity Fund 101 Huntington Avenue Boston, MA 02199 John Hancock Institutional Series Trust, on behalf of John Hancock Core Growth 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 Capital Series, on behalf of John Hancock Core Equity Fund ("Acquiring Fund"), and John Hancock Institutional Series Trust on behalf of John Hancock Core Growth 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 Capital Series, 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 Capital Series, 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 INDEPENDENT ACCOUNTANTS We hereby consent to incorporation by reference in the Prospectus/Proxy Statement and the use in the Statement of Additional Information constituting parts of this Registration on Form N-14 (the "Registration Statement") of our reports dated December 11, 2001 relating to the financial statements and financial highlights of John Hancock International Fund and John Hancock Mid Cap Growth Fund and our report dated February 11, 2002 relating to John Hancock Core Equity Fund, which appear in such Registration Statement. We also consent to the references to us under the headings "Financial Highlights", "Experts" and "Independent Auditors" in such Registration Statement. /s/PricewaterhouseCoopers LLP - ----------------------------- Boston, Massachusetts March 7, 2002 -----END PRIVACY-ENHANCED MESSAGE-----