FILE NO. 33-12947
FILE NO. 811-5079
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 11 (X)
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 12 (X)
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JOHN HANCOCK TAX-EXEMPT SERIES FUND
(Exact Name of Registrant as Specified in Charter)
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, (617) 375-1700
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SUSAN S. NEWTON
Vice President and Secretary
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b) of Rule 485
( ) on (date) pursuant to paragraph (b) of Rule 485
( ) 75 days after filing pursuant to paragraph (a) of Rule 485
(X) on September 30, 1996 pursuant to paragraph (a) of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of securities under the Securities Act of 1933.
The Registrant will file the notice required by Rule 24f-2 for the most recent
fiscal year of John Hancock Tax-Exempt Series Fund on or about October 20, 1995.
The Registrant filed the notice required by Rule 24f-2 for the most recent
fiscal year of John Hancock Managed Tax-Exempt Fund on or about December 26,
1996.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
JOHN HANCOCK
TAX-FREE
INCOME FUNDS
[JOHN HANCOCK'S GRAPHIC LOGO. A CIRCLE,
A DIAMOND, TRIANGLE AND A DIAMOND.]
- --------------------------------------------------------------------------------
PROSPECTUS
SEPTEMBER 30, 1996
This prospectus gives vital information about these funds. For your own benefit
and protection, please read it before you invest, and keep it on hand for future
reference.
Please note that these funds:
- - are not bank deposits
- - are not federally insured
- - are not endorsed by any bank or government agency
- - are not guaranteed to achieve their goal(s)
High Yield Tax-Free Fund may invest up to 100% in junk bonds; read risk
information carefully.
Like all mutual fund shares, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
CALIFORNIA TAX-FREE INCOME FUND
HIGH YIELD TAX-FREE FUND
MANAGED TAX-EXEMPT FUND
MASSACHUSETTS TAX-FREE
INCOME FUND
NEW YORK TAX-FREE INCOME FUND
TAX-FREE BOND FUND
[JOHN HANCOCK'S GRAPHIC LOGO. A CIRCLE,
A DIAMOND, TRIANGLE AND A DIAMOND.]
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
101 Huntington Avenue, Boston, Massachusetts 02199-7603
With respect to Class B shares of John Hancock Massachusetts Tax-Free Income
Fund and Class B shares of John Hancock New York Tax-Free Income Fund:
A registration statement relating to these securities and exchange commission.
These securities may not be sold nor may offers to buy be accepted prior to the
registration statement becomes effective. This prospectus shall not constitute
an offer to sell or the solicitation of an offer to buy Class B shares of these
Funds.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
CONTENTS
- --------------------------------------------------------------------------------
A fund-by-fund look at goals, strategies, risks, expenses and financial history.
Policies and instructions for opening, maintaining and closing an account in any
tax-free income fund.
Details that apply to the tax-free income funds as a group.
CALIFORNIA TAX-FREE INCOME FUND 4
HIGH YIELD TAX-FREE FUND 6
MANAGED TAX-EXEMPT FUND 8
MASSACHUSETTS TAX-FREE INCOME FUND 10
NEW YORK TAX-FREE INCOME FUND 12
TAX-FREE BOND FUND 14
YOUR ACCOUNT
Choosing a share class 16
How sales charges are calculated 16
Sales charge reductions and waivers 17
Opening an account 17
Buying shares 18
Selling shares 19
Transaction policies 21
Dividends and account policies 21
Additional investor services 22
FUND DETAILS
Business structure 23
Sales compensation 24
More about risk 26
FOR MORE INFORMATION BACK COVER
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
OVERVIEW
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
GOAL AND STRATEGY The fund's particular investment goals and the strategies it
intends to use in pursuing those goals.
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
PORTFOLIO SECURITIES The primary types of securities in which the fund invests.
Secondary investments are described in "More about risk" at the end of the
prospectus.
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
RISK FACTORS The major risk factors associated with the fund.
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
PORTFOLIO MANAGEMENT The individual or group designated by the investment
adviser to handle the fund's day-to-day management.
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
EXPENSES The overall costs borne by an investor in the fund, including sales
charges and annual expenses.
[[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
FINANCIAL HIGHLIGHTS A table showing the fund's financial performance for up to
ten years, by share class. A bar chart showing total return allows you to
compare the fund's historical risk level to those of other funds.
GOAL OF THE TAX-FREE INCOME FUNDS
John Hancock tax-free income funds seek to offer regular income that is exempt
from federal and, in some cases, state and local income tax. Each fund employs
its own strategy and has its own risk/reward profile. Each fund invests at least
80% of assets in municipal securities exempt from federal (and in some funds,
state) income tax as well as the federal alternative minimum tax. However, a
portion of a tax-free fund's income may be subject to these taxes. Because you
could lose money by investing in these funds, be sure to read all risk
disclosure carefully before investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
- - are in higher income brackets
- - desire regular monthly income
- - are interested in lowering their income tax burden
- - live in California, Massachusetts or New York (for state- specific funds)
Tax-free income funds may NOT be appropriate if you:
- - are seeking an investment for a tax-deferred retirement account
- - are not subject to a high level of state or federal income taxes
- - are investing for maximum return over a long time horizon
- - require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock tax-free income funds are managed by John Hancock Advisers,
Inc. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John
Hancock Mutual Life Insurance Company and manages more than $19 billion in
assets.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
CALIFORNIA TAX-FREE INCOME FUND
REGISTRANT NAME: JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
TICKER SYMBOL CLASS A: TACAX CLASS B: TSCAX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks income that is exempt from federal and California personal
income taxes. The fund seeks to provide the maximum current income that is
consistent with preservation of capital. To pursue this goal, the fund invests
primarily in California municipal securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial paper
of any maturity. Under normal circumstances, the fund invests at least 80% of
net assets in California municipal securities, particularly bonds. At the time
of investment the fund's debt securities must be rated at least BB/Ba, or if
unrated, be of equivalent quality. No more than 20% of assets may be invested in
municipal securities rated BB/Ba (junk bonds), and no more than 25% of assets
may be invested in unrated securities.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in certain
other investments, including private activity bonds, and may engage in other
investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
bonds).
Although the fund is diversified, because it concentrates in securities of
California issuers its performance is largely dependent on factors that may
disproportionately affect California issuers. These may include:
- - local economic or policy changes
- - tax base erosion
- - state constitutional limits on tax increases
- - changes in the ratings assigned to the state's municipal issuers
- - the legacy of past credit problems, such as the 1994 bankruptcy of Orange
County
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Dianne Sales-Singer, leader of the fund's portfolio management team since April
1995, is a senior portfolio officer of the adviser. Ms. Sales-Singer joined John
Hancock Funds in 1989 and has been in the investment business since 1984.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- --------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fee (after expense limitation)(3) 0.40% 0.40%
12b-1 fee (net of reduction)(4) 0.15% 0.90%
Other expenses (after expense limitation)(3) 0.20% 0.20%
Total fund operating expenses(3) 0.75% 1.50%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $52 $68 $ 85 $134
Class B shares
Assuming redemption
at end of period $65 $77 $102 $159
Assuming no redemption $15 $47 $ 82 $159
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.55% for each class and total fund
operating expenses would be 0.90% for Class A and 1.75% for Class B.
(4) Without the reduction, 12b-1 fees would be 1.00% for Class B shares. Because
of the 12b-1 fee, long-term shareholders may indirectly pay more than the
equivalent of the maximum permitted front-end sales charge.
4 CALIFORNIA TAX-FREE INCOME FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors,
_______________________.
VOLATILITY, AS INDICATED BY CLASS A [BAR CHART]
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED DECEMBER 31, 1990 1991 1992 1993 1994(1) 1995
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.00 $ 9.91 $ 10.32 $ 10.41 $ 10.85 $ 9.28
Net investment income (loss) 0.74 0.69 0.66(2) 0.62 0.58 0.57(2)
Net realized and unrealized gain (loss) on investments (0.16) 0.47 0.25 0.76 (1.57) 1.41
Total from investment operations 0.58 1.16 0.91 1.38 (0.99) 1.98
Less distributions:
Dividends from net investment income (0.67) (0.70) (0.67) (0.62) (0.58) (0.57)
Distributions from net realized gain on investments sold -- (0.05) (0.15) (0.32) -- --
Total distributions (0.67) (0.75) (0.82) (0.94) (0.58) (0.57)
Net asset value, end of period $ 9.91 $ 10.32 $ 10.41 $ 10.85 $ 9.28 $ 10.69
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 6.13 12.26 9.15 13.60 (9.31) 21.88
Total adjusted investment return at net asset value(3,4)(%) 5.29 11.86 8.90 13.42 (9.45) 21.73
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)($) 80,200 163,693 217,014 279,692 241,583 309,305
Ratio of expenses to average net assets (%) 0.00 0.40 0.58 0.69 0.75 0.75
Ratio of adjusted expenses to average net assets(5)(%) 0.84 0.80 0.83 0.87 0.89 0.90
Ratio of net investment income (loss) to average net assets(%) 7.11 6.75 6.36 5.69 5.85 5.76
Ratio of adjusted net investment income (loss) to average net
assets(5)(%) 6.27 6.35 6.11 5.51 5.71 5.61
Portfolio turnover rate(%) 62 45 34 51 62 37(6)
Fee reduction per share($) 0.09 0.04 0.03(2) 0.02 0.01 0.01(2)
<CAPTION>
CLASS B - YEAR ENDED DECEMBER 31, 1992 1993 1994(1) 1995
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.32 $ 10.41 $ 10.85 $ 9.28
Net investment income (loss) 0.58(2) 0.54 0.51 0.50(2)
Net realized and unrealized gain (loss) on investments 0.25 0.76 (1.57) 1.40
Total from investment operations 0.83 1.30 (1.06) 1.90
Less distributions:
Dividends from net investment income (0.59) (0.54) (0.51) (0.50)
Distributions from net realized gain on investments sold (0.15) (0.32) -- --
Total distributions (0.74) (0.86) (0.51) (0.50)
Net asset value, end of period $ 10.41 $ 10.85 $ 9.28 $ 10.68
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3)(%) 8.35 12.76 (9.99) 20.87
Total adjusted investment return at net asset value(3,4)(%) 8.10 12.58 (10.13) 20.72
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)($) 26,595 65,437 77,365 84,673
Ratio of expenses to average net assets(%) 1.35 1.44 1.50 1.50
Ratio of adjusted expenses to average net assets(5)(%) 1.60 1.62 1.64 1.65
Ratio of net investment income (loss) to average net assets(%) 5.43 4.82 5.10 4.97
Ratio of adjusted net investment income (loss) to average net assets(5)(%) 5.18 4.64 4.96 4.82
Portfolio turnover rate(%) 34 51 62 37(6)
Fee reduction per share($) 0.03(2) 0.02 0.01 0.01(2)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(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) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Portfolio turnover excludes merger activity.
CALIFORNIA TAX-FREE INCOME FUND 5
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
HIGH YIELD TAX-FREE FUND
REGISTRANT NAME: JOHN HANCOCK TAX-FREE TRUST
TICKER SYMBOL CLASS A: JHTFX CLASS B: TSHTX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks a high level of current income that is largely exempt from
federal income tax and is consistent with preservation of capital. To pursue
this goal, the fund invests primarily in a diversified portfolio of tax-exempt
medium-grade municipal debt securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial paper of
any maturity. Under normal circumstances, the fund invests at least 80% of
assets in municipal bonds that at the time of investment are rated at least
BB/Ba, or if unrated, of equivalent quality. Up to 5% of assets may be invested
in bonds rated below BB/Ba, or equivalent. Bonds rated BB/Ba or lower are
considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in private
activity bonds and certain other investments, including various derivative
securities used in the fund's capital preservation strategies, and may engage in
other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
bonds). Investors should expect greater fluctuations in share price, yield and
total return compared to less aggressive tax-free bond funds. These
fluctuations, whether positive or negative, may be sharp and unanticipated.
Issuers of medium-grade bonds are typically in weaker financial health than
issuers of high quality bonds, and their ability to pay interest and principal
is less certain. Medium-grade issuers are more likely to encounter financial
difficulties and to be materially affected by these difficulties when they do
encounter them. As a result, markets for medium-grade bonds may react strongly
to adverse news about an issuer or the economy, or to the perception of adverse
news. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Frank A. Lucibella, leader of the fund's portfolio management team since April
1995, is a second vice president of the adviser. Mr. Lucibella joined John
Hancock Funds in 1988 and has been in the investment business since 1982.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- --------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fee 0.58% 0.58%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.25% 0.25%
Total fund operating expenses 1.08% 1.83%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $56 $78 $102 $171
Class B shares
Assuming redemption
at end of period $69 $88 $119 $195
Assuming no redemption $19 $58 $ 99 $195
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6 HIGH YIELD TAX-FREE FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's
independent auditors, _________________________.
VOLATILITY, AS INDICATED BY CLASS B
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED OCTOBER 31, 1994(1) 1995(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.85 $ 8.82
Net investment income (loss) 0.48(3) 0.57
Net realized and unrealized gain (loss) on investments sold
and financial futures contracts (0.94) 0.70
Total from investment operations (0.46) 1.27
Less distributions:
Dividends from net investment income (0.48) (0.58)
Distributions in excess of net investment income (0.09) (0.04)
Total distributions (0.57) (0.62)
Net asset value, end of period $8.82 $9.47
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 4.96(5) 14.85
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 15,401 14,225
Ratio of expenses to average net assets (%) 1.15(6) 1.06
Ratio of net investment income (loss) to average net assets (%) 6.08(6) 6.36
Portfolio turnover rate (%) 62 64
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1987(7) 1987(8) 1988 1989 1990 1991(1) 1992
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.00 $ 9.49 $ 8.62 $ 9.25 $ 9.29 $ 9.07 $ 9.31
Net investment income (loss) 0.53 0.37 0.62 0.55 0.55 0.54 0.55
Net realized and unrealized gain (loss) on
investments sold
and financial futures contracts (0.51) (0.87) 0.70 0.13 (0.14) 0.34 0.17
Total from investment operations 0.02 (0.50) 1.32 0.68 0.41 0.88 0.72
Less distributions:
Dividends from net investment income (0.53) (0.37) (0.66) (0.51) (0.55) (0.54) (0.55)
Distributions in excess of net investment
income -- -- -- -- -- -- --
Distributions from net realized gain on
investments sold -- -- (0.03) -- -- -- (0.09)
Distributions from capitol paid-in -- -- -- (0.13) (0.08) (0.10) --
Total distributions (0.53) (0.37) (0.69) (0.64) (0.63) (0.64) (0.64)
Net asset value, end of period $ 9.49 $ 8.62 $ 9.25 $ 9.29 $ 9.07 $ 9.31 $ 9.39
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4)(%) 0.12(5) (5.13)(5) 15.88 7.54 4.60 10.07 7.89
Total adjusted investment return at net asset
value(4,9) (%) (0.39)(5) (5.34)(5) -- -- -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 15,753 15,026 24,278 29,841 35,820 51,467 65,933
Ratio of expenses to average net assets (%) 0.56(5) 0.61(5) 2.05 2.32 2.20 2.36 2.17
Ratio of adjusted expenses to average net
assets(10) (%) 1.07(5) 0.82(5) -- -- -- -- --
Ratio of adjusted net investment income to
average net assets (%) 4.96(5) 4.05(5) 6.66 5.79 5.96 5.61 5.78
Ratio of net investment income (loss) to
average net assets(10) (%) 4.45(5) 3.84(5) -- -- -- -- --
Portfolio turnover rate (%) 153 42 82 29 41 83 40
Fee reduction per share ($) 0.05 0.02 -- -- -- -- --
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1993 1994 1995(2)
- ----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.39 $ 9.98 $ 8.82
Net investment income (loss) 0.53 0.48 0.51
Net realized and unrealized gain (loss) on
investments sold
and financial futures contracts 0.72 (0.90) 0.69
Total from investment operations 1.25 (0.42) 1.20
Less distributions:
Dividends from net investment income (0.56) (0.48) (0.51)
Distributions in excess of net investment
income -- (0.07) (0.04)
Distributions from net realized gain on
investments sold (0.10) (0.19) --
Distributions from capitol paid-in -- -- --
Total distributions (0.66) (0.74) (0.55)
Net asset value, end of period $ 9.98 $ 8.82 $ 9.47
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4)(%) 13.69 (4.44) 13.99
Total adjusted investment return at net asset
value(4,9) (%) -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 113,442 151,069 155,234
Ratio of expenses to average net assets (%) 2.06 1.85 1.79
Ratio of adjusted expenses to average net
assets(10) (%) -- -- --
Ratio of adjusted net investment income to
average net assets (%) 5.23 5.36 5.61
Ratio of net investment income (loss) to
average net assets(10) (%) -- -- --
Portfolio turnover rate (%) 100 62 64
Fee reduction per share ($) -- -- --
</TABLE>
(1) Class A shares commenced operations on December 31, 1993.
(2) On December 22, 1994 John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) Annualized.
(7) For the period August 25, 1986 to April 30, 1987.
(8) For the period May 1, 1987 to October 31, 1987.
(9) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during periods shown.
(10) Unreimbursed, without fee reduction.
HIGH YIELD TAX-FREE FUND 7
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
MANAGED TAX-EXEMPT FUND
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: FMTAX CLASS B: FMTEX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks as high a level of current income exempt from Federal income tax
as is consistent with preservation of capital. To pursue this goal, the fund
ordinarily invests at least 80% of assets in a diversified portfolio of
municipal securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial paper
of any maturity. The fund's municipal securities must be investment grade at the
time of investment.
The fund generally does not invest more than 25% of assets in any one industry,
but reserves the right to invest more than 25% in the securities of a given
sector of the municipals market, in industrial revenue bonds, in securities of a
given state, or in U.S. Government and agency securities.
For defensive purposes, the fund may increase its holdings of investment-grade
short-term municipal securities, and may invest in taxable investment-grade
short-term securities. The fund also may invest in certain other investments,
and may engage in other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income investments, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
bonds). Economic and policy factors can also affect performance. To the extent
that the fund concentrates in the securities of a given issuer, sector, region,
type or rating, it increases its exposure to the risks of that category of
security. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Frank A. Lucibella, leader of the fund's portfolio management team since 1993,
is a second vice president of the adviser. Mr Lucibella joined John Hancock
Funds in 1988 and has been in the investment business since 1982.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- --------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fee (net of reduction)(3) 0.55% 0.55%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.21% 0.21%
Total fund operating expenses (net of reduction)(3) 1.06% 1.76%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $55 $77 $101 $169
Class B shares
Assuming redemption
at end of period $68 $85 $115 $189
Assuming no redemption $18 $55 $ 95 $189
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Without reduction, the management fee would be 0.60% for each class and
total fund operating expenses would be 1.11% for Class A and 1.81% for Class
B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
8 MANAGED TAX-EXEMPT FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors, Price
Waterhouse LLP.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VOLATILITY, AS INDICATED BY CLASS B
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) (1.31)(3) 18.98 8.25 5.66 12.55 6.39 15.51 (5.85) 12.63
<CAPTION>
CLASS A - YEAR ENDED OCTOBER 31, 1992(1) 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C>
Net asset value, beginning of period $11.25 $ 11.12 $ 12.13 $ 10.79
Net investment income (loss) 0.55 0.70 0.64 0.63
Net realized and unrealized gain (loss) on investments (0.11) 1.05 (1.25) 0.77
Total from investment operations 0.44 1.75 (0.61) 1.40
Less distributions:
Dividends from net investment income (0.53) (0.70) (0.64) (0.63)
Distributions from net realized gain on investments sold (0.04) (0.04) (0.09) --
Total distributions (0.57) (0.74) (0.73) (0.63)
Net asset value, end of period $11.12 $ 12.13 $ 10.79 $ 11.56
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) 4.74(3) 16.10 (5.22) 13.30
Total adjusted investment return at net asset value(2,4) (%) 4.51(3) 15.77 (5.29) 13.25
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 9,589 14,244 20,968 42,384
Ratio of expenses to average net assets (%) 0.78(3) 0.70 0.95 1.06
Ratio of adjusted expenses to average net assets(5) (%) 1.01(3) 1.03 1.02 1.11
Ratio of net investment income (loss) to average net assets (%) 6.24(3) 5.98 5.52 5.53
Ratio of adjusted net investment income (loss) to average
net assets(5) (%) 6.01(3) 5.65 5.42 5.48
Portfolio turnover rate (%) 23 23 59 104
Fee reduction per share ($) 0.02 0.04 0.01 0.01
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1987(7) 1988 1989 1990 1991 1992
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $ 9.69 $ 10.73 $ 10.78 $ 10.61 $ 11.12
Net investment income (loss) 0.27 0.74 0.74 0.73 0.68 0.66
Net realized and unrealized gain (loss) on investments (0.31) 1.04 0.12 (0.14) 0.61 0.04
Total from investment operations (0.04) 1.78 0.86 0.59 1.29 0.70
Less distributions:
Dividends from net investment income (0.27) (0.74) (0.74) (0.72) (0.72) (0.64)
Distributions from net realized gain on investments sold -- -- (0.07) (0.04) (0.06) (0.06)
Total distributions (0.27) (0.74) (0.81) (0.76) (0.78) (0.70)
Net asset value, end of period $ 9.69 $ 10.73 $ 10.78 $ 10.61 $ 11.12 $ 11.12
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) (1.31)(3) 18.98 8.25 5.66 12.55 6.39
Total adjusted investment return at net asset value(2,4)(%) (2.49)(3) 18.00 7.66 5.10 12.24 6.20
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 8,220 46,329 106,107 140,803 199,955 226,943
Ratio of expenses to average net assets (%) 1.40(3) 0.74 0.93 0.95 1.19 1.35
Ratio of adjusted expenses to average net assets(5) (%) 2.58(3) 1.72 1.52 1.51 1.50 1.54
Ratio of net investment income (loss) to average net assets (%) 6.11(3) 6.90 6.81 6.74 6.19 5.74
Ratio of adjusted net investment income (loss) to average
net assets(5) (%) 4.93(3) 5.92 6.22 6.18 5.88 5.55
Portfolio turnover rate (%) 174 186 94 54 30 23
Fee Reduction per share ($) 0.05(3) 0.10 0.06 0.06 0.04 0.02
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1993 1994 1995
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C>
Net asset value, beginning of period $ 11.12 $ 12.13 $ 10.79
Net investment income (loss) 0.64 0.56 0.55
Net realized and unrealized gain (loss) on investments 1.05 (1.25) 0.78
Total from investment operations 1.69 (0.69) 1.33
Less distributions:
Dividends from net investment income (0.64) (0.56) (0.55)
Distributions from net realized gain on investments sold (0.04) (0.09) --
Total distributions (0.68) (0.65) (0.55)
Net asset value, end of period $ 12.13 $ 10.79 $ 11.57
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) 15.51 (5.85) 12.63
Total adjusted investment return at net asset value(2,4)(%) 15.18 (5.92) 12.61
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 256,342 217,066 178,002
Ratio of expenses to average net assets (%) 1.23 1.62 1.73
Ratio of adjusted expenses to average net assets(5) (%) 1.56 1.69 1.78
Ratio of net investment income (loss) to average net assets (%) 5.49 4.84 4.92
Ratio of adjusted net investment income (loss) to average
net assets(5) (%) 5.16 4.77 4.87
Portfolio turnover rate (%) 23 59 104
Fee Reduction per share ($) 0.04 0.01 0.01
</TABLE>
(1) Class A and Class B shares commenced operations on January 3, 1992 and April
22, 1987, respectively.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Annualized.
(4) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
MANAGED TAX-EXEMPT FUND 9
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
MASSACHUSETTS TAX-FREE INCOME FUND
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: JHMAX CLASS B: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks income that is exempt from federal and Massachusetts personal
income taxes. The fund seeks to provide the maximum current income that is
consistent with preservation of capital. To pursue this goal, the fund invests
primarily in Massachusetts municipal securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial paper
of any maturity. Under normal circumstances, the fund invests at least 80% of
net assets in municipal securities. Up to 33.3% of assets may be invested in
municipal securities rated A or lower, or if unrated, of equivalent quality. The
balance of the fund's investments must be rated, at the time of investment, in
the top two rating categories or be of equivalent quality. Bonds rated BB/Ba or
lower are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term municipal securities. For defensive
purposes, it may invest more assets in these securities. The fund also may
invest in certain other investments, including private activity bonds, and may
engage in other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
bonds).
Because the fund is not diversified and because it concentrates in securities of
Massachusetts issuers, its performance is largely dependent on factors that may
disproportionately affect Massachusetts issuers. These may include:
- - local economic or policy changes
- - tax base erosion
- - state constitutional limits on tax increases
- - changes in the ratings assigned to the state's municipal issuers
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Dianne Sales-Singer, leader of the fund's portfolio management team since July
1993, is a senior portfolio officer of the adviser. Ms. Sales-Singer joined John
Hancock Funds in 1989 and has been in the investment business since 1984.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The figures
below are based on Class A expenses for the past year, adjusted to reflect any
changes. There were no Class B shares issued or outstanding during the last
fiscal year. Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- --------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fee (after expense limitation)(3) 0.00% 0.00%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.40% 0.40%
Total fund operating expenses
(after expense limitation)(3) 0.70% 1.40%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $52 $66 $82 $128
Class B shares
Assuming redemption
at end of period $64 $74 $97 $149
Assuming no redemption $14 $44 $77 $149
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.50% for each class and total fund
operating expenses would be 1.20% for Class A and 1.90% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10 MASSACHUSETTS TAX-FREE INCOME FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors, Price
Waterhouse LLP.
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED AUGUST 31, 1988(1) 1989 1990 1991 1992 1993 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.00 $10.63 $10.94 $ 10.63 $ 11.15 $ 11.75 $ 12.43
Net investment income (loss) 0.65 0.70 0.69 0.73 0.71 0.67 0.63
Net realized and unrealized gain (loss) on investments 0.63 0.31 (0.31) 0.53 0.60 0.82 (0.75)
Total from investment operations 1.28 1.01 0.38 1.26 1.31 1.49 (0.12)
Less distributions:
Dividends from net investment income (0.65) (0.70) (0.69) (0.73) (0.71) (0.67) (0.63)
Distributions from net realized gain on investments sold -- -- -- (0.01) -- (0.14) (0.12)
Total distributions (0.65) (0.70) (0.69) (0.74) (0.71) (0.81) (0.75)
Net asset value, end of period $10.63 $10.94 $10.63 $ 11.15 $ 11.75 $ 12.43 $ 11.56
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 13.13(4) 9.67 3.49 12.10 12.11 13.29 (0.97)
Total adjusted investment return at net asset value(3,6) (%) 10.38(4) 9.16 2.72 10.66 10.93 12.38 (1.50)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 4,757 9,138 9,968 15,015 29,113 50,019 54,122
Ratio of expenses to average net assets (%) 1.00(4) 1.00 1.00 0.60 0.60 0.67 0.70
Ratio of adjusted expenses to average net assets(7) (%) 3.75(4) 1.51 1.77 2.04 1.78 1.58 1.23
Ratio of net investment income (loss) to average net assets (%) 6.28(4) 6.35 6.31 6.64 6.18 5.61 5.28
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.53(4) 5.84 5.54 5.20 5.00 4.70 4.75
Portfolio turnover rate (%) 20 2 2 29 56 79 29
Fee reduction per share ($) 0.28 0.11 0.08 0.16 0.14 0.11 0.06
<CAPTION>
CLASS A - YEAR ENDED AUGUST 31, 1995 1996(2)
- -------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 11.56 $ 11.76
Net investment income (loss) 0.65 0.32
Net realized and unrealized gain (loss) on investments 0.20 0.23
Total from investment operations 0.85 0.55
Less distributions:
Dividends from net investment income (0.65) (0.32)
Distributions from net realized gain on investments sold -- --
Total distributions (0.65) (0.32)
Net asset value, end of period $ 11.76 $ 11.99
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 7.66 4.76(5)
Total adjusted investment return at net asset value(3,6) (%) 7.21 4.37(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 54,416 56,852
Ratio of expenses to average net assets (%) 0.70 0.76(4,8)
Ratio of adjusted expenses to average net assets(7) (%) 1.15 1.15(4)
Ratio of net investment income (loss) to average net assets (%) 5.67 5.42(4)
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 5.22 5.04(4)
Portfolio turnover rate (%) 24 24
Fee reduction per share ($) 0.05 0.04(4)
</TABLE>
(1) Class A shares commenced operations on September 3, 1987.
(2) Six months ended February 29, 1996. (Unaudited.)
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Annualized.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Unreimbursed, without fee reduction.
(8) The ratio does not reflect the application of fee credits, had the credits
been taken into consideration, the ratio would have been 0.70%.
MASSACHUSETTS TAX-FREE INCOME FUND 11
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
NEW YORK TAX-FREE INCOME FUND
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: JHNYX CLASS B: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks income that is exempt from federal income taxes as well as
New York State and New York City personal income taxes. The fund seeks to
provide the maximum current income that is consistent with preservation of
capital. To pursue this goal, the fund invests primarily in New York municipal
securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial
paper of any maturity. Under normal circumstances, the fund invests at least 80%
of net assets in municipal securities. Up to 33.3% of assets may be invested in
municipal securities rated A or lower, or if unrated, of equivalent quality. The
balance of the fund's investments must be rated, at the time of investment, in
the top two rating categories or be of equivalent quality. Bonds rated BB/Ba or
lower are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in certain
other investments, including private activity bonds, and may engage in other
investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
bonds).
Because the fund is not diversified and because it concentrates in securities of
New York issuers, its performance is largely dependent on factors that may
disproportionately affect New York issuers. These may include:
- - local economic or policy changes
- - tax base erosion
- - limited flexibility to raise taxes
- - changes in the ratings assigned to the state's municipal issuers
- - the legacy of past credit problems of New York City and other issuers
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Frank A. Lucibella, leader of the fund's portfolio management team since
April 1995, is a second vice president of the adviser. Mr. Lucibella joined John
Hancock Funds in 1988 and has been in the investment business since 1982.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The
figures below are based on Class A expenses for the past year, adjusted to
reflect any changes. There were no Class B shares issued or outstanding during
the last fiscal year. Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------- ------- -------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------
<S> <C> <C>
Management fee (after expense limitation)(3) 0.00% 0.00%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.40% 0.40%
Total fund operating expenses
(after expense limitation)(3) 0.70% 1.40%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over
the various time frames indicated. The example assumes you reinvested all
dividends and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- ----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class A shares $52 $66 $82 $128
Class B shares
Assuming redemption
at end of period $64 $74 $97 $149
Assuming no redemption $14 $44 $77 $149
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.50% for each class and total fund
operating expenses would be 1.20% for Class A and 1.90% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
12 NEW YORK TAX-FREE INCOME FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors,
Price Waterhouse LLP.
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A -- YEAR ENDED AUGUST 31, 1988(1) 1989 1990 1991 1992 1993 1994 1995 1996(2)
- -------------------------------- ------- ---- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.00 $10.48 $ 11.01 $ 10.74 $ 11.29 $ 11.90 $ 12.63 $ 11.73 $ 11.88
Net investment income (loss) 0.61 0.68 0.67 0.72 0.72 0.68 0.64 0.65 0.33
Net realized and unrealized gain (loss)
on investments 0.48 0.55 (0.25) 0.55 0.63 0.87 (0.77) 0.15 0.30
Total from investment operations 1.09 1.23 0.42 1.27 1.35 1.55 (0.13) 0.80 0.63
Less distributions:
Dividends from net investment income (0.61) (0.68) (0.67) (0.72) (0.72) (0.68) (0.64) (0.65) (0.33)
Distributions from net realized gain
on investments sold -- (0.02) (0.02) -- (0.02) (0.14) (0.13) -- --
Total distributions (0.61) (0.70) (0.69) (0.72) (0.74) (0.82) (0.77) (0.65) (0.33)
Net asset value, end of period $10.48 $11.01 $ 10.74 $ 11.29 $ 11.90 $ 12.63 $ 11.73 $ 11.88 $ 12.18
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(3) (%) 11.40(4) 11.87 3.74 12.24 12.17 13.70 (1.05) 7.19 5.37(5)
Total adjusted investment return at net
asset value(3,6) (%) 7.56(4) 11.22 3.05 11.02 11.09 12.83 (1.58) 6.74 4.97(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's
omitted) ($) 4,306 8,795 13,357 20,878 33,806 52,444 55,690 55,753 57,770
Ratio of expenses to average net assets
(%) 1.00(4) 1.00 1.00 0.60 0.60 0.67 0.70 0.70 0.73(4,8)
Ratio of adjusted expenses to average
net assets(7) (%) 4.84(4) 1.65 1.69 1.82 1.68 1.54 1.23 1.15 1.13(4)
Ratio of net investment income (loss) to
average net assets (%) 6.11(4) 6.30 6.17 6.57 6.22 5.63 5.28 5.67 5.47(4)
Ratio of adjusted net investment income
(loss) to average net assets(7) (%) 2.27(4) 5.65 5.48 5.35 5.14 4.76 4.75 5.22 5.07(4)
Portfolio turnover rate (%) 16 10 10 12 48 56 23 70 30
Fee reduction per share ($) 0.38 0.13 0.08 0.13 0.13 0.11 0.06 0.05 0.05(4)
</TABLE>
(1) Class A shares commenced operations on September 11, 1987.
(2) Six months ended February 29, 1996. (Unaudited.)
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Annualized.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Unreimbursed, without fee reduction.
(8) The ratio does not reflect the application of fee credits, had the credits
been taken into consideration, the ratio would have been 0.70%.
NEW YORK TAX-FREE INCOME FUND 13
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
TAX-FREE BOND FUND
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST
TICKER SYMBOL CLASS A: TAMBX CLASS B: TSMBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks as high a level of current income exempt from federal income
tax as is consistent with preservation of capital. To pursue this goal, the fund
invests in a diversified portfolio of municipal securities. Under normal
circumstances, the fund will place at least 80% of assets in municipal bonds.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal bonds may include investment-grade bonds, notes and
commercial paper. Less than 35% of assets may be invested in municipal bonds
rated BB/Ba or B (junk bonds). The fund may not invest more than 25% of assets
in industrial development or pollution control bonds that are directly or
indirectly dependent on the revenues or credit of private entities in any one
industry.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in certain
other investments, including private activity bonds, and may engage in other
investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income investments, the value of your investment in the fund
will fluctuate with changes in interest rates. Typically, a rise in interest
rates causes a decline in the market value of fixed income securities (including
municipal bonds). Bonds with longer maturities are especially sensitive to
interest rate movements. To the extent that the fund invests in bonds rated
BBB/Baa or lower, it takes on higher risks of volatility and default. Issuers of
these bonds are typically in weaker financial health and their ability to pay
interest and principal is less certain. Before you invest, please read "More
about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Thomas C. Goggins has been leader of the fund's portfolio management team
since joining the adviser in April 1995. A senior vice president of the adviser,
Mr. Goggins has been in the investment business since 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------- ------- -------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------
<S> <C> <C>
Management fee 0.55% 0.55%
12b-1 fee(4) 0.25% 1.00%
Other expenses 0.29% 0.29%
Total fund operating expenses(4) 1.09% 1.84%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over
the various time frames indicated. The example assumes you reinvested all
dividends and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- ----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class A shares $56 $78 $102 $172
Class B shares
Assuming redemption
at end of period $69 $88 $120 $196
Assuming no redemption $19 $58 $100 $196
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
(4) Until December 23, 1996 the adviser has agreed to limit total fund operating
expenses to 0.85% for Class A and 1.60% for Class B. Effective December 23,
1996 the 12b-1 fee will be increased from 0.15% to 0.25% for Class A and
from 0.90% to 1.00% for Class B. Prior to the increase, total fund operating
expenses would be 0.99% for Class A and 1.74% for Class B.
14 TAX-FREE BOND FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors,
__________________________.
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A -- YEAR ENDED DECEMBER 31, 1990(1) 1991 1992 1993 1994(2) 1995
------- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.00 $ 9.90 $ 10.24 $ 10.47 $ 10.96 $ 9.39
Net investment income (loss) 0.71 0.69 0.67 0.62 0.58 0.57(3)
Net realized and unrealized gain (loss) on investments (0.13) 0.72 0.42 0.93 (1.58) 1.28
Total from investment operations 0.58 1.41 1.09 1.55 (1.00) 1.85
Less distributions:
Dividends from net investment income (0.68) (0.68) (0.68) (0.62) (0.57) (0.57)
Distributions from net realized gain on investments sold -- (0.39) (0.18) (0.44) -- --
Total distributions (0.68) (1.07) (0.86) (1.06) (0.57) (0.57)
Net asset value, end of period $ 9.90 $ 10.24 $ 10.47 $ 10.96 $ 9.39 $ 10.67
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 6.04(5) 14.78 10.97 15.15 (9.28) 20.20
Total adjusted investment return at net asset value(4,6) (%) 5.18(5) 14.40 10.67 14.98 (9.39) 20.08
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 45,437 73,393 99,523 136,521 114,539 118,797
Ratio of expenses to average net assets (%) 0.40(5) 0.60 0.66 0.78 0.85 0.85
Ratio of adjusted expenses to average net assets(7) (%) 1.26(5) 0.98 0.96 0.95 0.96 0.97
Ratio of net investment income (loss) to average net assets (%) 7.09(5) 6.86 6.46 5.57 5.72 5.67
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 6.29(5) 6.48 6.16 5.40 5.61 5.55
Portfolio turnover rate (%) 64 123 79 116 107 113
Fee reduction per share ($) 0.08 0.04 0.03 0.02 0.01 0.01(3)
<CAPTION>
CLASS B -- YEAR ENDED DECEMBER 31, 1992 1993 1994(2) 1995
---- ---- ------- ----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.24 $ 10.47 $ 10.96 $ 9.38
Net investment income (loss) 0.59(3) 0.54 0.50 0.50(3)
Net realized and unrealized gain (loss) on investments 0.42 0.93 (1.58) 1.28
Total from investment operations 1.01 1.47 (1.08) 1.78
Less distributions:
Dividends from net investment income (0.60) (0.54) (0.50) (0.49)
Distributions from net realized gain on investments sold (0.18) (0.44) -- --
Total distributions (0.78) (0.98) (0.50) (0.49)
Net asset value, end of period $ 10.47 $ 10.96 $ 9.38 $ 10.67
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 10.15 14.30 (10.05) 19.41
Total adjusted investment return at net asset value(4,6) (%) 9.85 14.13 (10.16) 19.29
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 18,272 56,384 70,243 76,824
Ratio of expenses to average net assets (%) 1.43 1.53 1.60 1.60
Ratio of adjusted expenses to average net assets(7) (%) 1.73 1.70 1.71 1.72
Ratio of net investment income (loss) to average net assets (%) 5.57 4.66 4.97 4.90
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 5.27 4.49 4.86 4.78
Portfolio turnover rate (%) 79 116 107 113
Fee reduction per share (%) 0.03(3) 0.02 0.01 0.01(3)
</TABLE>
(1) Class A shares commenced operations on January 5, 1990.
(2) On December 22, 1994 John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Unreimbursed, without fee reduction.
TAX-FREE BOND FUND 15
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
YOUR ACCOUNT
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock tax-free income funds offer two classes of shares, Class A and
Class B. Each class has its own cost structure, allowing you to choose the one
that best meets your requirements. Your financial representative can help you
decide.
CLASS A
- - Front-end sales charges, as described below. There are several ways to reduce
these charges, also described below.
- - Lower annual expenses than Class B shares.
CLASS B
- - No front-end sales charge; all your money goes to work for you right away.
- - Higher annual expenses than Class A shares.
- - A deferred sales charge on shares you sell within six years of purchase, as
described below.
- - Automatic conversion to Class A shares after eight years, thus reducing future
annual expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
CLASS A Sales charges are as follows:
<TABLE>
<CAPTION>
CLASS A SALES CHARGES
- ---------------------
AS A % OF AS A % OF YOUR
YOUR INVESTMENT OFFERING PRICE INVESTMENT
<S> <C> <C>
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 3.00% 3.09%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE Class A shares are available with no
front-end sales charge. However, there is a contingent deferred sales charge
(CDSC) on any shares sold within one year of purchase, as follows:
<TABLE>
<CAPTION>
CDSC ON $1 MILLION+ INVESTMENTS
- -------------------------------
YOUR INVESTMENT CDSC ON SHARES BEING SOLD
<S> <C>
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
</TABLE>
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the LAST 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.
CLASS B Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a contingent deferred sales charge
(CDSC) on shares you sell within six years of buying them. 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 longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
<TABLE>
<CAPTION>
CLASS B DEFERRED CHARGES
- ------------------------
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
<S> <C>
1st year 5.00%
2nd year 4.00%
3rd or 4th years 3.00%
5th year 2.00%
6th year 1.00%
After 6 years None
</TABLE>
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.
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.
16 YOUR ACCOUNT
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
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.
- - 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.
- - 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.
- - 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 Investor Services to add these options to an
existing account (see the back cover of this prospectus).
GROUP INVESTMENT PROGRAM Allows established groups of four or more investors to
invest as a group. Each has an individual account, but for sales charge
purposes, their investments are lumped together, making the investors
potentially eligible for reduced sales charges. There is no charge, no
obligation to invest (although initial aggregate investments must be at least
$250) and you may terminate the program at any time.
To utilize: contact your financial representative or Investor Services to find
out how to qualify.
CDSC WAIVERS In general, the CDSC for either share class may be waived on
shares you sell for the following reasons:
- - to make payments through certain systematic withdrawal plans
- - to make certain distributions from a retirement plan
- - because of shareholder death or disability
To utilize: contact your financial representative or Investor Services, or
consult the SAI (see the back cover of this prospectus).
REINSTATEMENT PRIVILEGE If you sell shares of a John Hancock fund, you may
invest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge. 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 Investor Services.
WAIVERS FOR CERTAIN INVESTORS Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
- - government entities that are prohibited from paying mutual fund sales charges
- - financial institutions or common trust funds investing $1 million or more for
non-discretionary accounts
- - selling brokers and their employees and sales representatives
- - financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
- - fund trustees and other individuals who are affiliated with these or other
John Hancock funds
- - individuals transferring assets to a John Hancock tax-free fund from an
employee benefit plan that has John Hancock funds
- - members of an approved affinity group financial services program
- - certain insurance company contract holders (one-year CDSC applies)
- - participants in certain plans with at least 100 members (one-year CDSC
applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
Investor Services or consult the SAI.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for the
John Hancock tax-free income funds are as follows:
- non-retirement account: $1,000
- group investments: $250
- Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest at
least $25 a month
3 Complete the appropriate parts of the account application, carefully following
the instructions. If you have questions, please contact your financial
representative or call Investor Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges section of the
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 can
initiate any purchase, exchange or sale of shares through your financial
representative.
YOUR ACCOUNT 17
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
BUYING SHARES
OPENING AN ACCOUNT
BY CHECK
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A BLANK CHECK.]
- Make out a check for the investment amount, payable to "John Hancock
Investor Services Corporation."
- Deliver the check and your completed application to your financial
representative, or mail them to Investor Services (address on next page).
ADDING TO AN ACCOUNT
- Make out a check for the investment amount payable to "John Hancock
Investor Services Corporation."
- Fill out the detachable investment slip from an account statement. If no
slip is available, include a note specifying the fund name, your share
class, your account number, and the name(s) in which the account is
registered.
- Deliver the check and your investment slip or note to your financial
representative, or mail them to Investor Services (address on next page).
OPENING AN ACCOUNT
BY EXCHANGE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A WHITE ARROW OUTLINED IN BLACK THAT POINTS TO THE RIGHT
ABOVE A BLACK THAT POINTS TO THE LEFT.]
- Call your financial representative or Investor Services to request an
exchange.
ADDING TO AN ACCOUNT
- Call Investor Services to request an exchange.
OPENING AN ACCOUNT
BY WIRE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A JAGGED WHITE ARROW OUTLINED IN BLACK THAT POINTS UPWARDS
AT A 45 DEGREE ANGLE.]
- Deliver your completed application to your financial representative, or
mail it to Investor Services.
- Obtain your account number by calling your financial representative or
Investor Services.
- Instruct your bank to wire the amount of your investment to:
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.
ADDING TO AN ACCOUNT
- Instruct your bank to wire the amount of your investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your share class, your account number and the
name(s) in which the account is registered. Your bank may charge a fee to
wire funds.
OPENING AN ACCOUNT
BY PHONE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A TELEPHONE.]
See "By wire" and "By exchange."
ADDING TO AN ACCOUNT
- Verify that your bank or credit union is a member of the Automated
Clearing House (ACH) system.
- Complete the "Invest-By-Phone" and "Bank Information" sections on your
account application.
- Call Investor Services to verify that these features are in place on your
account.
- Tell the Investor Services representative the fund name, your share
class, your account number, the name(s) in which the account is
registered and the amount of your investment.
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
SELLING SHARES
DESIGNED FOR
BY LETTER
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF THE BACK OF AN ENVELOPE.]
- Accounts of any type.
- Sales of any amount.
TO SELL SOME OR ALL OF YOUR SHARES
- Write a letter of instruction or complete a stock power 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.
- Include all signatures and any additional documents that may be required
(see next page).
- Mail the materials to Investor Services.
- 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.
DESIGNED FOR
BY PHONE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A TELEPHONE.]
- Most accounts.
- Sales of up to $100,000.
TO SELL SOME OR ALL OF YOUR SHARES
- For automated service 24 hours a day using your touch-tone phone, call
the John Hancock Funds EASI-Line at 1-800-338-8080.
- To place your order with a representative at John Hancock Funds, call
Investor Services between 8 A.M. and 4 P.M. on most business days.
DESIGNED FOR
BY WIRE OR ELECTRONIC FUNDS TRANSFER (EFT)
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A JAGGED WHITE ARROW OUTLINED IN BLACK THAT POINTS UPWARDS
AT A 45 DEGREE ANGLE.]
- Requests by letter to sell any amount (accounts of any type).
- Requests by phone to sell up to $100,000 (accounts with telephone
redemption privileges).
TO SELL SOME OR ALL OF YOUR SHARES
- Fill out the "Telephone Redemption" section of your new account
application.
- To verify that the telephone redemption privilege is in place on an
account, or to request the forms to add it to an existing account, call
Investor Services.
- Amounts of $1,000 or more will be wired on the next business day. A $4
fee will be deducted from your account.
- 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.
DESIGNED FOR
BY EXCHANGE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A WHITE ARROW OUTLINED IN BLACK THAT POINTS TO THE RIGHT
ABOVE A BLACK THAT POINTS TO THE LEFT.]
- Accounts of any type.
- Sales of any amount.
TO SELL SOME OR ALL OF YOUR SHARES
- Obtain a current prospectus for the fund into which you are exchanging by
calling your financial representative or Investor Services.
- Call Investor Services to request an exchange.
ADDRESS
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116 BOSTON, MA 02205-9116
PHONE
1-800-225-5291
OR CONTACT YOUR FINANCIAL REPRESENTATIVE FOR INSTRUCTIONS AND ASSISTANCE.
To sell shares through a systematic withdrawal plan,
see "Additional investor services."
YOUR ACCOUNT 19
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
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. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
- your address of record has changed within the past 30 days
- you are selling more than $100,000 worth of shares
- you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
- a broker or securities dealer
- a federal savings, cooperative or other type of bank
- a savings and loan or other thrift institution
- a credit union
- a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
[A GRAPHIC IMAGE OF THE BACK OF AN ENVELOPE]
<TABLE>
<CAPTION>
SELLER REQUIREMENTS FOR WRITTEN REQUESTS
- ----------------------------------------------------------------------------------------
<S> <C>
Owners of individual, joint, sole - Letter of instruction.
proprietorship, UGMA/UTMA (custodial
accounts for minors) or general partner - On the letter, the signatures and
accounts. titles of all persons authorized to sign
for the account, exactly as the account
is registered.
- Signature guarantee if applicable
(see above).
- ----------------------------------------------------------------------------------------
Owners of corporate or association - Letter of instruction.
accounts.
- Corporate resolution, certified
within the past 90 days.
- On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
- Signature guarantee if applicable
(see above).
- ----------------------------------------------------------------------------------------
Owners or trustees of trust accounts. - Letter of instruction.
- On the letter, the signature(s) of
the trustee(s).
- If the names of all trustees are not
registered on the account, please also
provide a copy of the trust document
certified within the past 60 days.
- Signature guarantee if applicable (see
above).
- ----------------------------------------------------------------------------------------
Joint tenancy shareholders whose
co-tenants are deceased. - Letter of instruction signed by
surviving tenant.
- Copy of death certificate.
- Signature guarantee if applicable
(see above).
- ----------------------------------------------------------------------------------------
Executors of shareholder estates. - Letter of instruction signed by
executor.
- Copy of order appointing executor.
- Signature guarantee if applicable
(see above).
- ----------------------------------------------------------------------------------------
Administrators, conservators,
guardians and other sellers or account
types not listed above. - Call 1-800-225-5291 for instructions.
</TABLE>
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
TRANSACTION POLICIES
VALUATION OF SHARES The net asset value per share (NAV) 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) by dividing a class's net assets
by the number of its shares outstanding.
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 - Friday. Buy and sell requests are executed
at the next NAV to be calculated after your request is accepted by Investor
Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line 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. In addition, Investor Services 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 not taken, Investor Services is
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.
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.
Class B shares will continue to age from the original date and will retain the
same CDSC rate as they had before the exchange, except that the rate will change
to that of the new fund if the new fund's rate is higher. 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 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. A fund may change or cancel its exchange
privilege at any time, upon 60 days' notice to its shareholders. A fund may also
refuse any exchange order.
CERTIFICATED SHARES Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Investor Services. Certificated
shares can only be sold by returning the certificates to Investor 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 calendar days after
the purchase.
ELIGIBILITY BY STATE You may only invest in, or exchange into, fund shares
legally available in your state.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
- After every transaction (except a dividend reinvestment) that affects your
account balance.
- After any changes of name or address of the registered owner(s).
- 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 declare dividends daily and pay them monthly.
Short- and long-term capital gains, if any, are distributed annually, typically
after the end of a fund's fiscal year. Your dividends begin accruing the day
after payment is received by the fund and continue through the day your shares
are actually sold.
YOUR ACCOUNT 21
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
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 mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
TAXABILITY OF DIVIDENDS As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
The fund intends to meet certain federal tax requirements so that its
distributions of the tax-exempt interest it earns may be treated as
"exempt-interest dividends". However, any portion of exempt-interest dividends
attributable to interest on private activity bonds may increase certain
shareholders' alternative minimum tax.
Dividends from a fund's short- and long-term capital gains are taxable. Taxable
dividends paid in January may be taxable as if they had been paid the previous
December.
The state tax-free income funds intend to comply with certain state tax
requirements so that their income dividends will be exempt from state and local
personal income taxes in the applicable state. Dividends of the other tax-free
income funds are not exempt from state and local income taxes.
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, Investor 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:
- Complete the appropriate parts of your account application.
- If you are using MAAP to open an account, make out a check ($25 minimum) for
your first investment amount payable to "John Hancock Investor Services
Corporation." Deliver your check and application to your financial
representative or Investor Services.
SYSTEMATIC WITHDRAWAL PLAN This plan may be used for routine bill payment or
periodic withdrawals from your account. To establish:
- Make sure you have at least $5,000 worth of shares in your account.
- 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).
- 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.
- Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
- Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Investor Services.
RETIREMENT PLANS John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SEPs, SARSEPs, 401(k) plans, 403(b) plans (including
TSAs) and other pension and profit-sharing plans. 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 Investor Services at 1-800-225-5291.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
FUND DETAILS
- -------------------------------------------------------------------------------
BUSINESS STRUCTURE
HOW THE FUNDS ARE ORGANIZED Each John Hancock tax-free income fund is an
open-end management investment company or a series of such a company.
Each fund is supervised by a board of trustees, an independent body which has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others (see diagram). The board has the right, and
the obligation, to terminate the fund's relationship with any of these companies
and to retain a different company if the board believes that it is in the
shareholders' best interests.
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock tax-free income funds may
include individuals who are affiliated with the investment adviser. However, the
majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
[A flow chart that contains 7 rectangular-shaped boxes and illustrates the
hierachy of how the funds are organized. Within the flowchart, there are 5
tiers. The tiers are connected by shaded lines.]
[Shareholders represent the first tier. There is a shaded vertical arrow on the
left-hand side of the page. The arrow has arrowheads on both ends and is
contained within two horizontal, shaded lines. This is meant to highlight tiers
two and three which focus on Distribution and Shareholder Services.]
[Financial Services Firms and their Representatives are shown on the second
tier. Principal Distributor and Transfer Agent are shown on the third tier.]
[A shaded vertical arrow on the right-hand side of the page denotes those
entities involved in the Asset Management. The arrow has arrowheads on both ends
and is contained within two horizontal, shaded lines. This fourth tier includes
the Investment Advisor and the Custodian.]
[The fifth tier contains the Trustees/Directors.]
YOUR ACCOUNT 23
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
ACCOUNTING COMPENSATION The funds compensate the adviser for performing tax and
financial management services. Annual compensation for 1996 will not exceed
0.02% of each fund's average net assets.
PORTFOLIO TRADES In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock Mutual
Life Insurance Company, but only when the adviser believes no other firm offers
a better combination of quality execution (i.e., timeliness and completeness)
and favorable price.
INVESTMENT GOALS AND POLICIES Except for California Tax-Free Income Fund, High
Yield Tax-Free Fund and Tax-Free Bond Fund, each fund's investment goal is
non-fundamental and may be changed without shareholder approval. Except for
Managed Tax Exempt Fund, each fund's policy of investing at least 80% in
municipal securities is fundamental and may not be changed without shareholder
approval. High Yield Fund's 80% credit policy is also fundamental.
DIVERSIFICATION All of the tax-free funds are diversified, except the
Massachusetts and New York Tax-Free Income funds. Because they are not
diversified, these two funds can invest more than 5% of assets in the securities
of a single issuer.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the 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 financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the fund in assets ("12b-1" refers to the
federal securities regulation authorizing annual fees of this type). The 12b-1
fee rates vary by fund and by share class, according to Rule 12b-1 plans adopted
by the funds' respective boards. The sales charges and 12b-1 fees paid by
investors are detailed in the fund-by-fund information. The portions of these
expenses that are reallowed to financial services firms are shown on the next
page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
<TABLE>
<CAPTION>
CLASS B UNREIMBURSED DISTRIBUTION EXPENSES(1)
Unreimbursed As a % of
Fund expenses net assets
- ---- ------------ ----------
<S> <C> <C>
California Tax-Free Income $3,275,187 3.99%
High Yield Tax-Free $5,853,826 3.77%
Managed Tax-Exempt $6,993,452 3.51%
Massachusetts Tax-Free Income N/A N/A
New York Tax-Free Income N/A N/A
Tax-Free Bond $3,009,557 4.07%
</TABLE>
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
INITIAL COMPENSATION Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
ANNUAL COMPENSATION Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears. Firms affiliated
with John Hancock, which include Tucker Anthony, Sutro & Company and John
Hancock Distributors, may receive an additional fee of up to 0.05% a year of
their total eligible net assets.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
<TABLE>
<CAPTION>
CLASS A INVESTMENTS
MAXIMUM
SALES CHARGE REALLOWANCE FIRST YEAR MAXIMUM
PAID BY INVESTORS OR COMMISSION SERVICE FEE TOTAL COMPENSATION(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 3.00% 2.26% 0.25% 2.50%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
REGULAR INVESTMENTS OF
$1 MILLION OR MORE
First $1M - $4,999,999 -- 1.00% 0.25% 1.24%
Next $1 - $5M above that -- 0.50% 0.25% 0.74%
Next $1 and more above that -- 0.25% 0.25% 0.49%
WAIVER INVESTMENTS(2) -- 0.00% 0.25% 0.25%
<CAPTION>
CLASS B INVESTMENTS
MAXIMUM
REALLOWANCE FIRST YEAR MAXIMUM
OR COMMISSION SERVICE FEE TOTAL COMPENSATION
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
All amounts 3.75% 0.25% 4.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to fund commission
payments when there is no initial sales charge.
FUND DETAILS 25
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
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 each fund's
risk profile in the fund-by-fund information.
The funds are 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 a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following page are brief descriptions of these
securities and practices, along with the risks associated with them. The funds
follow certain policies that may reduce these risks.
As with any bond fund, there is no guarantee that a John Hancock tax-free income
fund will earn income or show a positive return over any period of time.
- --------------------------------------------------------------------------------
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.
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.
INFORMATION RISK The risk that key information about a security or market is
inaccurate or unavailable. Common to all municipal 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.
LEVERAGE RISK Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
- HEDGED When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position which 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.
- SPECULATIVE To the extent that a derivative is not used as a hedge, the fund
is directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost.
LIQUIDITY RISK The risk that certain securities may
be difficult or impossible to sell at the time and the price that the seller
would like. The seller may have to lower the price, sell other securities
instead, or forego an investment opportunity, any of which could have a negative
effect on fund management or performance.
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.
OPPORTUNITY RISK The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in other investments.
VALUATION RISK The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
HIGHER RISK SECURITIES AND PRACTICES
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semi-annual reports.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
- - No policy limitation on usage; fund may be using currently
+ Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
California
Tax-Free High Yield Managed Massachusetts New York
Income Tax-Free Tax-Exempt Tax-Free Income Tax-Free Income Tax-Free Bond
------ -------- ---------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENTS
The borrowing of money from banks or
through reverse repurchase agreements.
Leverage, credit risks. 15 33.3(1) 10 33.3 33.3 15
REPURCHASE AGREEMENTS The purchase of a
security that must later be sold back to
the issuer at the same price plus
interest. Credit risk. - - - - - -
SECURITIES LENDING The lending of
securities to financial institutions,
which provide cash or government
securities as collateral. Credit risk. 33.3 -- -- 33.3 33.3 33.3
SHORT-TERM TRADING Selling a security
soon after purchase. A portfolio
engaging in short-term trading will have
higher turnover and transaction
expenses. Market risk. - - - - - -
WHEN-ISSUED SECURITIES AND FORWARD
COMMITMENTS The purchase or sale of
securities for delivery at a future
date; market value may change before
delivery. Market, opportunity, leverage
risks. - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
RESTRICTED AND ILLIQUID SECURITIES
Securities not traded on the open
market. May include illiquid Rule 144A
securities. Liquidity, market risks. 10 10 15 15 15 10
- -----------------------------------------------------------------------------------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
PARTICIPATION INTERESTS Securities
representing an interest in another
security, often a municipal lease
obligation (MLO). MLOs are not backed by
the full faith and credit of the issuing
municipality. Credit, information,
interest rate, liquidity, valuation
risks. - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
LEVERAGED DERIVATIVE SECURITIES
FINANCIAL FUTURES AND OPTIONS;
SECURITIES AND INDEX OPTIONS Contracts
involving the right or obligation to
deliver or receive assets or money
depending on the performance of one or
more assets or an economic index.
- ---Futures and related options. Interest
rate, market, hedged or speculative
leverage, correlation, liquidity,
opportunity risks. + + + + + +
- ---Options on securities and indices.
Interest rate, market, hedged or
speculative leverage, correlation,
liquidity, credit, opportunity risks. 10(2) 10(2) + + + 10(2)
STRUCTURED SECURITIES Leveraged and/or
indexed debt securities, including
principal-only and interest-only
securities, leveraged floating rate
securities, and others. These securities
tend to be highly sensitive to interest
rate movements and their performance may
not correlate to such movements in a
conventional fashion. Credit, interest
rate, market, speculative leverage,
liquidity, valuation risks.
10 - 10 10 10 10
SWAPS, CAPS, FLOORS, COLLARS OTC
contracts involving the right or
obligation to receive or make payments
based on two different income streams.
Correlation, credit, currency, interest
rate, hedged or speculative leverage,
liquidity, valuation risks. + + + + + +
</TABLE>
(1) Applies to reverse repurchase agreements. Other borrowings are limited to
15% of total assets.
(2) Applies to purchased options only.
FUND DETAILS 27
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
<TABLE>
<CAPTION>
ANALYSIS OF FUNDS WITH 5% OR MORE IN JUNK BONDS
INVESTMENT-GRADE BONDS
QUALITY RATING
(S&P/MOODY'S)(1) HIGH YIELD TAX-FREE FUND TAX-FREE BOND FUND
- ---------------- ------------------------ ------------------
<S> <C> <C>
AAA/Aaa 10.32% 22.6%
AA/Aa 1.69% 4.8%
A/A 4.76% 14.9%
BBB/Baa 31.42% 51.1%
- --------------------------------------------------------------------------------
JUNK BONDS
BB/Ba 45.12% 5.3%
B/B 1.63% 0.9%
CCC/Caa 0.00% 0.00%
CC/Ca 0.00% 0.00%
C/C 0.00% 0.00%
D/D 0.00% 0.00%
% of portfolio in bonds 100.0 99.6
</TABLE>
- - Rated by S&P or Moody's
- - Rated by the adviser
(1) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
tax-free income funds:
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual/ semi-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 this prospectus (is legally a part of this
prospectus).
To request a free copy of the current annual/semi-annual report or SAI, please
write or call:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, MA 02205-9116
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
[John Hancock's graphic logo. A circle, a diamond, triangle and a diamond.]
101 Huntington Avenue
Boston, Massachusetts 02199-7603
[John Hancock's script logo.]
<PAGE>
SUBJECT TO COMPLETION
DATE OF ISSUANCE:
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
John Hancock Massachusetts Tax-Free Income Fund
John Hancock New York Tax-Free Income Fund
Class A and Class B Shares
Statement of Additional Information
September 30, 1996
This Statement of Additional Information provides information about John
Hancock Tax-Exempt Series Fund (the "Fund") and its two series, the John Hancock
Massachusetts Tax-Free Income Fund and the John Hancock New York Tax-Free Income
Fund (each a "Portfolio" and together, the "Portfolios"), in addition to the
information that is contained in the Fund's Prospectus (the "Prospectus") dated
September 30, 1996.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Fund's Prospectus, a copy of which can be obtained
free of charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
<PAGE>
TABLE OF CONTENTS
Statement of
Additional
Information
Page
Organization of the Fund 3
Investment Objective and Policies 3
Certain Investment Practices 9
Special Risks 15
Ratings 19, 22
Investment Restrictions 26
Those Responsible For Management 29
Investment Advisory And Other Services 38
Distribution Contract 41
Initial Sales Charge on Class A Shares 43
Deferred Sales Charge on Class B Shares 45
Special Redemptions 48
Additional Services And Programs 48
Tax Status 50
State Income Tax Information 53
Net Asset Val9ue 55
Description Of The Fund's Shares 55
Calculation Of Performance 57
Brokerage Allocation 59
Transfer Agent Services 61
Custody Of Portfolios 61
Independent Accountants 61
Appendix A-1
Financial Statements --
2
<PAGE>
ORGANIZATION OF THE FUND
John Hancock Tax-Exempt Series Fund is an open-end management investment company
presently consisting of two non-diversified separate portfolios and one
diversified separate portfolio. The two non-diversified separate portfolios are
the subject of this Statement of Additional Information and are described below.
John Hancock Massachusetts Tax-Free Income Fund (the "Massachusetts Portfolio").
The Massachusetts Portfolio is intended to provide investors with current income
excludable from gross income for Federal income tax purposes and exempt from the
personal income tax of Massachusetts, consistent with preservation of capital.
John Hancock New York Tax-Free Income Fund (the "New York Portfolio"). The New
York Portfolio is intended to provide investors with current income excludable
from gross income for Federal income tax purposes and exempt from the personal
income tax of New York State and New York City, consistent with preservation of
capital.
The Fund was organized in March 1987 by John Hancock Advisers, Inc. (the
"Adviser") as a Massachusetts business trust under the laws of The Commonwealth
of Massachusetts. Prior to January 2, 1991, when the Fund changed its name, it
was known as John Hancock Tax-Exempt Series Trust. The Adviser is an indirect
wholly- owned subsidiary of 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.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide income that is excludable
from gross income for Federal income tax purposes and exempt from the personal
income taxes of Massachusetts, or New York State and New York City, consistent
with preservation of capital. For a discussion of each Portfolio's investment
objective and policies, investors should refer to the captions "Goal and
Strategy" and "Portfolio Securities" in the Prospectus. As defined in this
Statement of Additional Information, "Tax-Exempt Bonds" and tax-exempt
securities refer to debt securities issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies or instrumentalities, the interest on
which is excludable from gross income for Federal income tax purposes, without
3
<PAGE>
regard to whether the interest income thereon is exempt from the personal income
tax of any state. There is no assurance that the Portfolios will achieve their
investment objective.
General. Municipal bonds generally are classified as either general obligation
bonds or revenue bonds. General obligation bonds are backed by the credit of an
issuer having taxing power and are payable from the issuer's general
unrestricted revenues. Their payment may depend on an appropriation of the
issuer's legislative body. Revenue bonds, by contrast, are payable only from the
revenues derived from a particular project, facility or a specific revenue
source. They are not generally payable from the unrestricted revenues of the
issuer.
All of the investments of each Portfolio will be made in:
(1) Tax-Exempt Bonds which are rated A or better by Standard & Poor's
Ratings Group ("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's") or Fitch Investors Services, Inc. ("Fitch").
Alternatively, the bonds may be unrated but considered by the Adviser
to be of comparable quality, and issued by issuers which have other
securities rated not lower than A by Standard & Poor's, Moody's or
Fitch.
(2) Tax-Exempt Bonds which are rated BBB or BB by Standard & Poor's, Baa
or Ba by Moody's or BBB or BB by Fitch, or which are unrated but are
considered by the Adviser to be of comparable quality. Not more than
one-third of a Portfolio's total assets will be invested in Tax-Exempt
Bonds rated lower than A or determined to be of comparable quality.
(3) Notes of issuers having an issue of outstanding Tax-Exempt Bonds rated
not lower than A by Standard & Poor's, Moody's or by Fitch, or notes
which are guaranteed by the U.S. Government or rated MIG-1 or MIG-2 by
Moody's, or unrated notes which are determined to be of comparable
quality by the Adviser.
(4) Obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. Some obligations issued by an agency or
instrumentality may be supported by the full faith and credit of the
U.S. Treasury, while others may be supported only by the credit of the
particular Federal agency or instrumentality.
(5) Commercial paper which is rated A-1 or A-2 by Standard & Poor's, P-1
or P-2 by Moody's, or at least F-1 by Fitch, or which is not rated,
but is considered by the Adviser to be of comparable quality;
obligations of banks with $1 billion of assets and cash equivalents,
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including certificates of deposit, bankers acceptances and repurchase
agreements. Ratings of A-2 or P-2 on commercial paper indicate a
strong capacity for timely payment, although the relative degree of
safety is not as high as for issuers designated A-1 or P-1.
The Portfolio may invest in certain types of Tax-Exempt Bonds whose interest
income may be treated as a tax preference item under the Federal alternative
minimum tax. The Portfolios will not include tax-exempt bonds generating this
income for purposes of measuring compliance with the 80% fundamental investment
policy described in the Prospectus.
Tax-Exempt Bonds. Tax-Exempt Bonds are issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, housing, hospitals, mass transportation, schools, streets
and water and sewer works. Other public purposes for which Tax-Exempt Bonds may
be issued include the refunding of outstanding obligations or obtaining funds
for general operating expenses. In addition, certain types of "private activity
bonds" may be issued by public authorities to finance privately operated housing
facilities and certain local facilities for water supply, gas, electricity, or
sewage or solid waste disposal, student loans, or the obtaining of funds to lend
to public or private institutions for the construction of facilities such as
educational, hospital and housing facilities. Such private activity bonds are
included within the term Tax-Exempt Bonds if the interest paid thereon is
excluded from gross income for Federal income tax purposes.
Other types of private activity bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may also constitute Tax-Exempt Bonds, but current
Federal tax law places substantial limitations on the size of such issues.
Notes. Tax-Exempt Notes generally are used to provide for short-term capital
needs and generally have maturities of one year or less. Tax-Exempt Notes
include:
1. Project Notes. Project notes are backed by an agreement between a local
issuing agency and the Federal Department of Housing and Urban Development
("HUD") and carry a United States Government guarantee. These notes provide
financing for a wide range of financial assistance programs for housing,
redevelopment, and related needs (such as low-income housing programs and urban
renewal programs). Although they are the primary obligations of the local public
housing agencies or local urban renewal agencies, the HUD agreement provides for
the additional security of the full faith and credit of the United States
Government. Payment by the United States pursuant to its full faith and credit
obligation does not impair the tax-exempt character of the income from Project
Notes.
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2. Tax-Anticipation Notes. Tax Anticipation Notes are issued to finance working
capital needs of municipalities. Generally, they are issued in anticipation of
various tax revenues, such as income, sales, use and business taxes, and are
specifically payable from these particular future tax revenues.
3. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in
expectation of receipt of specific types of revenue, other than taxes, such as
federal revenues available under Federal Revenue Sharing Programs.
4. Bond Anticipation Notes. Bond Anticipation Notes are issued to provide
interim financing until long-term bond financing can be arranged. In most cases,
the long-term bonds then provide the funds for the repayment of the Notes.
5. Construction Loan Notes. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a commitment
by the Government National Mortgage Association to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by the commitments of banks to purchase the loan.
Commercial Paper. Issues of commercial paper typically represent short-term,
unsecured, negotiable promissory notes. These obligations are issued by agencies
of state and local governments to finance seasonal working capital needs of
municipalities or to provide interim construction financing and are paid from
general revenues of municipalities or are refinanced with long-term debt. In
most cases, tax- exempt commercial paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions.
Yields. The yields on Tax-Exempt Bonds depend on a variety of factors, including
general money market conditions, effective marginal tax rates, the financial
condition of the issuer, general conditions of the Tax-Exempt Bond market, the
size of a particular offering, the maturity of the obligation and the rating (if
any) of the issue. The ratings of Moody's , Fitch and Standard & Poor's
represent their opinions as to the quality of various Tax-Exempt Bonds which
they undertake to rate. It should be emphasized, however, that ratings are not
absolute standards of quality. Consequently, Tax-Exempt Bonds with the same
maturity and interest rate with different ratings may have the same yield. Yield
disparities may occur for reasons not directly related to the investment quality
of particular issues or the general movement of interest rates, due to such
factors as changes in the overall demand or supply of various types of
Tax-Exempt Bonds or changes in the investment objectives of investors.
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"Moral Obligation" Bonds. No Portfolio currently intends to invest in so-called
"moral obligation" bonds, where repayment is backed by a moral commitment of an
entity other than the issuer, unless the credit of the issuer itself, without
regard to the "moral obligation," meets the investment criteria established for
investments by the Portfolio.
Lower Rated High Yield "High Risk" Debt Obligations. As discussed in the Fund's
Prospectus and above, each Portfolio may invest in high yielding, fixed income
securities rated below Baa by Moody's or BBB by Standard & Poor's or Fitch or
which are unrated but are considered by the Adviser to be of comparable quality.
Ratings are based largely on the historical financial condition of the issuer.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate. Bonds rated BB or Ba are generally
referred to as junk bonds.
See the "Appendix" attached hereto.
The values of lower-rated securities and those which are unrated but which are
considered by the Adviser to be of comparable quality generally fluctuate more
than those of high-rated securities. These securities involve greater price
volatility and risk of loss of principal and income. In addition, the lower
rating reflects a greater possibility of an adverse change in financial
condition affecting the ability of the issuer to make payments of interest and
principal. The market price and liquidity of lower-rated securities generally
responds to short-term market developments to a greater extent than for higher
rated securities, because these development are perceived to have a more direct
relationship to the issuer's ability to meet its ongoing debt obligations.
Although the Adviser seeks to minimize these risks through diversification,
investment analysis and attention to current developments in interest rates and
economic conditions, there can be no assurance that the Adviser will be
successful in limiting a Portfolio's exposure to the risks associated with lower
securities. Because each Portfolio invests in securities in the lower rated
categories, the achievement of each Portfolio's goals is more dependent on the
Adviser's ability than would be the case if each Portfolio were investing in
securities in the higher rated categories.
The market value of debt securities which carry no equity participation usually
reflects yields generally available on securities of similar quality and type.
When such yields decline, the market value of a portfolio already invested at
higher yields can be expected to rise if such securities are protected against
early call. In general, in selecting securities for its portfolio, the portfolio
manager of each Portfolio intends to seek protection against early call.
Similarly, when such yields increase, the market value of a portfolio already
invested at lower yields can be expected to decline. Each Portfolio may invest
in debt securities which sell at substantial discounts from par. These
securities are low coupon bonds which, during periods of high interest rates,
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because of their lower acquisition cost tend to sell on a yield basis
approximating current interest rates.
Additional Risks. Securities in which a Portfolio may invest are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Congress or, as the case may be, the Massachusetts or
New York legislature extending the time for payment of principal or interest, or
both, or imposing other constraints upon enforcement of such obligations. There
is also the possibility that, as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay when due principal of and
interest on their Tax- Exempt Bonds may be materially affected.
From time to time, proposals have been introduced before Congress which would
adversely affect the Federal income tax consequences of holding Tax-Exempt
Bonds. Federal tax legislation enacted primarily during the 1980's limits the
types and amounts of Tax-Exempt Bonds issuable for certain purposes, especially
for industrial development bonds and other types of so-called "private activity"
bonds. Such limits may affect the future supply and yields of these types of
Tax-Exempt Bonds. Further proposals limiting the issuance of Tax-Exempt Bonds
may well be introduced in the future. If it appeared that the availability of
Tax-Exempt Bonds for investment by a Portfolio and the value of the Portfolio's
investments could be materially affected by such changes in law, the Trustees
would reevaluate such Portfolio's investment objective and policies and consider
changes in the structure of the Portfolio or its dissolution.
Portfolio Turnover. It is impossible to predict portfolio turnover rates
accurately. The portfolio turnover rate for a Portfolio is calculated by
dividing the lower of that Portfolio's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of all securities whose maturities
at the time of acquisition were 1 year or less) by the monthly average value of
the securities in the Portfolio during the year.
Non-Diversification. Each Portfolio has registered as a "non-diversified"
investment company, permitting the Adviser to invest more than 5% of the assets
of each Portfolio in the obligations of any one issuer. Since a relatively high
percentage of a Portfolio's assets may be invested in the obligations of a
limited number of issuers, the value of Portfolio shares may be more susceptible
to any single economic, political or regulatory event than would the shares of a
diversified investment company.
Ratings. Ratings for Bonds issued by various jurisdictions are noted herein.
Such ratings reflect only the respective views of such organizations, and an
explanation of the significance of such ratings may be obtained from the rating
agency furnishing the same. There is no assurance that a rating will continue
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for any given period of time or that a rating will not be revised or withdrawn
entirely by any or all of such rating agencies, if, in its or their judgment,
circumstances so warrant. Any downward revision or withdrawal of a rating could
have an adverse effect on the market prices of any of the bonds described
herein.
CERTAIN INVESTMENT PRACTICES
"When-Issued" Securities. "When-issued" refers to securities whose terms are
available and for which a market exists, but which have not yet been issued. If
a Portfolio enters into a "when-issued" transaction, the Portfolio will
segregate in a separate account, cash or liquid high-grade debt securities equal
in value to its commitment to acquire "when-issued" securities. These assets
will be valued at market value daily, and additional cash or liquid assets will
be segregated in the separate account to the extent the total value of the
assets in the account declines below the amount of such commitment. Purchasing
Tax-Exempt Bonds on a when-issued basis may increase a Portfolio's overall
investment exposure and involves a risk of loss if the value of the securities
declines before the settlement date.
Forward Commitments. The Portfolios may purchase securities on a forward
commitment basis. In a forward commitment transaction, a Portfolio contracts to
purchase securities for a fixed price at a future date beyond customary
settlement time.
When a Portfolio engages in forward commitment 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 Portfolio's losing the opportunity
to obtain a price and yield considered to be advantageous. The purchase of
securities on a forward commitment basis also involves a risk of loss if the
value of the security to be purchased declines prior to the settlement date.
On the date a Portfolio enters into an agreement to purchase securities on a
forward commitment basis, the Portfolio will segregate in a separate account
cash or liquid, high grade debt securities equal in value to the Portfolio'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 forward
commitment. Alternatively, the Portfolio may enter into offsetting contracts for
the forward sale of other securities that it owns.
Repurchase Agreements. A Portfolio may enter into repurchase agreements with
respect to its portfolio securities. In a repurchase agreement, a Portfolio buys
a security subject to the right and obligation to sell it back at a higher
price. Each Portfolio has established a procedure providing that the securities
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serving as collateral for each repurchase agreement must be delivered to such
Portfolio'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, a Portfolio could
experience delays in or be prevented from liquidating the underlying securities
and could experience losses, including the possible decline in the value of the
underlying securities during the period in which the Portfolio seeks to enforce
its rights thereto, possible subnormal levels of income and lack of access to
income during this period, and the expense of enforcing its rights. The Adviser
will monitor the creditworthiness of the parties with whom the Fund enters into
repurchase agreements. The Portfolios will enter into repurchase agreements only
with member banks of the Federal Reserve System and with "primary dealers" in
U.S. Government securities. It is a fundamental policy of each Portfolio not to
invest more than 15% of its net assets in illiquid securities, including
repurchase agreements maturing in more than 7 days.
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 reacquire those securities
upon effecting their repurchase. To minimize various risks associated with
reverse repurchase agreements, the Fund will establish and maintain with the
Fund's custodian a separate account consisting of highly liquid, marketable
securities 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 and other
borrowings exceeding in the aggregate 33_% of the market value of its 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 Board of Trustees. Under procedures
established by the Board of Trustees, the Adviser will monitor the
creditworthiness of the banks involved.
Financial Futures Contracts. A Portfolio may hedge its portfolio by selling
financial futures contracts to offset the effect of expected increases in
interest rates and by purchasing such futures contracts to offset the effect of
expected declines in interest rates. A Portfolio may also buy and sell futures
contracts to hedge against changes in securities prices. Although other
techniques could be used to reduce a Portfolio's exposure to interest rate and
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security price fluctuations, a Portfolio may be able to hedge its exposure more
effectively and economically by using financial futures contracts. A portfolio
may enter into futures contracts and related options for hedging and speculative
purposes to the extent permitted by the regulations of the Commodity Futures
Trading Commission ("CFTC").
Financial futures contracts have been designed by boards of trade which have
been designated "contract markets" by the CFTC. Futures contracts are traded on
these markets in a manner that is similar to the way a stock is traded on a
stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate- sensitive instruments such as long-term
U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage
Association ("GNMA") modified pass-through mortgage-backed securities,
three-month U.S. Treasury bills, 90-day commercial paper, bank certificates of
deposit, the municipal bond buyer index, and Eurodollar certificates of deposit.
It is expected that if other financial futures contracts are developed and
traded, a Portfolio may engage in transactions in such contracts.
Although financial futures contracts by their terms call for actual delivery or
acceptance of interest rate instruments, in most cases these contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security and delivery
month). If the offsetting purchase price is less than a Portfolio's original
sale price, such Portfolio realizes a gain, or if it is more, the Portfolio
realizes a loss. Conversely, if the offsetting sale price is more than a
Portfolio's original purchase price, such Portfolio realizes a gain, or if it is
less, the Portfolio realizes a loss. A Portfolio will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing out transaction. For a discussion of the Federal income tax
considerations of trading in financial futures contracts, see the information
under the caption "Tax Status" below.
At the time a Portfolio enters into a financial futures contract, it is required
to deposit with its custodian a specified amount of cash or U.S. Government
securities, known as "initial margin." The margin required for a financial
futures contract is set by the board of trade or exchange on which the contract
is traded and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
financial futures contract which is returned to a Portfolio upon termination of
the contract, assuming all contractual obligations have been satisfied. The
Portfolios expect to earn interest income on their initial margin deposits. Each
day, the futures contract is valued at the official settlement price of the
board of trade or exchange on which it is traded. Subsequent payments, known as
"variation margin," to and from the broker, are made on a daily basis as the
market price of the financial futures contract fluctuates. This process is known
as "marking to the market." Variation margin does not represent borrowing or
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lending by a Portfolio, but is instead settlement between the Portfolio and the
broker of the amount one would owe the other if the financial futures contract
expired at that time. In computing net asset value, a Portfolio will mark to the
market its open financial futures positions.
Successful hedging depends on a strong correlation between the market for the
portfolio securities being hedged and the futures contract market for those
securities. There are several factors that may prevent this correlation from
being perfect, and thus, even a correct forecast of general interest rate trends
may not result in a successful hedging transaction. There are significant
differences between the securities and futures markets which could create an
imperfect correlation between the markets and which could impair the
effectiveness of a given hedge. The degree of imperfection of correlation
depends on circumstances such as: variations in speculative market demand for
financial futures and debt securities, including technical influences in futures
trading and differences between the financial instruments underlying the
standard financial futures contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers. The degree of
imperfection may be increased where the underlying debt securities are
lower-rated and, thus subject to greater fluctuation in prices than higher-rated
securities. In addition, the degree of imperfection may also be increased by the
fact that the Portfolios will enter into financial futures contracts on taxable
securities, and there is no guarantee that the prices of taxable securities will
move in a similar manner to the prices of a Portfolio's tax-exempt securities.
A decision as to whether, when and how to hedge involves the exercise of skill
and judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends. Although the
Adviser believes that the use of financial futures contracts will benefit the
Portfolios, an incorrect prediction could result in a loss on both the hedged
securities in a Portfolio's investments and hedging vehicle so that a
Portfolio's return might have been better had hedging not been attempted.
However, in the absence of the ability to hedge, the Adviser might have taken
portfolio actions in anticipation of the same market movements with similar
investment results but, presumably, at greater transaction costs. The low margin
deposits required for futures transactions permit an extremely high degree of
leverage. A relatively small movement in a futures contract may result in losses
or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in price of
certain futures contract during a single trading day. The daily limit
establishes the maximum amount by which the price of a futures contract may vary
either up or down from the previous day's settlement price. Once the daily limit
has been reached in a futures contract subject to the limit, no more trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movements during a particular trading day and, therefore, does not limit
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potential losses because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses.
Finally, although a Portfolio engages in financial futures transactions only on
boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
event participants decide to make or take delivery, liquidity in the market
could be reduced. In addition, a Portfolio could be prevented from executing a
buy or sell order at a specified price or closing out a position due to limits
on open positions or daily price fluctuation limits imposed by the exchanges or
boards of trade. If a Portfolio cannot close out a position, it will be required
to continue to meet margin requirements until the position is closed.
Options on Financial Futures Contracts. As discussed in the Portfolios'
Prospectus, a Portfolio may purchase and write call and put options on financial
futures contracts. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise, the writer of the option delivers the futures contract to
the holder at the exercise price. A Portfolio would be required to deposit with
its custodian initial and variation margin with respect to put and call options
on futures contracts written by it.
Options on futures contracts involve risks similar to those risks relating to
transactions in financial futures contracts described above. Also, an option
purchased by a Portfolio may expire worthless, in which case a Portfolio would
lose the premium paid therefor. The potential loss incurred by a Portfolio in
writing options on futures is unlimited and may exceed the premium received.
Other Considerations. The Portfolios will engage in futures transactions for
bona fide hedging or speculative purposes to the extent permitted by CFTC
regulations. A Portfolio 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 Portfolio
or which it expects to purchase. Except as stated below, the Portfolios' futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities that a Portfolio owns, or futures contracts will be purchased to
protect the Portfolio against an increase in the price of securities or the
currency in which they are denominated it intends to purchase. As evidence of
this hedging intent, each Portfolio 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 Portfolio will have purchased or will be in the process
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of purchasing, equivalent amounts of related securities or assets denominated in
the related currency 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 a Portfolio to do so, a long futures position may be terminated
or an option may expire without the corresponding purchase of securities or
other assets.
As an alternative to literal compliance with the bona fide hedging definition, a
CFTC regulation permits the Portfolios to elect to comply with a different test,
under which the aggregate initial margin and premiums required to establish
speculative positions in futures contracts and options on futures will not
exceed 5% of the net asset value of a Portfolio's portfolio, after taking into
account unrealized profits and losses on any such positions and excluding the
amount by which such options were in-the- money at the time of purchase. Each
Portfolio will engage in transactions in futures contracts and options only to
the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining its
qualification as a regulated investment company for federal income tax purposes.
When a Portfolio purchases a futures contract, writes a put option thereon or
purchases a call option thereon, an amount of cash or high grade, liquid debt
securities will be deposited in a segregated account with the Portfolio's
custodian which is equal to the underlying value of the futures contract reduced
by the amount of initial and variation margin held in the account of its broker.
Variable or Floating Rate Obligations. Certain of the obligations in which the
Fund may invest may be variable or floating rate obligations on which the
interest rate is adjusted at predesignated periodic intervals (variable rate) or
when there is a change in the market rate of interest (floating rate) on which
the obligations may include a demand feature which entitles the purchaser to
demand prepayment of the principal amount prior to stated maturity. Also, the
issuer may have a corresponding right to prepay the principal amount prior to
maturity. As with any other type of debt security, the marketability of variable
or floating rate instruments may vary depending upon a number of factors,
including the type of issuer and the terms of the instruments. The Fund may also
invest in more recently developed floating rate instruments which are created by
dividing a municipal security's interest rate into two or more different
components. Typically, one component ("floating rate component" or "FRC") pays
an interest rate that is reset periodically through an auction process or by
reference to an interest rate index. A second component ("inverse floating rate
component" or "IFRC") pays an interest rate that varies inversely with changes
to market rates of interest, because the interest paid to the IFRC holders is
generally determined by subtracting a variable or floating rate from a
predetermined amount (i.e., the difference between the total interest paid by
the municipal security and that paid by the FRC). The Fund may purchase FRC's
without limitation. Up to 10% of the Fund's total assets may be invested in
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IFRC's in an attempt to protect against a reduction in the income earned on the
Fund's other investments due to a decline in interest rates. The extent of
increases and decreases in the value of an IFRC generally will be greater than
comparable changes in the value of an equal principal amount of a fixed-rate
municipal security having similar credit quality, redemption provisions and
maturity. To the extent that such instruments are not readily marketable, as
determined by the Adviser pursuant to guidelines adopted by the Board of
Trustees, they will be considered illiquid for purposes of the Fund's 10%
investment restriction on investment in non-readily marketable securities.
Options Transactions
The Fund may write listed and over-the-counter covered call options and
covered put options on securities or securities indices in order to earn
additional income from the premiums received. In addition, the Fund may purchase
listed and over-the-counter call and put options. The extent to which covered
options will be used by the Fund will depend upon market conditions and the
availability of alternative strategies.
The Fund will write listed and over-the-counter call options only if they
are "covered," which means that the Fund owns or has the immediate right to
acquire the securities underlying the options without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio. A call option written by the Fund may also be "covered" if the Fund
holds on a share-for-share basis a covering call on the same securities where
(i) the exercise price of the covering call held is equal to or less than the
exercise price of the call written or the exercise price of the covering call is
greater than the exercise price of the call written, in the latter case only if
the difference is maintained by the Fund in cash or high grade liquid debt
obligations in a segregated account with the Fund's custodian, and (ii) the
covering call expires at the same time as or later than the call written. If a
covered call option is not exercised, the Fund would keep both the option
premium and the underlying security. If the covered call option written by the
Fund is exercised and the exercise price, less the transaction costs, exceeds
the cost of the underlying security, the Fund would realize a gain in addition
to the amount of the option premium it received. If the exercise price, less
transaction costs, is less than the cost of the underlying security, the Fund's
loss would be reduced by the amount of the option premium.
As the writer of a covered put option, the Fund will write a put option
only with respect to securities it intends to acquire for its portfolio and will
maintain in a segregated account with its custodian bank cash or high grade
liquid debt securities with a value equal to the price at which the underlying
security may be sold to the Fund in the event the put option is exercised by the
purchaser. The Fund may also write a "covered" put option by purchasing on a
share-for-share basis a put on the same security as the put written by the Fund
if the exercise price of the covering put held is equal to or greater than the
exercise price of the put written and the covering put expires at the same time
as or later than the put written.
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When writing listed and over-the-counter covered put options on securities,
the Fund would earn income from the premiums received. If a covered put option
is not exercised, the Fund would keep the option premium and the assets
maintained to cover the option. If the option is exercised and the exercise
price, including transaction costs, exceeds the market price of the underlying
security, the Fund would realize a loss, but the amount of the loss would be
reduced by the amount of the option premium.
If the writer of an exchange-traded option wishes to terminate its
obligation prior to its exercise, it may effect a "closing purchase
transaction." This is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that the Fund's
position will be offset by the Options Clearing Corporation. The Fund may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. There is no guarantee that a closing purchase transaction can be
effected. Although the Fund will generally write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular option or at any particular time, and for some options no secondary
market on an exchange may exist.
In the case of a written call option, effecting a closing transaction will
permit the Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. In the case of a
written put option, it will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option.
The Fund will realize a loss from a closing transaction if the cost of the
closing transaction is more than the premium received for writing the option.
However, because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation in the value of the underlying security owned by the
Fund.
Over-the-Counter Options. The Fund may engage in options transactions on
exchanges and in the over-the-counter markets. In general, exchange-traded
options are third-party contracts (i.e., performance of the parties' obligations
is guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. Over-the-counter ("OTC") transactions are two-party
contracts with price and terms negotiated by the buyer and seller. The Fund will
acquire only those OTC options for which management believes the Fund can
receive on each business day at least two separate bids or offers (one of which
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will be from an entity other than a party to the option) or those OTC options
valued by an independent pricing service. The Fund will write and purchase OTC
options only with member banks of the Federal Reserve System and primary dealers
in U.S. Government securities or their affiliates which have capital of at least
$50 million or whose obligations are guaranteed by an entity having capital of
at least $50 million. The SEC has taken the position that OTC options are
subject to the Fund's 15% restriction on illiquid investments. The SEC, however,
allows the Fund to exclude from the 15% limitation on illiquid securities a
portion of the value of the OTC options written by the Fund, provided that
certain conditions are met. First, the other party to the OTC options has to be
a primary U.S. Government securities dealer designated as such by the Federal
Reserve Bank. Second, the Fund must have an absolute contractual right to
repurchase the OTC options at a formula price. If the above conditions are met,
the Fund may treat as illiquid only that portion of the OTC option's value (and
the value of its underlying securities) which is equal to the formula price for
repurchasing the OTC option, less the OTC option's intrinsic value.
Restricted Securities. Each Portfolio may purchase restricted securities,
including those eligible for resale to "qualified institutional buyers" pursuant
to Rule 144A under the Securities Act of 1933, as amended (the "Securities
Act"). The Trustees will monitor the Portfolios' investments in these
securities, focusing on certain factors, including valuation, liquidity and
availability of information. Purchases of other restricted securities are
subject to an investment restriction limiting each Portfolio's investments in
illiquid securities to not more than 15% of its net assets.
Short-Term Trading. Short-term trading might be utilized to take advantage of
market developments, yield disparities and variations in the creditworthiness of
issuers. A high turnover rate involves greater transaction expenses to a
Portfolio, and could involve a higher proportion of short-term capital gains,
distributions of which are taxable to shareholders as ordinary income. Portfolio
turnover rates are shown in the "Financial Highlights" section of the
Prospectus.
The investment objective and policies described above under the caption
"Investment Objective and Policies" and the practices described above under the
caption "Certain Investment Practices" are not fundamental and may be changed by
the Trustees without shareholder approval. The policy of each Portfolio
requiring that under normal circumstances at least 80% of each Portfolio's net
assets consist of Tax-Exempt Bonds is fundamental and may not be changed by the
Trustees without shareholder approval.
SPECIAL RISKS
The following information as to certain special risks associated with investing
in Massachusetts and New York constitutes only a brief summary and does not
purport to be a complete description of the considerations associated with such
investments. The information is based in part on information from official
statements related to securities offerings of Massachusetts and New York issuers
and is believed to be accurate.
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MASSACHUSETTS TAX-EXEMPT BONDS
The economy of the Commonwealth of Massachusetts (the "Commonwealth") has
recently stabilized with unemployment falling to 5.4% for 1995, while the
national unemployment rate was 5.6%. In February 1996, the unemployment rate in
the Commonwealth was 5.0%, while the national unemployment rate was 5.5%.
The financial condition of the Commonwealth has improved over the last four
years. This improvement reflects the combination of implementing more
conservative fiscal policy and budgetary practices, as well as increasing tax
revenues through a combination of tax increases and the slowly rebounding state
economy. Since Fiscal 1992, the state revenues have increased from $9.48 billion
to an estimated $11.16 billion in Fiscal 1995, an annual gain of 5.6%. For
Fiscal 1996, tax revenues are currently projected to increase by 4.4% to $11.65
billion.
In connection with his proposal to reorganize state government, Governor Weld
filed legislation on January 23, 1996 that would reduce the personal income tax
rate on earned income from 5.95% to 5.45% over two calendar years. The bill
would reduce the rate to 5.70% for calendar year 1997, followed by a reduction
to 5.45% in calendar year 1998. The Executive Office for Administration and
Finance of the Commonwealth estimates that this cut in the personal income tax
rate would reduce base tax revenues by approximately $133 million in fiscal
1997, an additional $265 million in fiscal 1998 and a further $132 million in
fiscal 1999, at which time the proposed tax reduction would be fully
implemented.
Fiscal 1992. Fiscal 1992 ended with an excess of operating revenues over
expenditures of $312 million and a positive fund balance of $549 million, which
included $230 million in the Stabilization Fund. Overall, budgeted revenues
increased 0.7% to $13.7 billion and budgeted expenditures declined by 1.7% to
$13.4 billion.
Fiscal 1993. The Commonwealth ended Fiscal 1993 with an operating surplus of $13
million and aggregate ending operating fund balance of approximately $562
million, including a Stabilization Fund balance of $309 million. Budget revenues
increased by 4.7% to over $14.7 billion in Fiscal 1992. Budgeted expenditures in
Fiscal 1993 totalled approximately $14.7 billion, approximately 9.6% higher than
the Fiscal 1992 expenditures.
Fiscal 1994. The Commonwealth ended Fiscal 1994 with an operating surplus of
approximately $27 million and aggregate ending operating fund balance of
approximately $589 million, including a Stabilization Fund balance of $383
million. For the year, budgeted revenues totaled $15.5 billion, representing an
increase of 5.7% over Fiscal 1993. The Commonwealth budgeted expenditures in
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Fiscal 1994 totalled $15.523 billion, approximately 5.6% higher than the Fiscal
1993 budgeted expenditures.
Fiscal 1995. Fiscal 1995 tax revenue collections totalled $11.163 billion.
Budgeted revenues and other sources, including non-tax revenue collected in
fiscal 1995 totalled $16.387 billion, approximately $837 million, or 5.4%, above
1994 budgeted revenues of $15.550 billion. Budgeted expenditures and other uses
of funds in fiscal 1995 were approximately $16.251 billion, approximately $728
million, or 4.7% above fiscal 1994 budgeted expenditures and uses of $15.523
billion. The Commonwealth ended fiscal 1995 with an operating gain of $137
million and an ending fund balance of $726 million.
During Fiscal 1995, a modification was enacted creating a formula for assigning
certain year-end surpluses to the Stabilization Fund. The new allocations called
for sharing funds between the Stabilization Fund and the newly created Cost
Stabilization Fund. Amounts in the Cost Relief Fund can be appropriated for the
following purposes: 1) to subsidize costs of the Massachusetts Water Pollution
Abatement Trust projects; 2) finance homeowner loans to facilitate compliance
with sanitary waste regulations; 3) mitigate sewer rate increases; and 4)
unanticipated obligations or extraordinary expenditures of the Commonwealth. As
calculated by the Comptroller, the amount of surplus funds (as described above)
for fiscal 1995 was approximately $94.9 million, of which $55.9 million was
available to be carried forward as an initial balance for Fiscal 1996; $27.9
million was deposited in the Stabilization Fund; and approximately $11.1 million
was deposited to the Cost Relief Fund.
Fiscal 1996. On June 21, 1995, the Governor signed into law the Fiscal 1996
Budget totalling $16.8 billion in appropriations. A final supplemental budget
passed for Fiscal 1995 added $71 million in continuing appropriations to the
Fiscal Budget. Overall, the Commonwealth expects the Fiscal 1996 budget to total
approximately $16.9 billion, a $684 million, or 4.5% increase over Fiscal 1995
spending. Comprehensive educational reform funding with a $233 million addition
represented the largest individual expenditure increase. Budgeted revenues are
estimated to equal approximately $16.8 billion in Fiscal 1996. The fiscal 1996
forecast for federal reimbursements has decreased by approximately $7 million
primarily due to lower reimbursable spending in public assistance programs.
Fiscal 1997. On June 30, 1996, Governor Weld signed the Fiscal 1997 budget into
law. The 1997 budget provides for expenditures of $17.45 billion, an increase of
3.2% over Fiscal 1996.
The Fiscal 1997 budget centers on numerous projections for spending requirements
of specific programs and expected generation of revenue from individual taxes or
fees; however, achievement of these estimates cannot be assured.
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The reserves of the Massachusetts Unemployment Compensation Trust Fund had been
exhausted by September 1991 due to persistently high levels of unemployment. To
compensate for this shortfall, benefit payments in excess of contributions were
financed through repayable advances from the federal unemployment loan account.
Legislation enacted in September 1992 significantly increased employer
contributions in order to reduce advances from the federal loan account with
1993 contributions exceeding outlays by $200 million. Since September 1994 when
all federal advances and related interest were repaid, the Fund has remained
solvent. As of December 31, 1995, the Trust Fund had a surplus of $514 million.
Credit Factors
Commonwealth-funded local aid represents an important component of the operating
budgets of cities and towns, and decreases in this funding could negatively
impact their ratings. Changes in local aid funding could also negatively impact
a locality's ability to pay assessments from certain Commonwealth agencies,
including the Massachusetts Bay Transportation Authority and the Massachusetts
Water Resources Authority. In the event that a locality incurs substantial
financial difficulties, the Commonwealth may intervene and place the locality
under State receivership.
The fiscal viability of the authorities and municipalities in Massachusetts is
inextricably linked to the financial health of the Commonwealth as well as to
the guarantee of the debt of several authorities, most notably, the
Massachusetts Bay Transportation Authority and the University of Massachusetts
Building Authority. These agency ratings are based on this guarantee and can be
expected to follow any changes in the Commonwealth's rating. In addition,
Massachusetts statutes which limit the taxing authority of the Commonwealth or
certain governmental entities may impair the ability of issuers to maintain debt
service on their obligations.
The tax on personal property and real estate is virtually the only source of
local tax revenues available to the Commonwealth's cities and towns to meet
local costs. "Proposition 2 1/2", an initiative adopted by the voters in
November 1980, limits the power of Massachusetts cities and towns and certain
tax-supported districts to raise revenue from property taxes to support their
operations, including the payment of debt service. Proposition 2 1/2 required
many cities and towns to reduce their property tax levies to a stated percentage
of full and fair cash value of taxable property and real estate, and limited the
amount that all cities and towns might increase their property tax from year to
year.
Growth of tax revenues in the Commonwealth is limited by law. Effective July 1,
1990, the amount of direct bonds the Commonwealth could have outstanding in any
fiscal year was limited, and the total appropriation for any fiscal year for
general obligation debt service was limited to 10%. Moreover, Massachusetts
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local government entities are subject to certain limitations on their taxing
power. These limits could affect their ability, or the ability of the
Commonwealth, to meet their respective financial obligations.
If either Massachusetts or any of its local government entities is unable to
meet its financial obligations, the income derived by the Portfolio, the
Portfolio's net asset value, the Portfolio's ability to preserve or realize
capital appreciation or the Portfolio's liquidity could be impaired.
Ratings
The rating agencies have assigned the following long term credit ratings to the
Commonwealth: "A1" from Moody's; "A+" from Standard and Poor's, and "A+" from
Fitch.
New York Tax-Exempt Bonds
The following section provides only a brief summary of the complex factors
affecting the financial situation in New York and is based on information
obtained from New York State (the "State" or "New York State") certain of its
authorities and New York City (the "City" or "New York City") as publicly
available on the date of this Statement of Additional Information. The
information contained in such publicly available documents has not been
independently verified. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
the State, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default in the absence of a
specific guarantee of pledge provided by the State. It should also be noted that
the fiscal stability of New York State is related to the fiscal stability of New
York City and of the State's Authorities. New York State's experience has been
that if New York City or any other major political subdivision or any of the
State's Authorities suffers serious financial difficulty, the ability of New
York State, New York State's political subdivisions (including New York City)
and the State's Authorities to obtain financing in the public credit markets is
adversely affected. This results in part from the expectation that to the extent
that any Authority or local government experiences financial difficulty, it will
seek and receive New York State financial assistance. Moreover, New York City
accounts for approximately 40 percent of New York State's population and tax
receipts, so New York City's financial integrity in particular affects New York
State directly. Accordingly, if there should be a default by New York City or
any other major political subdivision or any of the State's Authorities, the
market value and marketability of all New York Tax-Exempt Bonds issued by New
York State, its political subdivisions and Authorities ("New York Tax-Exempt
Bonds") could be adversely affected. This would have an adverse effect on the
asset value and liquidity of the New York Portfolio, even though securities of
the defaulting entity may not be held by the Portfolio.
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Regional Economy
The New York State economy has entered its third year of slow recovery from the
national recession of 1990. Expansion in the service, trade, and construction
sectors has netted the State approximately 185,000 new jobs since the recession
trough of 1992. Much of the service growth has been in business, social
services, and in the health sectors. The State's Budget Division, in light of
the forecasts for national economic growth, anticipates continued but slowing
economic growth for New York State. Mirroring national trends, personal income
growth is expected to increase 5% in 1995, down from 6% in 1994, and continue to
increase at a slower rate. Employment growth in 1995 is expected to be slightly
lower than the prior year, or .8%, with a net increase of roughly 60,000 jobs.
Industries that have benefited from the lower dollar abroad will be offset by
U.S. Government cutbacks and shrinking of the banking industry. Unemployment,
which peaked to 9.3% in 1992 was reported at a more favorable 6.3% in May 1995.
1995-1996 Fiscal Year. On June 7, 1995, the State Legislature passed the
1995-1996 budget and the 1995-1996 Financial Plan was formulated on June 20,
1995. The Financial Plan reflects a deposit of $15 million in the Tax
Stabilization Reserve Fund and a year end fund balance of $172 million. The
Financial Plan projects total receipts of the General Fund to be $33.1 billion,
a decline of $48 million from the prior fiscal year. The absence of one-time
transactions, the tax impact of tax reductions enacted in 1994 and 1995, the
reduction of the business tax surcharge, and reductions in the General Fund
share of petroleum based taxes account for the anticipated decline in receipts.
Tax cuts enacted this year are expected to reduce personal income tax receipts
by $515 million. Business taxes are projected to fall to $4.7 billion, or $360
million less than Fiscal 1995 levels. User taxes deposited in the General Fund
are expected to increase $73 million from the preceding fiscal year. These taxes
include cigarette, alcoholic beverage, and auto rental taxes; and a portion of
motor fuel excise levies and vehicle registration fees. Miscellaneous receipts
and transfers from other funds are projected to increase $550 million, largely
due to several one-time transactions.
General Fund disbursements and transfers to other governmental funds, combined,
are projected at $33.1 billion, or $334 million below the level of disbursements
in 1994-1995. Grants to local governments are anticipated to decline $392
million and direct payments to local governments, including school aid and
revenue sharing, are projected to increase $74 million from the prior fiscal
year. Social welfare, including Medicaid, welfare, and other social services
will be cut 6.5%, largely due to a reduction of nearly 9% in Medicaid spending.
Other governmental funds, the Special Revenue Funds, Capital Projects Funds, and
the Debt Service Funds, project disbursements of $26 billion, $4 billion, and
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$2.5 billion, respectively. Transfers from the General Fund to these funds are
projected at $2.04 billion.
1994-1995 Fiscal Year. The State ended the 1994-95 Fiscal Year with the General
Fund in balance. The closing fund balance of $158 million reflects $157 million
in the Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve
Fund.
General Fund receipts fell short of projections by $1.163 billion. Personal
income tax collections reflected weak estimated tax collections and lower
withholding due to reduced wage and salary growth, weakness in the brokerage
industry, and deferral of capital gains realizations in anticipation of Federal
tax changes. Business taxes fell short by $373 million, reflecting lower bank
payments as substantial overpayments of the 1993 liability depressed net
collections. Offsetting these shortfalls were user taxes and fees, which
exceeded projections by $210 million.
Disbursements of the General Fund were lower than original projections by $848
million. Educational costs fell short of projections by $188 million in part due
to the availability of $110 million in additional lottery proceeds and the use
of LGAC bond proceeds. The spending reductions also reflect measures taken by
the Governor to avert a gap in the 1994-95 State Financial Plan in January 1995.
These actions included a hiring freeze, halting the development of certain
services, and the suspension of non-essential capital projects.
1993-1994 Fiscal Year. The State of New York completed its 1993-1994 fiscal year
(ending March 30, 1994) with an accumulated surplus of $370 million from
combined Governmental Funds. This includes a General Fund accumulated deficit of
$1.637 billion, a Capital Fund accumulated deficit of $622 million, and
accumulated surpluses in the Special Revenue and Debt Service Funds. On an
operating basis, the State reported an operating surplus of $1.051 billion from
combined Governmental Funds.
General Fund operations completed Fiscal Year 1993-1994 with a surplus of $914
million reported on GAAP-basis. The surplus reflects several major factors
including the use of $671 million of the 1992-1993 operating surplus to fund
1993-1994 expenditures, $575 million in net Local Government Assistance
Corporation ("LGAL") bond proceeds, and the accumulation of a $265 million
balance in the Contingency Reserve.
Receipts of the General Fund increased $800 million or 2.5% over the prior
fiscal year. Primarily, the increase stemmed from gains of over $1 billion in
personal income and business taxes. This 10% growth was driven by the changes in
Federal business laws and the strong performance of the banking and securities
firms in 1993. Expenditures increased $1.05 billion or 3.2% over the prior year.
The growth in expenditures primarily consisted of $850 million in additional
social service costs. The majority of these costs related to Medicaid and Income
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Maintenance programs. In addition, the settlement of outstanding labor contracts
and unfavorable judicial decisions caused another $240 million in departmental
operations expenditures. On a cash basis the state closed 1993-1994 with a
surplus of $332 million based upon receipts of $32.2 billion and disbursements
of $31.9 billion.
1992-1993 Fiscal Year. In 1992-1993, the State recorded a GAAP-based General
Fund operating surplus of $2.065 billion and ended the years with an accumulated
General Fund deficit of $2.5 billion. The year was highlighted by higher than
expected revenue growth generated by the improving economy combined with the
effects of a tax-induced one-time year end acceleration of income into 1992.
After reflecting a 1992-1993 year-end deposit to the tax refund reserve of $671
million, General Fund receipts exceeded 1992 projections by $45 million. If not
for that year-end transaction, which had the effect of reducing 1992-1993
receipts by $671 million and making them available in Fiscal Year 1993-1994,
General Fund receipts would have been $716 million higher than originally
projected. The favorable revenue performance was primarily attributable to the
withholding and estimated tax components of the income tax exceeding projections
by $800 million. Disbursements ended 1992-1993 at $45 million above projections.
After adjusting for the impact of a $150 million payment from the Medicaid
Malpractice Insurance Association to health insurers pursuant to January 1993
legislation, all other expenditures fell $105 million below projections. The
State closed Fiscal Year 1992-1993 with a cash-basis surplus of $67 million
based on receipts of $31.4 billion and disbursements of $30.8 billion.
Ratings
The State of New York had its A rating by Moody's and A- by Standard & Poor's
reconfirmed during June 1994 and July 1994, respectively. In affirming the
ratings of long term general obligations both agencies cited the positive trends
established over the last two fiscal years. Fitch also retained its A+ rating on
New York State.
Current Budget The revised Fiscal Year 1994-1995 budget was developed from
projections of moderate economic growth and slightly higher expectations
regarding social service case loads and required State services and slightly
lower estimates of tax receipts. The budget calls for a balanced General Fund on
a cash basis. Total receipts are projected to increase to $34.1 billion and
expenditures to $34.0 billion. The 1994-1995 revenue projections incorporate a
$1.5 billion transfer from the tax refund reserve fund, a rate sustaining the
1993-94 income tax growth and moderate user tax expansion. Disbursement
estimates call for a $1.9 billion increase in grants to local education
governments consisting primarily of a $554 million increase in local education
support and a $143 million local tax relief package. In addition, increased
disbursement for pension contributions of $110 million, salary increases of $193
million and a $153 million capital fund contribution represent significant new
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expenditures. At the close of 1994-1995, the balance of the Tax Stabilization
Reserve Fund is projected to total $207 million.
New York State anticipates that its 1994-1995 borrowings for capital purposes
will total approximately $3.1 billion in general obligation and contractual
obligation debt. Of this issuance, general obligations will total only $375
million, the lowest level since 1988-1989. Major projects to be undertaken with
these funds include highway and bridge improvements, mental hygiene facilities,
university building improvements, housing programs and prisons.
Authorities The fiscal stability of New York is related, at least in part, to
the fiscal stability of its localities and Authorities. Authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to New York itself and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls, mass
transportation and rentals for dormitory rooms and housing. In recent years,
however, New York has provided financial assistance through appropriations, in
some cases of a recurring nature, to certain Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation indebtedness
or otherwise, for debt service. This assistance is expected to continue to be
required in future years. Failure of New York to appropriate necessary amounts
or to take other action to permit the Authorities to meet their obligations
could result in a default by one or more of the Authorities. If a default were
to occur, it would likely have a significant adverse effect on the market price
of obligations of the State and its Authorities.
As of March 31, 1994, there was outstanding a $26.4 billion aggregate principal
amount of bonds and notes issued by Authorities which were either guaranteed by
the State or supported by the State through lease-purchase and
contractual-obligation arrangements or moral obligation provisions. Debt service
on outstanding Authority obligations is normally paid out of revenues generated
by the Authorities' projects or programs, but in recent years the State has
provided special financial assistance, in some cases of a recurring nature, for
operating capital and debt service expenses.
Agencies and Localities Beginning in 1975 (in part as a result of the then
current New York City and UDC financial crises), various localities of New York
State began experiencing difficulty in marketing their securities. As a result,
certain localities, in addition to New York City, have experienced financial
difficulties leading to requests for State assistance. If future financial
difficulties cause agencies or localities to seek special State assistance, this
could adversely affect New York State's ability to pay its obligations.
Similarly, if financial difficulties of New York State result in New York City's
inability to meet its regular aid commitments or to provide further emergency
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financing, issuers may default on their outstanding obligations, which would
affect the marketability of debt obligations of New York, its agencies and
municipalities such as the New York Municipal Obligations held by the Portfolio.
Reductions in Federal spending could materially and adversely affect the
financial condition and budget projections of New York State's localities.
Should localities be adversely affected by Federal cutbacks, they may seek
additional assistance from the State which might, in turn, have an adverse
impact on New York State's ability to maintain a balanced budget.
New York City and the Municipal Assistance Corporation In 1975, New York City
encountered severe financial difficulties which impaired the borrowing ability
of New York City, New York State, and the Authorities. New York City lost access
to public credit markets and was not able to sell debt to the public until 1979.
As a result of the City's financial difficulties, certain organizations were
established to provide financial assistance and oversee and review the City's
financing. These organizations continue to exercise various monitoring functions
relating to the City's financial position.
New York City has maintained a balanced budget for each of its last nine fiscal
years and has retired all of its federally guaranteed debt. As a result of the
City's success in balancing its budget, certain restrictions imposed on the City
by the New York Financial Control Board (the "Control Board"), which was created
in response to the City's 1975 fiscal crises, have been suspended. Those
restrictions, including the Control Board's power to approve or disapprove
certain contracts, long-term and short-term borrowings and the four-year
financial plan of the City, will remain suspended unless and until, among other
things, there is a substantial threat of an actual failure by New York City to
pay debt service on its notes and bonds or to keep its operating deficits below
$100 million. Although the City has maintained a balanced budget in recent
years, the ability to balance future budgets is contingent upon accrual versus
expected levels of Federal and State Aid and the effects of the economy on City
revenues and services.
The City requires certain amounts of financing for seasonal and capital spending
purposes. The City has issued $2.2 billion in notes to finance the City's
current estimate of its seasonal financing needs during its 1995 fiscal year.
The City's capital financing program projects long-term financing requirements
of approximately $11.3 billion for the City's fiscal years 1995 through 1998 for
the construction and rehabilitation of the City's infrastructure and other fixed
assets. The major capital requirements include expenditures for the City's water
supply system, sewage and waste disposal systems, roads, bridges, mass transit,
schools and housing.
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New York cities and towns have experienced financial stress due to the slow rate
of recovery from the recession of 1992 and from cutbacks to local assistance.
The 1995-1996 State Financial Plan projects total receipts of the State's
General Fund to be $33.1 billion, a decline of $48 million from the prior fiscal
year. The absence of one-time transactions, the impact of tax reductions enacted
in 1994 and 1995, the reduction of the business tax surcharge, and reductions in
the General Fund's share of petroleum-based taxes account for the anticipated
decline in receipts. State General Fund disbursements and transfers will be $334
million below the level of disbursements in 1994-1995. Grants to local
governments are anticipated to decline $392 million and direct payments to local
governments, including school aid and revenue sharing, are projected to increase
$74 million from the prior fiscal year. Social welfare, including Medicaid,
welfare and other social services, will be cut 6.5%, largely due to a reduction
of nearly 9% in Medicaid spending.
Certain localities in addition to the City could have financial problems which,
if significant, could lead to requests for additional State assistance during
the State's 1994-95 fiscal years and thereafter. Fiscal difficulties experienced
by the City of Yonkers, for example, could result in State actions to allocate
State resources in amounts that cannot yet be determined. In the recent past,
the State provided substantial financial assistance to its political
subdivisions, totaling approximately 67% of General Fund disbursements in the
State's fiscal year 1992-93 and estimated to account for 68% of General Fund
disbursements in the State's 1993-94 fiscal year, primarily for aid to
elementary, secondary and higher education (34% in fiscal year 1992-93 and 34%
in fiscal year 1993-94 of local assistance) and Medicaid and income maintenance
(33% in fiscal year 1992-93 and 34% in fiscal year 1993-94). The legislature
enacted substantial reductions for previously budgeted levels of State aid since
December 1990. To the extent the State is constrained by its financial
condition, State assistance to localities may be further reduced, compounding
the serious fiscal constraints already experienced by many local governments.
Localities also face anticipated and potential problems resulting from pending
litigation (including challenges to local property tax assessments), judicial
decisions and socio-economic trends.
The total indebtedness of all localities in the State, other than New York City,
was approximately $15.7 billion as of the localities' fiscal year ending during
1992. A small portion (approximately $71.6 million) of this indebtedness
represented borrowing to finance budgetary deficits issued pursuant to enabling
State legislation (requiring budgetary review by the State Comptroller).
Subsequently, certain counties and other local governments have encountered
significant financial difficulties, including Nassau County and Suffolk County
(which each received approval by the legislature to issue deficit notes). The
State has imposed financial control on the City of New York from 1977 to 1986
and on the City of Yonkers in 1984, 1988 and 1989, under an appointed control
board in response to fiscal crises encountered by these municipalities.
27
<PAGE>
Litigation Certain litigation pending against New York State, its subdivisions
and their officers and employees could have a substantial or long-term adverse
effect on State finances. Among the more significant of these lawsuits are those
that involve: (i) the validity and fairness of certain eighteenth century
agreements and treaties by which Oneida and Cayuga Indian tribes transferred
title to the State of approximately five million acres of land in central New
York; (ii) certain aspects of the State's Medicaid rates and regulations,
including reimbursements to providers of mandatory and optional Medicaid
services; (iii) the care and housing for individuals released from State mental
health facilities; (iv) the treatment provided at several State mental hygiene
facilities; (v) contamination of the Love Canal area of Niagara Falls; (vi)
education accommodations for learning-disabled students at a State University;
(vii) alleged employment discrimination by the State and its agencies; (viii)
the State's practice of reimbursing certain mental hygiene patient-care expenses
with the client's Social Security benefits; (ix) methods by which the State
computes its aid to localities for the administrative costs of food stamp
programs; (xi) retirement benefits payable to certain State and municipal
employees; (xii) State reimbursement of local governments for Medicaid
expenditures made for certain mentally disturbed patients; (xiii) the State's
possession of certain assets taken pursuant to the State's Abandoned Property
Law; (xiv) alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; and (xv) liability for
maintenance of erosion barriers constructed along Long Island's shorelines.
INVESTMENT RESTRICTIONS
The Portfolios observe the following fundamental restrictions. The Portfolios
may not:
(1) Issue senior securities, except as permitted by paragraphs (2) and (7)
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or
sale of options, futures contracts and options on futures contracts,
forward commitments, and repurchase agreements entered into in
accordance with the Portfolios' investment policies, and the pledge,
mortgage or hypothecation of the Portfolios' 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 Portfolio's total assets (including the amount borrowed) taken at
market value. The Portfolio will not purchase securities while
borrowings are outstanding.
(3) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and then only if such
28
<PAGE>
pledging, mortgaging or hypothecating does not exceed 10% of the
Portfolio'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 Portfolio may be deemed
to be an underwriter for purposes of the Securities Act of 1933. A
Portfolio may also participate as part of a group in bidding for the
purchase of Tax- Exempt Bonds directly from an issuer in order to take
advantage of the lower purchase price available to members of such
groups.
(5) Purchase or sell real estate or any interest therein, but this
restriction shall not prevent a Portfolio from investing in Tax-Exempt
Bonds secured by real estate or interests therein.
(6) Make loans, except that the Portfolio (1) may lend portfolio
securities in accordance with the Portfolio's investment policies in
an amount up to 33 1/3% of the Portfolio'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.
(7) Purchase or sell commodities or commodity contracts or puts, calls or
combinations of both, except options on securities, securities
indices, currency and other financial instruments, futures contracts
on securities, securities indices, currency and other financial
instruments and options on such futures contracts, forward
commitments, interest rate swaps, caps and floors, securities index
put or call warrants and repurchase agreements entered into in
accordance with the Portfolio's investment policies.
(8) Purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after such purchase, the
value of its investments in such industry would exceed 25% of its
total assets taken at market value at the time of each investment.
(Tax- Exempt Bonds and securities issued or guaranteed by the United
States Government and its agencies and instrumentalities are not
subject to this limitation.)
(9) Purchase securities of an issuer (other than the U.S. Government, its
agencies or instrumentalities), if such purchase would cause more than
10 percent of the outstanding voting securities of such issuer to be
held by the Portfolio.
29
<PAGE>
The Portfolios observe the following non-fundamental restrictions. The
Portfolios may not:
(1) Except as permitted by fundamental investment restriction (4) above,
participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the
management of the Adviser to save commissions or to average prices
among them is not deemed to result in a joint securities trading
account.
(2) Purchase securities on margin or make short sales unless by virtue of
its ownership of other securities, the Portfolio 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 Portfolio may obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities.
(3) Purchase securities of an issuer (other than the U.S. Government, its
agencies or instrumentalities), if to the Portfolio's knowledge, one
or more of the Trustees or officers of the Fund or directors or
officers of the Adviser or any investment management subsidiary of the
Adviser individually owns beneficially more than 0.5 percent and
together own beneficially more than 5 percent of the securities of
such issuer, nor will the Portfolio hold the securities of any such
issuer. For the purposes of this paragraph (3), each government unit
(state, county, city, for example) and each subdivision, agency or
instrumentality thereof, and each multimember agency of which any of
them is a member, shall be considered a separate issuer.
(4) Purchase a security if, as a result, (i) more than 10% of the
Portfolio's total assets would be invested in the securities of other
investment companies, (ii) the Portfolio would hold more than 3% of
the total outstanding voting securities of any one investment company,
or (iii) more than 5% of the Portfolio'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 Portfolio in connection with lending the Portfolio'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 Portfolio may, in connection
with the John Hancock Group of Funds Deferred Compensation Plan for
30
<PAGE>
Independent Trustees/Directors, purchase securities of other
investment companies within the John Hancock Group of Funds. The
Portfolio may not purchase the shares of any closed-end investment
company except in the open market where no commission or profit to a
sponsor or dealer results from the purchase, other than customary
brokerage fees.
(5) Except for investments which, in the aggregate, taken at cost do not
exceed 5 percent of the Portfolio's total assets taken at market
value, purchase securities unless the issuer thereof, together with
any predecessors, has a record of at least 3 years' continuous
operation prior to the purchase. (This limitation does not apply to
securities that are issued or guaranteed by the United States
government and its agencies or instrumentalities or are secured by the
pledge of the faith, credit, and taxing power of any entity authorized
to issue Tax-Exempt Bonds.)
(6) Purchase any security, including any repurchase agreement maturing in
more than seven days, which is subject to legal or contractual delays
in or restrictions on resale, or which is not readily marketable, if
more than 15% of the net assets of the Portfolio, taken at market
value, would be invested in such securities.
In order to permit the sale of the Portfolios in certain states the Trustees
may, in their sole discretion, adopt restrictions on investment policies more
restrictive than those described above. Should the Trustees determine that a
restrictive policy is no longer in the best interest of a Portfolio and its
shareholders, the Portfolio may cease offering shares in the state involved and
the Trustees may revoke the restrictive policy. Moreover, if the states involved
no longer require any such restrictive policy, the Trustees may, at their
discretion, revoke the policy.
The fundamental restrictions of a Portfolio may not be changed without approval
of a majority of the outstanding voting securities of the respective Portfolio.
As used in the Prospectus and this Statement of Additional Information, such
approval means the approval of the lesser of (i) the holders of 67 percent or
more of the shares represented at the meeting if the holders of more than 50
percent of the outstanding shares of the affected Portfolio are present in
person or by proxy, or (ii) the holders of more than 50 percent of the
outstanding shares.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trustees of the Fund who elect
officers who are responsible for the day-to-day operations of the Fund and who
31
<PAGE>
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Fund are also officers and directors of the Adviser or officers
and directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
The following table sets forth the principal occupations of the Trustees and
principal officers of the Fund during the past five years. Unless otherwise
indicated, the business address of each is 101 Huntington Avenue, Boston,
Massachusetts 02199.
<TABLE>
<CAPTION>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
<S> <C> <C>
*Edward J. Boudreau, Jr. Chairman (1,2) Chairman and Chief Executive
October 1944 Officer, the Adviser and The
Berkeley Financial Group ("The
Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital"); John Hancock Advisers
International Limited ("Advisers
International"); John Hancock
Funds; John Hancock Investor
Services Corporation ("Investor
Services") and Sovereign Asset
Management Corporation ("SAMCorp");
(hereinafter the Adviser, the
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Investor Services
and SAMCorp are collectively
referred to as the "Affiliated
Companies"); Chairman, First
Signature Bank & Trust; Director,
John Hancock Freedom Securities
Corp., John Hancock Capital
- --------------------
* An "interested person" of the Fund, as such term is 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) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
32
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Corp. and New England/Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science; Vice
Chairman and President, the Adviser
(until July 1992); Chairman, John
Hancock Distributors, Inc. (until
April 1994).
Dennis S. Aronowitz Trustee (3) Professor of Law, Boston University
Boston University School of Law; Trustee, Brookline
Boston, Massachusetts Savings Bank.
June 1931
Richard P. Chapman, Jr. Trustee (1,3) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, Massachusetts Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University
(education); Director, Depositors
Insurance Fund, Inc. (insurance).
- --------------------
* An "interested person" of the Fund, as such term is 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) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
33
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
William J. Cosgrove Trustee (3) Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, New Jersey N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc., EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
Douglas M. Costle Trustee (1,3) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, Vermont 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean, Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
- --------------------
* An "interested person" of the Fund, as such term is 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) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
34
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Leland O. Erdahl Trustee (3) Director of Santa Fe Ingredients
9449 Navy Blue Court Company of California, Inc. and
Las Vegas, NV 89117 Santa Fe Ingredients Company, Inc.
December 1928 (private food processing
companies); Director of Uranium
Resources, Inc.; President of
Stolar, Inc. (from 1987-1991) and
President of Albuquerque Uranium
Corporation (from 1985-1992);
Director of Freeport-McMoRan Copper
& Gold Company Inc., Hecla Mining
Company, Canyon Resources
Corporation and Original Sixteen to
One Mine, Inc. (from 1984-1987 and
from 1991 to 1995) (management
consultant).
Richard A. Farrell Trustee (3) President of Farrell, Healer & Co.,
Farrell, Healer & Company, Inc. (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank
Boston, MA 02110 of Boston Corporation.
November 1932
Gail D. Fosler Trustee (3) Vice President and Chief Economist,
4104 Woodbine Street The Conference Board (non-profit
Chevy Chase, MD economic and business research).
December 1947
- --------------------
* An "interested person" of the Fund, as such term is 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) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
35
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
William F. Glavin Trustee (3) President, Babson College; Vice
Babson College Chairman, Xerox Corporation (until
Horn Library June 1989); Director, Caldor Inc.,
Babson Park, MA 02157 Reebok, Ltd. (since 1994), and Inco
March 1931 Ltd.
*Anne C. Hodsdon Trustee and President (1,2) President and Chief Operating
April 1953 Officer, the Adviser; Executive
Vice President, The Adviser (until
December 1994); Senior Vice
President; the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
Dr. John A. Moore Trustee (3) President and Chief Executive
Institute for Evaluating Officer, Institute for Evaluating
Health Risks Health Risks, (nonprofit
1101 Vermont Avenue N.W. institution) ( since September
Suite 608 1989).
Washington, DC 20005
February 1939
Patti McGill Peterson Trustee (3) President, St. Lawrence University;
St. Lawrence University Director, Niagara Mohawk Power
110 Vilas Hall Corporation (electric utility) and
Canton, NY 13617 Security Mutual Life (insurance).
May 1943
- --------------------
* An "interested person" of the Fund, as such term is 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) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
36
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
John W. Pratt Trustee (3) Professor of Business
2 Gray Gardens East Administration at Harvard
Cambridge, MA 02138 University Graduate School of
September 1931 Business Administration (since
1961).
*Richard S. Scipione Trustee (1) General Counsel, the Life Company;
John Hancock Place Director, the Adviser, the
P.O. Box 111 Affiliated Companies, John Hancock
Boston, Massachusetts Distributors, Inc., JH Networking
August 1937 Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., John
Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993).
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Fort Lauderdale, FL
November 1932
*Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief Investment
July 1938 Investment Officer (2) Officer, the Adviser; President,
the Adviser (until December 1994);
Director, the Adviser, Advisers
International, John Hancock Funds,
Investor Services, SAMCorp., and NM
Capital; Senior Vice President, The
Berkeley Group.
- --------------------
* An "interested person" of the Fund, as such term is 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) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
37
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
*James B. Little Senior Vice President, Senior Vice President, the Adviser,
February 1935 Chief Financial Officer The Berkeley Group, John Hancock
Funds and Investor Services; Senior
Vice President and Chief Financial
Officer, each of the John Hancock
funds.
*John A. Morin Vice President Vice President and Secretary, the
July 1950 Adviser; Vice President, Investor
Services, John Hancock Funds and
each of the John Hancock funds;
Compliance Officer, certain John
Hancock funds; Counsel, the Life
Company; Vice President and
Assistant Secretary, The Berkeley
Group.
*Susan S. Newton Vice President, Secretary Vice President and Assistant
March 1950 Secretary, the Adviser; Vice
President and Secretary, certain
John Hancock funds; Vice President
and Secretary, John Hancock Funds,
Investor Services and John Hancock
Distributors, Inc. (until 1994);
Secretary, SAMCorp; Vice President,
The Berkeley Group.
- --------------------
* An "interested person" of the Fund, as such term is 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) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
38
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
*James J. Stokowski Vice President and Treasurer Vice President, the Adviser; Vice
November 1946 President and Treasurer, each of
the John Hancock funds.
</TABLE>
As of the June 17, 1996, the officers and Trustees of the Fund as a group owned
less than 1% of the outstanding shares of each Portfolio and to the knowledge of
the registrant, no persons owned of record or beneficially 5% or more of any
class of the Fund's outstanding securities.
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
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. The three non-Independent Trustees,
Messrs. Boudreau, Scipione and Ms. Hodsdon, and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and
receive no compensation from the Fund for their services. The Trustees not
listed below were not Trustees of the Fund during its fiscal year ended August
31, 1995.
Total Compensation
Aggregate From the Fund and
Compensation From John Hancock Fund
Independent Trustees the Fund 1 Complex to Trustees 2
- -------------------- ---------- ---------------------
MA NY
-- --
Dennis S. Aronowitz $ 819 $ 832 $ 61,050
Richard P. Chapman, Jr.+ 843 858 62,800
William J. Cosgrove+ 874 889 61,050
Douglas M. Costle
Gail D. Fosler 832 845 60,800
William F. Glavin+
Bayard Henry* 791 804 58,850
Edward J. Spellman 857 871 61,050
Total $5,016 $5,099 $365,600
1 Compensation for the fiscal year ended August 31, 1995.
2 The total compensation paid by the Fund and the other funds in the John
Hancock Fund Complex is as of December 31, 1995. As of such date there were
sixty-one funds in the John Hancock Fund Complex, of which each of the
Independent Trustees served sixteen.
39
<PAGE>
* Mr. Henry retired from his position as a Trustee effective April 26, 1996.
+ As of December 31, 1995, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Fund Complex for Mr.
Chapman was $54,681 and for Mr. Cosgrove was $54,243 under the John Hancock
Deferred Compensation Plan for Independent Trustees.
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Fund receives its investment advice from the
Adviser. Investors should refer to the Prospectus and below for a description of
certain information concerning the investment management contract. Each of the
Trustees and principal officers of the Fund who is also an affiliated person of
the Adviser is named above, together with the capacity in which such person is
affiliated with the Fund and the Adviser.
The Adviser acts as investment adviser for the Fund. The Adviser is a
Massachusetts corporation with offices at 101 Huntington Avenue, Boston,
Massachusetts 02199- 7603. The Adviser is a registered investment advisory firm
which maintains a securities research department, the efforts of which will be
made available to the Fund.
The Adviser was organized in 1968 and presently has more than $19 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of approximately 1,080,000
shareholders. 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 $80 billion, the Life Company is one of the ten largest life
insurance companies in the United States, and carries high ratings from Standard
and Poor's and A.M. Best's. Founded in 1862, the Life Company has been serving
clients for over 130 years.
No person other than the Adviser and its directors and employees regularly
furnishes advice to the Fund with respect to the desirability of the Fund's
investing in, purchasing or selling securities. The Adviser may from time to
time receive statistical or other similar factual information, and information
regarding general economic factors and trends, from the Life Company and its
affiliates.
Securities held by a Portfolio may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Securities may be held by, or be appropriate investments for, a
Portfolio as well as such other clients or funds. 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 for a Portfolio
or for other funds or clients for which the Adviser renders investment advice
arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds or
40
<PAGE>
clients in a manner deemed equitable to all of them. To the extent that
transactions on behalf of more than one client of the Adviser or its affiliates
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
The Fund, on behalf of each Portfolio, has entered into investment advisory
agreements (collectively, the "Advisory Agreements"), each dated as of July 1,
1996, between the Fund and the Adviser. Pursuant to the respective Advisory
Agreements, the Adviser agreed to act as investment adviser and manager to the
Portfolios. As manager and investment adviser, the Adviser will: (a) furnish
continuously an investment program for the Portfolios and determine, subject to
the overall supervision and review of the Board of Trustees, which investments
should be purchased, held, sold or exchanged, and (b) provide supervision over
all aspects of the Portfolios' operations except those which are delegated to a
custodian, transfer agent or other agent.
As compensation for its services under the Advisory Agreements, the Adviser
receives from each Portfolio a fee computed and paid monthly based on a stated
percentage of the respective Portfolio's average daily net assets as follows:
Net Asset Value Annual Rate
--------------- -----------
First $250 million 0.500%
Next $250 million 0.450%
Next $500 million 0.425%
Next $250 million 0.400%
Amounts over $1,250,000,000 0.300%
Each Portfolio bears all costs of its organization and operation, including
expenses of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Portfolio's plans of distribution; fees and expenses of
custodians including those for keeping books and accounts and calculating the
net asset value of shares; fees and expenses of transfer agents and dividend
disbursing agents; legal, accounting, financial, management, tax and auditing
fees and expenses of the Portfolios (including an allocable portion of the cost
of the Adviser's employees rendering such services to the subject Portfolio);
thecompensation and expenses of Trustees who are not otherwise affiliated with
the Fund, the Portfolios, the Adviser or any of their affiliates; expenses of
Trustees' and shareholders' meetings; trade association memberships; insurance
premiums; and any extraordinary expenses.
41
<PAGE>
The State of California imposes a limitation on the expenses of the Portfolios.
Each Advisory Agreement provides that if, in any fiscal year, the total expenses
of the subject Portfolio (excluding taxes, interest, brokerage commissions and
extraordinary items, but including the management fee) exceeds the expense
limitations applicable to the Portfolio imposed by the securities regulations of
any state in which it is then registered to sell shares, the Adviser will reduce
its fee for the Portfolio to the extent required by these limitations and will
make any additional arrangements that the Adviser is required by law to make.
The Adviser has agreed that if, in any fiscal year, the total expenses of the
subject Portfolio (excluding taxes, interest, brokerage commissions and
extraordinary items, but including the Adviser's fee) exceed the expense
limitations applicable to the Portfolio, the Adviser will reduce its fee for the
Portfolio in the amount of that excess up to the amount of its fee during that
fiscal year. Although there is no certainty that any limitations will be in
effect in the future, the California limitation on an annual basis currently is
2.5% of the first $30 million of average net assets, 2.0% of the next $70
million of net assets and 1.5% of the remaining average net assets.
The Advisory Agreements were approved on March 5, 1996 by all of the Trustees,
including all of the Trustees who are not parties to the Advisory Agreements or
"interested persons" of any such party. The shareholders of the Portfolios also
approved their respective Portfolio's Advisory Agreement on June 26, 1996. Each
Advisory Agreement will continue in effect from year to year, provided that
continuance is approved annually both (i) by the holders of a majority of the
outstanding voting securities of each Portfolio or by the Board of Trustees, and
(ii) by a majority of the Trustees who are not parties to the Advisory
Agreements or "interested persons" of any such party. Each Advisory Agreement
may be terminated on 60 days written notice by any party and will terminate
automatically if assigned.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit a Portfolio's expenses to a specified percentage of its average daily net
assets. The Adviser retains the right to re-impose a fee and recover any other
payments to the extent that, at the end of any fiscal year, a Portfolio's annual
expenses fall below this limit.
On August 31, 1995, the net assets of the Massachusetts and New York Portfolios
were $54,415,695 and $55,752,967, respectively. For the years ended August 31,
1993 and 1994, as a result of the expense limitations described in the
Prospectus, the Adviser did not receive a fee from any Portfolio. For the year
ended August 31, 1995, the management fee paid by the Massachusetts and New York
Portfolios to the Adviser amounted to $62,994 and $57,450, respectively.
Pursuant to the Advisory Agreements, the Adviser is not liable to the Fund or
its shareholders for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the contract
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its duties or from
reckless disregard by the Adviser of its obligations and duties under the
management contract.
42
<PAGE>
Under the investment management contract, the Fund and each Portfolio may use
the name "John Hancock" or any name derived from or similar to it only for so
long as the contract or any extension, renewal or amendment thereof remains in
effect. If the contract 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 non-exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
DISTRIBUTION CONTRACT
The Fund has a distribution contract with John Hancock Funds. Under the
contract, 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. John Hancock Funds accepts orders for the
purchase of the shares of the Fund which are offered at net asset value next
determined, plus the applicable sales charge. John Hancock Funds and Selling
Brokers receive compensation in the form of a sales charge imposed, in the case
of Class A shares, at the time of sale or, in the case of Class B shares, on a
deferred basis.
The Fund's Trustees have adopted Distribution Plans with respect to Class A and
Class B shares (together, the "Plans"), on behalf of each Portfolio pursuant to
Rule 12b-1 under the Investment Company Act. Under the Plans, the Fund will pay
distribution and service fees at an aggregate annual rate of up to 0.30% and
1.00%, respectively, of the average daily net assets of the Portfolio
attributable to shares of that class, provided that the service fee will not
exceed 0.25% of such 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 Portfolio shares, (ii) marketing,
promotional and overhead expenses incurred in connection with the distribution
of Portfolio shares; and (iii) with respect to Class B shares only, interest
expenses on unreimbursed distribution expenses. The service fees will be used to
compensate Selling Brokers for providing personal and account maintenance
services to shareholders. Any unreimbursed expenses will not be carried beyond
one year from the date incurred. In the event that John Hancock Funds is not
fully reimbursed for expenses incurred by it under the Class B Plan in any
fiscal year, John Hancock Funds may carry these expenses forward, provided,
however, that the Trustees may terminate the Class B Plan and thus the Fund's
obligation to make further payments at any time. Accordingly, the Fund does not
treat unreimbursed expenses relating to the Class B shares as a liability of the
Fund. The Class A Plan was approved by a majority of the Class A voting
securities of each Portfolio and each of the Plans with all amendments were
approved by a majority of the Trustees, including a majority of the Trustees who
43
<PAGE>
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 the Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds shall provide the
Fund on behalf of each Portfolio with a written report of the amounts expended
under the Plans and the purpose for which such expenditures were made. The
Trustees shall review such reports on a quarterly basis.
During the fiscal year ended August 31, 1995, each Portfolio paid John Hancock
Funds the following amounts of expenses with respect to Class A shares:
<TABLE>
<CAPTION>
Expense Items
Printing and
Mailing of Interest
Prospectuses Compensation Carrying or
to New to Selling Expense of Other Finance
Advertising Shareholders Brokers Distributors Charges
----------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Massachusetts Tax-Free Income Fund $10,383 $1,257 $44,137 $103,758 $0
New York Tax-Free Income Fund $ 8,207 $3,247 $43,803 $106,993 $0
</TABLE>
Each of the Plans provides that it 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. Each of the Plans provides that it may be terminated
as to any Portfolio without penalty (a) by vote of a majority of the Independent
Trustees, (b) upon 60 days' written notice to John Hancock Funds of the affected
Portfolio and (c) automatically in the event of assignment. They 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
voting securities of the subject class of the affected Portfolio. Each of the
Plans also provides that no material amendment to the Plan will, in any event,
be effective unless it is approved by a vote of a majority of the Trustees and
of the Independent Trustees of the Fund. The holders of Class A and Class B
shares of each Portfolio 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 each Plan will benefit the holders of the applicable class of shares of the
applicable Portfolio.
When the Fund seeks an Independent Trustee to fill a vacancy or as a nominee for
election by shareholders, the selection or nomination of the Independent Trustee
is, under resolutions adopted by the Trustees, committed to the discretion of
the Committee on Administration of the Trustees. The members of the Committee on
44
<PAGE>
Administration are all Independent Trustees and are identified in this Statement
of Additional Information under the heading "Those Responsible for Management."
The distribution contract continues in effect from year to year if approved
annually by vote of a majority of the Trustees who are not interested persons of
one of the parties to the contract, cast in person at a meeting called for the
purpose of voting on such approval, and by either the Trustees or the holders of
a majority of the affected Portfolio's outstanding voting securities. The
distribution contract automatically terminates upon assignment. Such contract
may be terminated as to any Portfolio without penalty on 60 days' notice at the
option of either party to the contract or by vote of a majority of the
outstanding voting securities of each class of that Portfolio which has voting
rights with respect to the contract.
INITIAL SALES CHARGE ON CLASS A SHARES
The sales charge applicable to purchases of Class A shares of a Portfolio is
described in the Fund's Prospectus. Methods of obtaining a reduced sales charge
with respect to purchases of Class A shares referred to generally in the
Prospectus are described in detail below.
Combined Purchases. For each Portfolio, in calculating the sales charge
applicable to purchases of Class A shares made at one time, the purchases will
be combined if made by (a) an individual, his 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) certain groups of four or more individuals making use of salary
deductions or similar group methods of payment whose funds are combined for the
purchase of mutual fund shares. Further information about combined purchases,
including certain restrictions on combined group purchases, is available from
either a representative of John Hancock Investor Services ("Investor Services")
or a representative of a Selling Broker.
Without Sales Charge. 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 Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust department or common trust funds if it is
purchasing $1 million or more for non-discretionary customers or accounts.
o A Trustee or officer of the Fund; a Director or officer of the Adviser and
its affiliates 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, mother,
father, sister, brother, mother-in-law, father-in-law) of any of the
foregoing; or any fund, pension, profit sharing or other benefit plan for
the individuals described above.
45
<PAGE>
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into an 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 an approved affinity group financial services plan.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception of
the Portfolio account, may purchase 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 million to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares of the Fund 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.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of a reduced sales
charge by taking into account not only the amount then being invested but also
the purchase price or current account value of the Class A shares already held
by such person.
Combination Privilege. For each Portfolio, reduced sales charges (according to
the schedule set forth in the Prospectus) also are available to an investor
based on the aggregate amount of his concurrent and prior investments in Class A
shares of the Portfolio and shares of all other John Hancock funds which carry a
sales charge.
Letter of Intention. For each Portfolio, the reduced sales charges are also
applicable to investments made over a specified period pursuant to a Letter of
Intention (the "LOI"), which should be read carefully prior to its execution by
an investor. Such an investment (including accumulations and combinations) must
aggregate $100,000 or more invested during a period of thirteen months from the
date of the LOI or from a date within ninety days prior thereto, upon written
request to Investor 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
46
<PAGE>
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 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 Investor 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 Investor Services to act as his attorney-in-fact to
redeem any escrowed Class A shares and adjust the sales charge, if necessary. An
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 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 shares which are redeemed within six
years of purchase 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 shares being redeemed. Accordingly, no
CDSC will be imposed on increases in account value above the initial purchase
prices, including increases in account value derived from reinvestment of
dividends or capital gains distributions. No CDSC will be imposed on shares
derived from reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution plans
administered by Investor Services or the Life Company 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 this number, 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.
47
<PAGE>
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period 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 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. Upon redemption, appreciation is effective only on a per share basis for
those shares being redeemed. Appreciation of shares cannot be redeemed CDSC fee
at the account level.
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 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:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
----
* Amount subject to CDSC $400
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 shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees enables the Fund to sell the Class B shares without a sales charge
being deducted at the time of the purchase. See the Prospectus for additional
information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B 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.
48
<PAGE>
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other plans qualified under
the Internal Revenue Code of 1986, as amended (the "Code")) unless otherwise
noted.
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code after age 70 1/2.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans such as 401(k), 403(b), 457. In
all cases, the distribution must be free from penalty under the Code.
* Redemptions made to effect distributions from an Individual Retirement
Account either before age 59 1/2 or after age 59 1/2, as long as the
distributions are based on your life expectancy or the joint-and-last
survivor life expectancy of you and your beneficiary. These distributions
must be free from penalty under the 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.
For non-retirement accounts (please see above for retirement account waivers):
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 10% of your account value at
the time you established your periodic withdrawal planand 10% of the value
of subsequent investments (less redemptions) in that account at the time
you notify Investor Services. (Please note, this waiver does not apply to
periodic withdrawal plan redemptions of Class A shares that are subject to
a CDSC.)
Please see matrix for reference.
49
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived 10% of account
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
Between 59 1/2 Only Life 10% of account
and 70 1/2 Waived Waived Waived Expectancy value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived for
rollover, or
annuity
payments. Not 10% of account
waived if paid Waived for Waived for Waived for value annually
directly to annuity annuity annuity in periodic
participant. payments 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
- ------------------------------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- ------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor 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 each Portfolio in whole or in part in portfolio
securities as prescribed by the Trustees of the Fund. When the shareholder sells
portfolio securities received in this fashion the shareholder would incur a
brokerage charge. Any such securities would be valued for the purposes of making
such payment at the same value as used in determining net asset value. The Fund
has, however, elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, each Portfolio 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 each Portfolio's net asset
value at the beginning of such period.
50
<PAGE>
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of the
Portfolios for shares of the same class in any other John Hancock fund offering
that class.
Systematic Withdrawal Plan. Each of the Portfolios permits the establishment of
a Systematic Withdrawal Plan. Payments under this plan represent proceeds
arising from the redemption of a Portfolio's shares. Since the redemption price
of the shares of a Portfolio may be more or less than the shareholder's cost,
depending upon the market value of the securities owned by the Portfolio 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 Class A or Class B shares of the Portfolio 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
shares and because redemptions are taxable events. Therefore, a shareholder
should not purchase Portfolio shares at the same time as 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 Investor Services.
Monthly Automatic Accumulation Program ("MAAP"). The program, as it relates to
automatic investment checks, is subject to the following conditions:
The investment will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic Accumulation
Program may be revoked by Investor Services without prior notice if any check is
not honored by your bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any check.
The program may be discontinued by the shareholder either by calling Investor
Services or upon written notice to Investor Services which is received at least
five (5) business days prior to the due date of any investment.
Reinvestment Privilege. A shareholder who has redeemed shares of a Portfolio
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
that Portfolio or in any of the other John Hancock mutual funds, subject to the
minimum investment limit in any fund. Each of the Portfolios may modify or
terminate the reinvestment privilege at any time.
No sales charge will apply to proceeds from the redemption of Class A shares of
a Portfolio reinvested in Class A shares of any of the other John Hancock funds
51
<PAGE>
which are otherwise subject to a sales charge. If a CDSC was paid upon a
redemption, you may reinvest in the same class of shares from which the
redemption was made within 120 days at net asset value. Your account will be
credited with the amount of the CDSC previously charged and the reinvested
shares will continue to be subject to the CDSC. For the purpose of calculating
the CDSC, the holding period of the shares acquired through reinvestment will
include the holding period of the redeemed shares.
A redemption or exchange of Portfolio 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 shares will be treated as described under the heading "Tax
Status."
TAX STATUS
Each Portfolio is treated as a separate entity for accounting and tax purposes
and each has qualified as a "regulated investment company" under Subchapter M of
the Code and intends to so 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, each Portfolio will not be subject to Federal income tax on taxable
income (including gain from the disposition of portfolio securities or the right
to when-issued securities prior to issuance or the lapse, exercise, delivery
under or closing out of options and financial futures contracts, income from
repurchase agreements and other taxable securities, income attributable to
accrued market discount, and a portion of the discount from certain stripped
tax-exempt obligations or their coupons) which is distributed to shareholders in
accordance with the timing requirements of the Code.
Each Portfolio will be subject to a four percent non-deductible Federal excise
tax on certain taxable amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. Each Portfolio intends under normal circumstances to avoid
liability for such tax by satisfying such distribution requirements.
Distributions of tax-exempt interest ("exempt-interest dividends") timely
designated as such by a Portfolio to its shareholders will be treated as
tax-exempt interest under the Code, provided that the Portfolio qualifies as a
regulated investment company and at least 50% of the value of its assets at the
end of each quarter of its taxable year is invested in obligations, the interest
on which is excluded from gross income under Section 103(a) of the Code.
Shareholders are required to report their receipt of tax- exempt interest,
including such distributions, on their Federal income tax returns.
Interest income from certain types of tax-exempt bonds that are private activity
bonds in which the Portfolios may invest is treated as an item of tax preference
for purposes of the Federal alternative minimum tax. To the extent that a
Portfolio invests in these tax-exempt bonds, shareholders will be required to
treat as an item of tax preference for Federal alternative minimum purposes that
part of the Portfolio's exempt-interest dividends which is derived from interest
on these tax-exempt bonds. Exempt-interest dividends derived from interest
52
<PAGE>
income from all tax-exempt bonds are taken into account in determining the
alternative minimum tax liability, if any, of corporate shareholders of each
Portfolio.
The amount of 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 Portfolio to dispose of portfolio
securities and/or engage in options or futures transactions that will generate
capital gains. At the time of an investor's purchase of a Portfolio's shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Portfolio's holdings. Consequently, subsequent distributions
from such appreciation may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
below the investor's cost for such shares, and the distributions (or portions
thereof) in reality represent a return of a portion of the purchase price.
Upon a redemption of shares (including by exercise of the exchange privilege) a
shareholder will ordinarily realize a taxable gain or loss depending upon his
basis in his shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon the shareholder's tax holding period for
the shares. A sales charge paid in purchasing shares of a Portfolio 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 Portfolio or another John Hancock fund are subsequently acquired without
payment of a sales charge pursuant to the reinvestment or exchange privilege.
This 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 same Portfolio within a period of 61 days beginning 30
days before and ending 30 days after the shares are disposed of, such as may
occur when dividends are reinvested. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
Although its present intention is to distribute all net capital gains, if any,
each Portfolio 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. A Portfolio will not,
in any event, distribute net long-term 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 year capital losses, it would be subject to federal income
tax in the hands of the Portfolio. Each shareholder would be treated for federal
income tax purposes as if the Portfolio 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 Portfolio and reinvested the remainder in
the Portfolio. Accordingly, each shareholder would (a) include his pro rata
share of such excess as long-term capital gain income in his return for his
taxable year in which the last day of the Portfolio's taxable year falls, (b) be
53
<PAGE>
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 Portfolio and (c) be entitled to increase
the adjusted tax basis for his shares in a Portfolio by the difference between
his pro rata share of each excess and his pro rata share of such taxes.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of a Portfolio will not be deductible for Federal income tax purposes to the
extent it is deemed related to exempt-interest dividends paid by such Portfolio.
Pursuant to published guidelines, the Internal Revenue Service may deem
indebtedness to have been incurred for the purpose of purchasing or carrying
shares of a Portfolio even though the borrowed funds may not be directly
traceable to the purchase of shares.
For Federal income tax purposes, each of the Portfolios is permitted to
carryforward a net capital loss in any year to offset its net capital gains, if
any, during the eight years following the year of the loss. To the extent
subsequent capital gains are offset by such losses, they would not result in
federal income tax liability to the Portfolio and, as noted above, would not be
distributed to shareholders. The Massachusetts Portfolio has realized capital
loss carryforwards of $398,976. Of this amount $2,465 expires August 31, 2002
and $396,511 expires August 31, 2003. The New York Portfolio has a realized
capital loss carryforward of $77,663 that expires August 31, 2003.
A Portfolio that invests in securities with original issue discount (or with
market discount if an election is made to include market discount in income
currently) must accrue income on such securities prior to the receipt of the
corresponding cash payments. Each Portfolio must distribute, at least annually,
all or substantially all of its net income, including such accrued income, to
shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, a Portfolio may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash to satisfy distribution requirements.
The Portfolios may invest in debt obligations that are in the lower rating
categories or are unrated, including debt obligations of issuers not currently
paying interest as well as issuers who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
Portfolios. Tax rules are not entirely clear about issues such as when the
Portfolios may cease to accrue interest, original issue discount, or market
discount, when and to what extent deductions may betaken for bad debts or
worthless securities, how payments received on obligations in default should be
allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Portfolios, in the event they invest in such securities, in
order to ensure that they distribute sufficient income to preserve their status
as regulated investment companies and to avoid becoming subject to Federal
income or excise tax.
The options and futures transactions undertaken by a Portfolio produce taxable
capital gain or loss and may affect the character as long-term or short-term of
some capital gains and losses realized by the Portfolio. Also, the Portfolio's
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losses on its transactions involving options and futures contracts and related
securities positions may be deferred rather than being taken into account
currently. Each Portfolio's options and futures contracts will generally be
required to be marked to market for tax purposes as of the close of its taxable
year, even if they have not been actually disposed of, and any gain or loss
recognized will generally be treated as 60% long- term and 40% short-term
capital gain or loss. Accordingly, the special tax rules applicable to options
and futures transactions may affect the amount, timing and character of each
Portfolio's gain or loss and hence of its distributions to shareholders.
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.
Dividends, capital gain distributions, and ownership of or gains realized on the
redemption (including an exchange) of Portfolio shares may also be subject to
state and local taxes. The discussion does not address special tax rules
applicable to certain types of investors, such as banks, insurance companies, or
tax-exempt entities. Shareholders should always consult their own tax advisers
as to the Federal, state or local tax consequences of ownership of shares of a
Portfolio in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
Portfolio investment is effectively connected will be subject to U.S. Federal
income tax treatment 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 a Portfolio and, unless an effective IRS Form W-8 or authorized substitute
is on file, to 31% backup withholding on certain other payments from a
Portfolio. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in a Portfolio.
The Portfolios are not subject to Massachusetts corporate excise or franchise
taxes. Provided that each Portfolio qualifies as a regulated investment company
under the Code, it will also not be required to pay any Massachusetts income
tax.
STATE INCOME TAX INFORMATION
MASSACHUSETTS TAXES
Massachusetts legislation enacted on December 9, 1994 (the "Act") substantially
changed the Massachusetts income tax treatment of capital gains realized by
persons subject to Massachusetts income taxation, effective for taxable years
beginning on or after January 1, 1996. Under the Act, long-term capital gains
from the sale of a capital asset will generally be taxed on a sliding scale at
rates ranging from 5% to 0%, with the applicable tax rate declining as the tax
holding period of the asset (beginning on the later of January 1, 1995 or the
date of actual acquisition) increases from more than one year to more than six
years. Massachusetts resident individuals, as well as estates or personal trusts
subject to Massachusetts income taxation, will be subject to this new tax
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structure with respect to redemption, exchanges or other dispositions of their
shares of the Massachusetts Portfolio in their taxable years beginning after
1995, assuming that they hold their shares of the Massachusetts Portfolio as
capital assets for purposes of the Act. The Act does not address the
Massachusetts tax treatment of dividends paid by the Massachusetts Portfolio
that are designated and treated as long-term capital gains for Federal income
tax purposes, and it is accordingly not clear how such dividends will be treated
for Massachusetts tax purposes for taxable years beginning after 1995.
NEW YORK TAXES
New York State and New York City personal income taxes are imposed on "New York
taxable income," which is defined, in the case of New York resident individuals,
estates and trusts as "New York adjusted gross income" minus the New York
deductions and New York exemptions. "New York adjusted gross income", in the
case of a New York resident individual, estate or trust, is federal adjusted
gross income with certain modifications Because distributions that qualify as
exempt- interest dividends under IRC ss. 852(b) (5) will be excluded from
Federal gross income and adjusted gross income, such distributions will also be
excluded from New York adjusted gross income, unless specifically modified by
New York law.
New York law requires that New York resident individuals, estates and trusts add
certain items to their federal adjusted gross income. One such modification is
the addition, to the extent not properly includible in Federal adjusted gross
income, of interest income on obligations of any state (or political subdivision
of any state) other than New York and its political subdivisions.
Distributions that are taxable under the IRC, including distributions properly
designated as capital gain dividends pursuant to IRC ss.852(b)(3) and
distributions derived from interest on U.S. Government obligations, will be
includible in New York adjusted gross income, as there is no provision in the
New York tax law that permits their subtraction from federal adjusted gross
income. New York tax law does not currently contain any special provisions that
would impose differing rates of tax on capital gain and ordinary income in the
hands of individual taxpayers.
Under New York tax law, New York resident individuals, estates and trusts are
subject to a minimum income tax (sometimes referred to as the "New York
alternate minimum tax") at the rate of six percent of "New York minimum taxable
income." This tax is imposed in addition to the regular personal income tax
imposed by the State of New York. For purposes of this minimum tax, New York
minimum taxable income is, prior to certain reductions, equal to the sum of the
federal items of tax preference defined in IRC ss.57, with certain modifications
and adjustments, but excludes from New York minimum taxable income "the federal
item of tax preference with respect to tax-exempt interest". Distributions by
the portfolio of exempt-interest dividends (including any portion of such
dividends derived from interest on private activity bonds, the interest on which
is a tax preference item enumerated in IRC ss.57) thus will not be included in
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income subject to the New York State or New York City minimum income tax on New
York resident individuals, estates and trusts.
Distributions that are properly designated as exempt-interest dividends under
IRC ss.852 (b) (5) made by the Portfolio to corporations, will be included in
entire net income in the computation of the New York Statefranchise tax and New
York City business taxes and shares of the Portfolio will be included in
investment capital for purposes of these taxes. If such distributions increase a
corporate shareholder's liability, they will also result in an increased
liability for tax surcharges. However, distributions that are taxable under the
IRC, with the possible exception of distributions properly treated as capital
gain dividends pursuant to IRC ss.852(b) (3), may be eligible for a 50% dividend
subtraction.
Under New York tax law, a portion of interest on indebtedness incurred or
continued to purchase or carry shares of an investment company paying dividends
which are exempt from the New York State and New York City personal income
taxes, such as the New York Portfolio, will not be deductible by the investor
for New York State and New York City personal income tax purposes.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of Portfolio shares, the
following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices. Short- term debt investments which have a remaining maturity
of 60 days or less are generally valued at amortized cost which approximates
market value. If market quotations are not readily available or if in the
opinion of the Adviser any quotation or price is not representative of true
market value, the fair value of the security may be determined in good faith in
accordance with procedures approved by the Trustees.
No Portfolio will price its securities on the following national holidays: New
Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor
Day; Thanksgiving Day; and Christmas Day.
Description Of The Fund's Shares
The Trustees of the Fund are responsible for the management and supervision of
the Portfolios. The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest of the
Portfolios, 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 the issuance of three
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series of shares -- the John Hancock Massachusetts Tax-Free Income Fund, the
John Hancock New York Tax-Free Income Fund and the John Hancock Managed
Tax-Exempt Fund. In addition, the Trustees have authorized the issuance of two
classes of shares of each series, designated as Class A and Class B.
The shares of each class of the Portfolios represent an equal proportionate
interest in the aggregate net assets attributable to the classes of the
Portfolios. Class A and Class B shares of the Portfolios will be sold
exclusively to members of the public (other than the institutional investors
described in the Prospectus) at net asset value. A sales charge will be imposed
either at the time of the purchase, for Class A shares, or on a contingent
deferred basis, for Class B shares. For Class A shares, no sales charge is
payable at the time of purchase on investments of $1 million or more, but for
such investments a CDSC may be imposed in the event of certain redemption
transactions within one year of purchase.
Class A and Class B shares each have exclusive voting rights on matters relating
to their respective distribution plans. The different classes of the Portfolios
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 Portfolios, 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 and Class B shares
will be borne exclusively by that class (ii) Class B shares will pay higher
distribution and service fees than Class A shares and (iii) each of Class A and
Class B shares will bear any other class expenses properly allocable to such
class of shares, subject to the requirements imposed by the Internal Revenue
Service on funds with a multiple-class structure. Similarly, the net asset value
per share may vary depending on whether Class A or Class B shares are purchased.
In the event of liquidation, shareholders are entitled to share pro rata in the
net assets of the subject Portfolio available for distribution to such
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 by the Fund, 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 Fund'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 Fund. 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.
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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 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 Fund shareholder held
personally liable by reason of being or having been a shareholder. Liability is
therefor limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
Pursuant to an order granted by the SEC, the Fund has adopted a deferred
compensation plan for its Independent Trustees which allows Trustees' fees to be
invested by the Fund in other John Hancock funds.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
CALCULATION OF PERFORMANCE
For the 30-day period ended February 29, 1996, the Portfolios' annualized yield
and tax-equivalent yields for Class A shares at the maximum tax rates were 4.84%
and 9.11% for Massachusetts and 4.67% and 8.32% for New York, respectively. The
average annual total returns of the Portfolios' Class A shares for the 1 year, 5
years and the life-of-fund periods ended February 29, 1996 were respectively
4.80%, 7.50% and 8.19% for Massachusetts and 5.63%, 7.78% and 8.40% for New
York.
The Fund advertises yield, where appropriate. Each Portfolio'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:
Yield = 2[(a - b + 1) 6 - 1]
-----
cd
Where:
a = dividends and interest earned during the period.
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b = expenses accrued during the period (net of fee reductions and expense
limitation payments, if any).
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).
Each Portfolio's total return is computed by finding the average annual
compounded rate of return over the 1 year, 5 years and life-of-fund period that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at the
beginning of the 1 year, 5 years and life-of-fund periods.
Because each share has its own sales charge and fee structures, the classes have
different performance results. In the case of Class A shares or Class B shares,
this calculation assumes the maximum sales charge is included in the initial
investment or the CDSC applied at the end of the period. 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
subject Portfolio during the period stated by the maximum offering price or net
asset value at the end of the period. Excluding the Portfolio's sales load from
the distribution rate produces a higher rate.
In addition to average annual total returns, each Portfolio 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 Portfolio's 4.5% sales
charge on Class A shares or the CDSC on Class B shares into account. Excluding
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the Portfolio's sales charge on Class A shares and the CDSC on Class B shares
from a total return calculation produces a higher total return figure.
The Portfolios may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Portfolio which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of the Portfolio that is not tax-exempt.
From time to time, in reports and promotional literature, a Portfolio's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes as well as the Russell and Wilshire Indices. Comparisons may also be
made to bank certificates of deposit, ("CDs") which differ from mutual funds,
such as a Portfolio, in several ways. The interest rate established by the
sponsoring bank is fixed for the term of a CD, there are penalties for early
withdrawal from CDs, and the principal on a CD is insured.
PERFORMANCE RANKINGS AND RATINGS REPORTED PERIODICALLY IN NATIONAL FINANCIAL
PUBLICATIONS SUCH AS MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S, BARRON'S, ETC., AS WELL AS
LIPPER, MAY BE UTILIZED.
The performance of a Portfolio is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of a
Portfolio for any period in the future. The performance of a Portfolio 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 Portfolio's performance.
BROKERAGE ALLOCATION
For each Portfolio decisions concerning the purchase and sale of securities held
by the Portfolio and the allocation of brokerage commissions are made by the
officers of the Fund 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.
For each Portfolio, 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 commission paid
by the issuer and transactions with dealers serving as market maker reflect a
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"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.
The primary policy of each Portfolio 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 a Portfolio as a factor in the selection of
broker-dealers to execute the Portfolios' portfolio transactions.
To the extent consistent with the foregoing, the Portfolios 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
Portfolios, and their value and expected contribution to the performance of the
Portfolios. 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 Portfolios will make no commitment to allocate
portfolio transactions upon any prescribed basis. While the Fund's officers will
be primarily responsible for the allocation of the Fund's brokerage business,
the policies in this regard must be consistent with the foregoing and will at
all times be subject to review by the Trustees. For the years ended on August
31, 1993 and 1994 the Fund paid no brokerage commissions. For the year ended
August 31, 1995, the Fund paid brokerage commissions of $5,738.00.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Portfolios may pay to a broker which provides brokerage and research services to
the Portfolios 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 August
31, 1995, neither Portfolio paid commissions as compensation to any brokers for
research services such as industry, economic and company reviews and evaluations
of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc. ("Distributors"), a broker-dealer
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and John Hancock Freedom Securities Corporation and its two broker-dealer
subsidiaries, Tucker Anthony Incorporated and Sutro & Company, Inc. (each an
"Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, each Portfolio
may execute portfolio transactions with or through Affiliated Brokers. During
the year ending August 31, 1995, neither Portfolio executed any portfolio
transactions with Affiliated Brokers.
Any of the Affiliated Brokers may act as broker for the Portfolios 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 and comparable to the Fund
as determined by a majority of the Trustees who are not interested persons (as
defined in the Investment Company Act) of the Fund, the Adviser or the
Affiliated Broker. Because the Adviser, which is affiliated with the Affiliated
Brokers, has, as an investment adviser to the Fund, the obligation to provide
investment management services, which includes elements of research and related
investment skills, such research and related skills will not be used by the
Affiliated Brokers as a basis for negotiating commissions at a rate higher than
that determined in accordance with the above criteria.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation ("Investor Services"), P.O. Box 9116,
Boston, MA 02205-9116, a wholly-owned indirect subsidiary of the Life Company,
is the transfer and dividend paying agent for the Fund. The Fund pays an annual
fee of $19.00 for each Class A shareholder and $21.50 for each Class B
shareholder, plus certain out-of-pocket expenses. These expenses are aggregated
and charged to the Fund on the basis of the relative net asset value.
CUSTODY OF PORTFOLIOS
Securities of each Portfolio are held pursuant to a custodian agreement between
the Fund and Investors Bank & Trust Company, 24 Federal Street, Boston, MA
02110. Under the custodian agreement, Investors Bank & Trust Company performs
custody, portfolio and fund accounting services.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Funds are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts 02110. Price Waterhouse LLP audits and renders an
opinion on each Portfolio's annual financial statements and reviews each
Portfolio's annual Federal income tax return.
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APPENDIX
RATINGS
Moody's describes its ratings for Tax-Exempt Bonds as follows:
Bonds. "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.
"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 grater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in 'Aaa'
securities.
"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.
"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' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
A-1
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"Bonds which are rated 'C' are the lowest rated classes of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever obtaining any
real investment standing."
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue. Should
no rating be assigned, the reason may be one of the following: (i) an
application for rating was not received or accepted; (ii) the issue or issuer
belongs to a group of securities that are not rated as a matter of policy; (iii)
there is a lack of essential data pertaining to the issue or issuer; or (iv) the
issue was privately placed, in which case the rating is not published in Moody's
publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Standard & Poor's describes its ratings for Tax-Exempt Bonds as follows:
"AAA. Debt rated 'AAA' has the highest rating 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 higher 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 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 pay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major risk exposures to adverse
conditions.
Unrated. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
Fitch describes its rating for Tax-Exempt Bonds as follows:
A-2
<PAGE>
AAA. Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
the 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A. Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB. Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB. Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
Notes. Ratings for state and municipal notes and other short-term obligations
will be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance on bond risk are of lesser importance in the short run. Symbols will
be used as follows:
"MIG-1 Notes bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
"MIG-2 Notes bearing this designation are of high quality with margins of
protection ample although not so large as in the preceding group."
Commercial Paper. As described in the Prospectus, the Fund may invest in
commercial paper which is rated A-1 or A-2 by Standard & Poor's, P-1 or P-2 by
Moody's or F-1+ or f1 by Fitch.
A-3
<PAGE>
Moody's ratings for commercial paper are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's two highest commercial paper rating categories
are as follows:
"P-1 -- "Prime-1" indicates the highest quality repayment capacity of the rated
issues.
"P-2 -- "Prime-2" indicates that the issuer has a strong capacity for repayment
of short-term promissory obligations. Earnings trends and coverage ratios, while
sound, will be more subjective to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained."
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
"A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1."
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1+ Exceptionally strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues rated "F-1+"
A-4
<PAGE>
Quality Distribution
--------------------
For the year ended August 31, 1995, the average weighted quality distribution of
the securities of each Portfolio was as follows:
<TABLE>
<CAPTION>
Massachusetts Portfolio
- -----------------------
Rating Rating
Average % of Assigned % of Assigned % of
Security Ratings Value Portfolio by Adviser Portfolio by Service Portfolio
- ---------------- ----- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA $14,428,458 27.9% 0 0.0% $14,428,458 27.9%
AA 7,336,369 14.2 0 0.0 7,336,369 14.2
A 20,502,195 39.6 0 0.0 20,502,195 39.6
BBB 9,184,891 17.6 0 0.0 9,184,891 17.6
BB 0 0.0 0 0.0 0 0.0
Debt--Unrated 273,020 0.5 0 0.0 273,020 0.5
Debt Securities 51,724,933 99.8 0 0.0 $51,724,933 99.8%
Equity Securities 0 0.0
Short-Term Securities 81,462 0.2
Total Portfolio $51,806,395 100.0%
Other Assets -- Net 1,416,324
Net Assets $53,222,719
New York Portfolio
- ------------------
Rating Rating
Average % of Assigned % of Assigned % of
Security Ratings Value Portfolio by Adviser Portfolio by Service Portfolio
- ---------------- ----- --------- ---------- --------- ---------- ---------
AAA $11,260,728 21.3% 0 0.0% $11,260,728 21.3%
AA 12,376,835 23.4 0 0.0 12,376,835 23.4
A 13,363,199 25.3 0 0.0 13,363,199 25.3
BBB 13,145,937 24.7 0 0.0 13,145,937 24.8
BB 2,551,645 4.8 0 0.0 2,551,645 4.8
Debt Securities 52,698,345 99.6 0 0.0 $52,698,345 99.6%
Equity Securities 0 0.0
Short-Term Securities 222,615 0.4
Total Portfolio 52,920,960 100.0%
Other Assets -- Net 1,506,242
Net Assets $54,427,203
</TABLE>
A-5
<PAGE>
JOHN HANCOCK
MANAGED TAX-EXEMPT FUND
Class A and Class B Shares
Statement of Additional Information
September 30, 1996
This Statement of Additional Information provides information about John
Hancock Managed Tax-Exempt Fund (the "Fund") in addition to the information that
is contained in the Fund's Class A and Class B Prospectus (the "Prospectus")
dated September 30, 1996.
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 Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Statement of
Additional
Information
Page
ORGANIZATION OF THE FUND 2
INVESTMENT OBJECTIVE AND POLICIES 2
CERTAIN INVESTMENT PRACTICES 3
INVESTMENT RESTRICTIONS 15
THOSE RESPONSIBLE FOR MANAGEMENT 18
INVESTMENT ADVISORY AND OTHER SERVICES 27
DISTRIBUTION CONTRACT 29
NET ASSET VALUE 31
INITIAL SALES CHARGE ON CLASS A SHARES 32
DEFERRED SALES CHARGE ON CLASS B SHARES 34
SPECIAL REDEMPTIONS 37
ADDITIONAL SERVICES AND PROGRAMS 38
DESCRIPTION OF THE FUND'S SHARES 39
TAX STATUS 40
CALCULATION OF PERFORMANCE 46
BROKERAGE ALLOCATION 49
TRANSFER AGENT SERVICES 51
CUSTODY OF PORTFOLIO 51
INDEPENDENT ACCOUNTANTS 51
APPENDIX A A-1
APPENDIX B B-1
FINANCIAL STATEMENTS F-1
<PAGE>
ORGANIZATION OF THE FUND
John Hancock Managed Tax-Exempt Fund (formerly John Hancock Freedom Managed
Tax-Exempt Fund) (the "Fund") is a diversified series of John Hancock Tax-
Exempt Series Fund (the "Trust"), an open-end management investment company. The
Trust was organized in March 1987 by John Hancock Advisers, Inc. (the "Adviser")
as a Massachusetts business trust under the laws of The Commonwealth of
Massachusetts. Prior to January 2, 1991, when the Trust changed its name, it was
known as John Hancock Tax-Exempt Series Trust. Prior to September 1, 1996, the
Fund was a series of Freedom Investment Trust. The Adviser is an indirect
wholly-owned subsidiary of 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.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek as high a level of current
income exempt from Federal income tax as is consistent with preservation of
capital, by investing primarily in municipal securities. There are market risks
in any investment and therefore there can be no assurance that the Fund will
achieve its investment objectives.
The Fund will invest at least 80% of its total assets in municipal
securities with varying maturities, the interest from which is, in the opinion
of bond counsel for the issuer, excluded from gross income for federal income
tax purposes. Municipal securities are issued to obtain funds for various public
purposes. The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or a specific revenue source,
and generally are not payable from the unlimited revenues of the issuer.
Industrial development bonds issued by or on behalf of public authorities to
obtain funds for privately-operated facilities are in most cases revenue bonds
which do not generally carry the pledge of the full faith and credit of the
issuer of such bonds, but depend for payment on the ability of the industrial
user to meet its obligations.
The Fund will not generally invest more than 25% of its total assets in any
industry. Governmental issuers of municipal securities are not considered part
of any "industry." However, municipal securities backed only by the assets and
revenues of non-governmental users will be subject to this limitation. It is
possible that the Fund may from time to time invest more than 25% of its assets
in a particular segment of the municipal securities market, such as hospital
revenue obligations, housing agency obligations, or airport revenue obligations.
This would be the case only if the Adviser determined that the yields available
from obligations in a particular segment of the market justified the additional
risks associated with such concentration. Economic, business, political and
other developments generally affecting the revenues of issuers in such a market
segment (e.g., proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand for their
2
<PAGE>
services or products) may have a general adverse effect on all municipal
securities in such segment. The Fund reserves the right to invest more than 25%
of its assets in industrial development bonds or in issuers located in any
particular state. The Fund may also invest in variable rate and floating rate
municipal obligations which have interest rates that are adjusted at designated
intervals or whenever there are changes in the market rates of interest on which
the interest rates are based. The Fund's distributions of the interest on
certain tax-exempt securities which the Fund may purchase may be treated as an
item of tax preference under the federal alternative minimum tax. The Fund's
present policy is to invest no more than 20% of its total assets in taxable
securities including those generating interest that is an item of tax preference
under the alternative minimum tax.
CERTAIN INVESTMENT PRACTICES
Municipal Securities
Municipal securities are issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies and
instrumentalities to obtain funds for various public purposes. The interest on
these obligations is generally exempt from federal income tax in the hands of
most investors. The two principal classifications of municipal securities are
"Notes" and "Bonds."
Municipal Notes. Municipal Notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal Notes
include: Project Notes (which carry a U.S. Government guarantee), Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes and
Construction Loan Notes.
Project Notes are issued by public bodies (called "Local Issuing Agencies")
created under the laws of a state, territory, or U.S. possession. They have
maturities that range up to one year from the date of issuance. Project Notes
are backed by an agreement between the Local Issuing Agency and the U.S.
Department of Housing and Urban Development to provide financing for a range of
programs of financial assistance for housing, redevelopment, and related needs
such as low-income housing programs and urban renewal programs. While they are
the primary obligations of the local public housing agencies or the local urban
renewal agencies, the agreement provides for the additional security of the full
faith and credit of the U.S. Government.
Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue such as federal revenues
available under the Federal Revenue Sharing Program. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
Anticipation Notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
3
<PAGE>
cases, these monies provide for the repayment of the notes. Construction Loan
Notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes issued for
different purposes and secured differently from those described above.
Municipal Bonds. Municipal Bonds, which meet longer term capital needs and
generally have maturities of more than one year when issued, have two principal
classifications: "General Obligation" Bonds and "Revenue" Bonds.
Issuers of General Obligation Bonds include states, counties, cities, towns
and regional districts. The proceeds of these obligations are used to fund a
wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount of special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial Development and Pollution Control Bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user.
4
<PAGE>
Variable or Floating Rate Obligations
Certain of the obligations in which the Fund may invest may be variable or
floating rate obligations on which the interest rate is adjusted at
predesignated periodic intervals (variable rate) or when there is a change in
the market rate of interest on which the interest rate payable on the obligation
is based (floating rate). Variable or floating rate obligations may include a
demand feature which entitles the purchaser to demand prepayment of the
principal amount prior to stated maturity. Also, the issuer may have a
corresponding right to prepay the principal amount prior to maturity. As with
any other type of debt security, the marketability of variable or floating rate
instruments may vary depending upon a number of factors, including the type of
issuer and the terms of the instruments. The Fund may also invest in more
recently developed floating rate instruments which are created by dividing a
municipal security's interest rate into two or more different components.
Typically, one component ("floating rate component" or "FRC") pays an interest
rate that is reset periodically through an auction process or by reference to an
interest rate index. A second component ("inverse floating rate component" or
"IFRC") pays an interest rate that varies inversely with changes to market rates
of interest, because the interest paid to the IFRC holders is generally
determined by subtracting a variable or floating rate from a predetermined
amount (i.e., the difference between the total interest paid by the municipal
security and that paid by the FRC). The Fund may purchase the FRC's without
limitation. Up to 10% of the Fund's total assets may be invested in IFRC's in an
attempt to protect against a reduction in the income earned on the Fund's other
investments due to a decline in interest rates. The extent of increases and
decreases in the value of an IFRC generally will be greater than comparable
changes in value of an equal principal amount of fixed-rate municipal security
having similar credit quality, redemption provisions and maturity. To the extent
that such instruments are not readily marketable, as determined by the Adviser
pursuant to the guidelines adopted by the Board of Trustees, they will be
considered illiquid for purposes of the Fund's 15% investment restriction on
investment in non- readily marketable securities. Variable and floating rate
obligations are subject to the quality characteristics for municipal obligations
described in the Appendix to this Statement of Additional Information.
Other Municipal Securities
There is, in addition, a variety of hybrid and special types of municipal
securities as well as numerous differences in the security of municipal
securities both within and between the two principal classifications above.
For the purpose of certain requirements of various of the Fund's investment
restrictions, identification of the "issuer" of a municipal security depends on
the terms and conditions of the security. When the assets and revenues of a
political subdivision are separate from those of the government which created
the subdivision and the security is backed only by the assets and revenues of
the subdivision, the subdivision would be deemed to be the sole issuer.
Similarly, in the case of an industrial development bond, if that bond is backed
5
<PAGE>
only by the assets and revenues of the nongovernmental user, then the
nongovernmental user would be deemed to be the sole issuer. If, however, in
either case, the creating government or some other entity guarantees the
security, the guarantee would be considered a separate security and would be
treated as an issue of the government or other agency.
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 municipal securities which they rate. It should be
emphasized, however, that such ratings are relative and subjective and are not
absolute standards of quality. These ratings will be used by the Fund as initial
criteria for the selection of portfolio securities, but the Fund will also rely
upon the independent advice of the Adviser to evaluate potential investments.
Among the factors which will be considered are the long-term ability of the
issuer to pay principal and interest and general economic trends. Appendix A
contains further information concerning the ratings of Moody's and S&P and their
significance.
Subsequent to its purchase by the Fund, an issue of municipal securities
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Fund. Neither event will require the sale of such municipal
securities by the Fund, but the Adviser will consider such event in its
determination of whether the Fund should continue to hold the securities.
Risk Factors
The yields on municipal securities are dependent on a variety of factors,
including general economic and monetary conditions, money market factors,
conditions of the municipal securities market, size of a particular offering,
maturity of the obligation, and rating of the issue.
Municipal securities are also subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. There is also
the possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay, when due, principal of and interest
on certain municipal securities may be materially affected.
From time to time, proposals to restrict or eliminate the federal income
tax- exemption for interest on municipal securities have been introduced before
Congress. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund would be adversely affected. In such
6
<PAGE>
event, the Fund would re-evaluate its investment objective and policies and
submit possible changes in its structure for the consideration of shareholders.
Short-Term Investments
Although the Fund's portfolio generally will consist primarily of municipal
bonds, for liquidity purposes and for maintaining a defensive position, in
anticipation of a market decline, all or a portion of the Fund's assets may be
held in cash or invested in short-term municipal securities (i.e., those with
less than one year remaining to maturity). Short-term municipal securities
consist of short-term municipal notes and short-term municipal loans and
obligations, including municipal paper, master demand notes and variable rate
demand notes. Investments in short-term municipal securities will, at the time
of purchase, be rated within the three highest rating categories of S&P's, Fitch
or Moody's, or if unrated determined to be of comparable quality by the Adviser.
The Fund's investments in short-term municipal securities will represent less
than 25% of its total assets except when the Fund is in a temporary defensive
investment position in anticipation of a market decline.
The Fund may also invest for liquidity or temporary defensive purposes in
taxable short-term obligations of the U.S. Government, its agencies or
instrumentalities; commercial paper rated in the highest grade by the rating
services (A1, Prime-1 or F-1+, respectively); certificates of deposit and
bankers' acceptances; and repurchase agreements with respect to any securities
eligible for investment by the Fund, including municipal securities. The Fund
may also borrow an amount equal to up to 10% of its total assets to meet
anticipated redemptions but will not make any additional investments so long as
such borrowings exceed 5% of the value of its total assets.
Financial Futures Contracts
The Fund may buy and sell futures contracts (and related options) on debt
securities, interest rate indices, and other instruments. The Fund may hedge its
portfolio by selling or purchasing financial futures contracts as an offset
against the effects of changes in securities prices or interest rates. Although
other techniques could be used to reduce exposure to market fluctuations, the
Fund may be able to hedge its exposure more effectively and perhaps at a lower
cost by using financial futures contracts. The Fund may enter into financial
futures contracts for hedging and other non-speculative purposes to the extent
permitted by regulations of the Commodity Futures Trading Commission ("CFTC").
Financial futures contracts have been designed by boards of trade which
have been designated "contract markets" by the CFTC. Futures contracts are
traded on these markets in a manner that is similar to the way a stock is traded
on a stock exchange. The boards of trade, through their clearing corporations,
7
<PAGE>
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate instruments such as long-term U.S. Treasury
bonds, U.S. Treasury notes, Government National Mortgage Association ("GNMA")
modified pass-through mortgage-backed securities, three-month U.S. Treasury
bills, 90-day commercial paper, bank certificates of deposit and Eurodollar
certificates of deposit. It is expected that if other financial futures
contracts are developed and traded the Fund may engage in transactions in such
contracts.
Although some financial futures contracts by their terms call for actual
delivery or acceptance of financial instruments, in most cases the contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security and delivery
month). Other financial futures contracts, such as futures contracts on
securities indices, by their terms call for cash settlements. If the offsetting
purchase price is less than the Fund's original sale price, the Fund realizes a
gain, or if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the Fund's original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. The transaction costs must
also be included in these calculations. The Fund will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing transaction. For a discussion of the Federal income tax considerations
of transactions in financial futures contracts, see the information under the
caption "Tax Status" below.
At the time the Fund enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
Government securities, known as "initial margin," ranging upward from 1.1% of
the value of the financial futures contract being traded. The margin required
for a financial futures contract is set by the board of trade or exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the financial futures contract which is returned to the Fund
upon termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. Each day, the futures contract is valued at the official settlement
price of the board of trade or exchange on which it is traded. Subsequent
payments, known as "variation margin," to and from the broker are made on a
daily basis as the market price of the financial futures contract fluctuates.
This process is known as "mark to market." Variation margin does not represent a
borrowing or lending by the Fund but is instead a settlement between the Fund
and the broker of the amount one would owe the other if the financial futures
contract expired. In computing net asset value, the Fund will mark to market its
open financial futures positions.
Successful hedging depends on a strong correlation between the market for
the underlying securities and the futures contract market for those securities.
There are several factors that will probably prevent this correlation from being
a perfect one, and even a correct forecast of general interest rate trends may
8
<PAGE>
not result in a successful hedging transaction. There are significant
differences between the securities and futures markets which could create an
imperfect correlation between the markets and which could affect the success of
a given hedge. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for financial
futures and debt securities, including technical influences in futures trading
and differences between the financial instruments being hedged and the
instruments underlying the standard financial futures contracts available for
trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
the underlying debt securities are lower-rated and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise of
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market or interest rate trends. The Fund will bear
the risk that the price of the securities being hedged will not move in complete
correlation with the price of the futures contracts used as a hedging
instrument. Although the Adviser believes that the use of financial futures
contracts will benefit the Fund, an incorrect market prediction could result in
a loss on both the hedged securities in the Fund's portfolio and the hedging
vehicle so that the Fund's return might have been better had hedging not been
attempted. However, in the absence of the ability to hedge, the Adviser might
have taken portfolio actions in anticipation of the same market movements with
similar investment results but, presumably, at greater transaction costs. The
low margin deposits required for futures transactions permit an extremely high
degree of leverage. A relatively small movement in a futures contract may result
in losses or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount the price of a futures contract may vary either up or down
from the previous day's settlement price, at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
Finally, although the Fund engages in financial futures transactions only
on boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
9
<PAGE>
event participants decide to make or take delivery, liquidity in the market
could be reduced. In addition, the Fund could be prevented from executing a buy
or sell order at a specified price or closing out a position due to limits on
open positions or daily price fluctuation limits imposed by the exchanges or
boards of trade. If the Fund cannot close out a position, it must continue to
meet margin requirements until the position is closed.
Options on Financial Futures Contracts. The Fund may buy and sell options
on financial futures contracts on debt securities, interest rate indices, and
other instruments. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise, the writer of the option delivers the futures contract to
the holder at the exercise price. The Fund would be required to deposit with its
custodian initial and variation margin with respect to put and call options on
futures contracts written by it. Options on futures contracts involve risks
similar to the risks of transactions in financial futures contracts. Also, an
option purchased by the Fund may expire worthless, in which case the Fund would
lose the premium it paid for the option.
Other Considerations. The Fund will engage in futures and options
transactions for bona fide hedging or other non-speculative purposes to the
extent permitted by CFTC regulations. 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 which it expects to purchase. Except as stated below, the Fund's
futures transactions will be entered into for traditional hedging purposes
- --i.e., 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 the Fund intends
to purchase. As evidence of this 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 or
assets in the cash market at the time when the futures contract 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.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits the Fund to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish nonhedging positions in futures contracts and options on futures
will not exceed 5% of the net asset value of the Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Fund will engage in transactions in options and futures contracts only to the
extent such transactions are consistent with the requirements of the Internal
10
<PAGE>
Revenue Code of 1986, as amended (the "Code") for maintaining its qualification
as a regulated investment company.
When the Fund purchases financial futures contracts, or writes put options
or purchases call options thereon, cash or liquid, high grade debt securities
will be deposited in a segregated account with the Fund's custodian in an amount
that, together with the amount of initial and variation margin held in the
account of the broker, equals the market value of the futures contracts.
Options Transactions
The Fund may write listed and over-the-counter covered call options and
covered put options on securities or securities indices in order to earn
additional income from the premiums received. In addition, the Fund may purchase
listed and over-the-counter call and put options. The extent to which covered
options will be used by the Fund will depend upon market conditions and the
availability of alternative strategies.
The Fund will write listed and over-the-counter call options only if they
are "covered," which means that the Fund owns or has the immediate right to
acquire the securities underlying the options without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio. A call option written by the Fund may also be "covered" if the Fund
holds on a share-for-share basis a covering call on the same securities where
(i) the exercise price of the covering call held is equal to or less than the
exercise price of the call written or the exercise price of the covering call is
greater than the exercise price of the call written, in the latter case only if
the difference is maintained by the Fund in cash or high grade liquid debt
obligations in a segregated account with the Fund's custodian, and (ii) the
covering call expires at the same time as or later than the call written. If a
covered call option is not exercised, the Fund would keep both the option
premium and the underlying security. If the covered call option written by the
Fund is exercised and the exercise price, less the transaction costs, exceeds
the cost of the underlying security, the Fund would realize a gain in addition
to the amount of the option premium it received. If the exercise price, less
transaction costs, is less than the cost of the underlying security, the Fund's
loss would be reduced by the amount of the option premium.
As the writer of a covered put option, the Fund will write a put option
only with respect to securities it intends to acquire for its portfolio and will
maintain in a segregated account with its custodian bank cash or high grade
liquid debt securities with a value equal to the price at which the underlying
security may be sold to the Fund in the event the put option is exercised by the
purchaser. The Fund may also write a "covered" put option by purchasing on a
share-for-share basis a put on the same security as the put written by the Fund
if the exercise price of the covering put held is equal to or greater than the
exercise price of the put written and the covering put expires at the same time
as or later than the put written.
11
<PAGE>
When writing listed and over-the-counter covered put options on securities,
the Fund would earn income from the premiums received. If a covered put option
is not exercised, the Fund would keep the option premium and the assets
maintained to cover the option. If the option is exercised and the exercise
price, including transaction costs, exceeds the market price of the underlying
security, the Fund would realize a loss, but the amount of the loss would be
reduced by the amount of the option premium.
If the writer of an exchange-traded option wishes to terminate its
obligation prior to its exercise, it may effect a "closing purchase
transaction." This is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that the Fund's
position will be offset by the Options Clearing Corporation. The Fund may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. There is no guarantee that a closing purchase transaction can be
effected. Although the Fund will generally write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular option or at any particular time, and for some options no secondary
market on an exchange may exist.
In the case of a written call option, effecting a closing transaction will
permit the Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. In the case of a
written put option, it will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option.
The Fund will realize a loss from a closing transaction if the cost of the
closing transaction is more than the premium received for writing the option.
However, because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation in the value of the underlying security owned by the
Fund.
Over-the-Counter Options. The Fund may engage in options transactions on
exchanges and in the over-the-counter markets. In general, exchange-traded
options are third-party contracts (i.e., performance of the parties' obligations
is guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. Over-the-counter ("OTC") transactions are two-party
contracts with price and terms negotiated by the buyer and seller. The Fund will
acquire only those OTC options for which management believes the Fund can
receive on each business day at least two separate bids or offers (one of which
12
<PAGE>
will be from an entity other than a party to the option) or those OTC options
valued by an independent pricing service. The Fund will write and purchase OTC
options only with member banks of the Federal Reserve System and primary dealers
in U.S. Government securities or their affiliates which have capital of at least
$50 million or whose obligations are guaranteed by an entity having capital of
at least $50 million. The SEC has taken the position that OTC options are
subject to the Fund's 15% restriction on illiquid investments. The SEC, however,
allows the Fund to exclude from the 15% limitation on illiquid securities a
portion of the value of the OTC options written by the Fund, provided that
certain conditions are met. First, the other party to the OTC options has to be
a primary U.S. Government securities dealer designated as such by the Federal
Reserve Bank. Second, the Fund must have an absolute contractual right to
repurchase the OTC options at a formula price. If the above conditions are met,
the Fund may treat as illiquid only that portion of the OTC option's value (and
the value of its underlying securities) which is equal to the formula price for
repurchasing the OTC option, less the OTC option's intrinsic value.
Repurchase Agreements
A repurchase agreement is a contract under which the Fund acquires a
security for a relatively short period (usually not more than 7 days) subject to
the obligation of the seller to repurchase and the Fund to resell such security
at a fixed time and price (representing the Fund's cost plus interest). The Fund
will enter into repurchase agreements only with member banks of the Federal
Reserve System and with "primary dealers" in U.S. Government securities. The
Adviser will continuously monitor the creditworthiness of the parties with whom
the Fund enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving
as collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income and lack of
access to income during this period and the expense of enforcing its rights.
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
13
<PAGE>
when-issued transactions with respect to securities purchased for its portfolio
in order to obtain what is considered to be an advantageous price and yield at
the time of the transaction. For when-issued transactions, no payment is made
until delivery is due, often a month or more after the purchase. In a forward
commitment transaction, the Fund contracts to purchase securities for a fixed
price at a future date beyond customary settlement time.
When the Fund engages in forward commitment and when-issued transactions,
it relies on the seller to consummate the transaction. The failure of the issuer
or seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when- issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when- issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid, high grade debt securities 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.
Stand-By Commitments
The Fund may acquire stand-by commitments from banks with respect to
municipal securities held by the Fund. Under a stand-by commitment, a bank that
acts as a municipal securities dealer agrees to purchase, at the Fund's option,
specified municipal securities at a specified price. The Fund uses stand-by
commitments for liquidity purposes (i.e., to provide a ready market for its
municipal securities to meet cash needs).
When the Fund exercises a stand-by commitment that it has acquired from a
dealer with respect to a municipal security held in its portfolio, the dealer
will normally pay to the Fund an amount equal to: (1) the Fund's acquisition
cost of the municipal securities (excluding any accrued interest which the Fund
paid on their acquisition), less any amortized market premium or plus any
amortized market or original issue discount during the period the Fund owned the
securities, plus (2) all interest accrued on the securities since the last
interest payment date or the date the securities were purchased by the Fund,
whichever is later. The Fund's right to exercise stand-by commitments would be
unconditional and unqualified. A stand-by commitment would not be transferable
by the Fund, although it could sell the underlying municipal securities to a
third party at any time.
14
<PAGE>
The Fund intends to enter into stand-by commitments only with those banks
which, in the opinion of the Adviser, present minimal credit risk. The Fund may
pay for stand-by commitments either separately, in cash or by paying a higher
price for portfolio securities which are acquired subject to such a commitment
(thus reducing the yield to maturity otherwise available for the same
securities). The total amount paid for outstanding stand-by commitments held by
the Fund is not expected to exceed 1/2 of 1% of the Fund's total asset value
calculated immediately after each stand-by commitment is acquired. The Fund
intends to acquire stand-by commitments solely to facilitate portfolio liquidity
and does not intend to exercise its rights thereunder for trading purposes. The
acquisition of a stand-by commitment would not ordinarily affect the valuation
or maturity of the underlying municipal securities. Stand-by commitments
acquired by the Fund would be valued at zero in determining net asset value.
Where the Fund paid directly or indirectly for a stand-by commitment, its cost
would be amortized over the period the commitment is held by the Fund. Although
Federal income tax law may not be entirely clear in certain cases, the Fund
intends to take the position that it is the owner of municipal securities it
holds subject to stand-by commitments. If the Fund were not treated as the owner
of such securities in a particular case, the Fund would not be able to treat the
income it earned from such securities as tax-exempt interest, and its
distributions of such income would therefore be taxable to shareholders.
Short Term Trading and Portfolio Turnover
The Fund may engage in short-term trading, if the Adviser believes that
these transactions will improve the overall return of the Fund's portfolio and
therefore may have higher portfolio turnover than that of other funds with
similar objectives. 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 corresponding higher transaction expenses and may
make it more difficult for the Fund to qualify as a regulated investment company
for federal income tax purposes.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions (as
well as the Fund's investment objective and policy of investing at least 80% of
its total assets in municipal securities, the interest on which is excluded from
gross income for federal income tax purposes) will not be changed without
approval of a majority of the Fund's outstanding voting securities which, as
15
<PAGE>
used in the Prospectus and this Statement of Additional Information, means
approval by the lesser of (1) 67% or more of the Fund's shares represented at a
meeting if at least 50% of the Fund's outstanding shares are present in person
or by proxy at the meeting or (2) 50% of the Fund's outstanding shares.
The Fund observes the following fundamental restrictions:
The Fund may not:
1. Purchases on Margin and Short Sales. Purchase securities on margin or
sell short, except that the Fund may obtain such short-term credits as are
necessary for the clearance of securities transactions. The deposit or payment
by the Fund of initial or maintenance margin in connection with futures
contracts or related options transactions is not considered the purchase of a
security on margin.
2. Borrowing. Borrow money, except from banks temporarily for extraordinary
or emergency purposes (not for leveraging or investment) and then in an
aggregate amount not in excess of 10% of the value of the Fund's total assets at
the time of such borrowing, provided that the Fund will not purchase securities
for investment while borrowings equaling 5% or more of the Fund's total assets
are outstanding.
3. Underwriting Securities. Act as an underwriter of securities of other
issuers, except to the extent that it may be deemed to act as an underwriter in
certain cases when disposing of restricted securities. (See also Restriction
12.)
4. Senior Securities. Issue senior securities except as appropriate to
evidence indebtedness which the Fund is permitted to incur, provided that, to
the extent applicable, (i) the purchase and sale of futures contracts or related
options, (ii) collateral arrangements with respect to futures contracts, related
options, forward foreign currency exchange contracts or other permitted
investments of the Fund as described in the Prospectus, including deposits of
initial and variation margin, and (iii) the establishment of separate classes of
shares of the Fund for providing alternative distribution methods are not
considered to be the issuance of senior securities for purposes of this
restriction.
5. Warrants. Invest in marketable warrants to purchase common stock.
Warrants acquired in units or attached to securities are not included in this
restriction.
6. Single Issuer Limitation/Diversification. Purchase securities of any one
issuer, except securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, if immediately after such purchase more than 5%
of the value of the Fund's total assets would be invested in such issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
such issuer; provided, however, that up to 25% of the value of the Fund's total
assets may be invested without regard to these limitations.
16
<PAGE>
7. Real Estate. Purchase or sell real estate although the Fund may purchase
and sell securities which are secured by real estate, mortgages or interests
therein, or issued by companies which invest in real estate or interests
therein; provided, however, that Fund will not purchase real estate limited
partnership interests.
8. Commodities; Commodity Futures; Oil and Gas Exploration and Development
Programs. Purchase or sell commodities or commodity futures contracts or
interests in oil, gas or other mineral exploration or development programs,
except the Fund may engage in such forward foreign currency contracts and/or
purchase or sell such futures contracts and options thereon as described in the
Prospectus.
9. Making Loans. Make loans, except that the Fund may purchase or hold debt
instruments and may enter into repurchase agreements (subject to Restriction 12)
in accordance with its investment objectives and policies.
10. Industry Concentration. Purchase any securities which would cause more
than 25% of the market value of the Fund's total assets at the time of such
purchase to be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that there is no
limitation with respect to investments in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. For purposes of this
Restriction, state and municipal governments and their political subdivisions
are not considered members of any industry. This limitation shall not be
applicable to investments in tax-exempt securities issued by any state and
municipal governments and their political subdivisions.
Nonfundamental Investment Restrictions. The following restrictions are
designated as nonfundamental and may be changed by the Board of Trustees without
shareholder approval.
The Fund may not:
11. Options Transactions. Write, purchase, or sell puts, calls or
combinations thereof except that the Fund may write, purchase or sell puts and
calls on securities as described in the Prospectus.
12. Illiquid Securities. Purchase or otherwise acquire any security if, as
a result, more than 15% of the Fund's net assets (taken at current value) would
be invested in securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale. This
policy includes repurchase agreements maturing in more than seven days. This
policy does not include restricted securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 which the Board of Trustees or the
Adviser has determined under Board-approved guidelines are liquid.
17
<PAGE>
13. Acquisition for Control Purposes. Purchase securities of any issuer for
the purpose of exercising control or management, except in connection with a
merger, consolidation, acquisition or reorganization.
14. Unseasoned Issuers. Purchase securities of any issuer with a record of
less than three years of continuous operations, including predecessors, if such
purchase would cause the investments of the Fund in all such issuers to exceed
5% of the total assets of the Fund taken at market value, except this
restriction shall not apply to (i) obligations of the U.S. Government, its
agencies or instrumentalities and (ii) securities of such issuers which are
rated by at least one nationally recognized statistical rating organization.
This restriction shall not apply to municipal obligations for the payment of
which is pledged the faith, credit and taxing power of any person authorized to
issue such securities.
15. Beneficial Ownership of Officers and Directors of Fund and Adviser.
Purchase or retain the securities of any issuer if those officers or trustees of
the Fund or officers or directors of the Adviser who each own beneficially more
than 1/2 of 1% of the securities of that issuer together own more than 5% of the
securities of such issuer.
16. Hypothecating, Mortgaging and Pledging Assets. Hypothecate, mortgage or
pledge any of its assets except to secure loans as a temporary measure for
extraordinary purposes. For the purpose of this restriction, (i) forward foreign
currency exchange contracts are not deemed to be a pledge of assets, (ii) the
purchase or sale of securities by the Fund on a when-issued or delayed delivery
basis and collateral arrangements with respect to the writing of options on debt
securities or on futures contracts are not deemed to be a pledge of assets, and
(iii) the deposit in escrow of underlying securities in connection with the
writing of call options is not deemed to be a pledge of assets.
17. Joint Trading Accounts. Participate on a joint or joint and several
basis in any trading account in securities (except for a joint account with
other funds managed by the Adviser for repurchase agreements permitted by the
Securities and Exchange Commission pursuant to an exemptive order).
18. Securities of Other Investment Companies. 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
18
<PAGE>
Group of Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John Hancock Group
of Funds. The Fund may not purchase the shares of any closed-end investment
company except in the open market where no commission or profit to a sponsor or
dealer results from the purchase, other than customary brokerage fees.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amounts of net assets will not be considered a violation
of any of the foregoing restrictions.
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 and directors of the Adviser or officers and directors of
the Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock
Funds").
The following table sets forth the principal occupation or employment of
the Trustees and principal officers of the Fund during the past five years:
19
<PAGE>
<TABLE>
<CAPTION>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Trust During Past 5 Years
- ----------------- ---------- -------------------
<S> <C> <C>
*Edward J. Boudreau, Jr. Chairman (3,4) Chairman and Chief Executive
101 Huntington Avenue Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("The
Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital"); John Hancock Advisers
International Limited; ("Advisers
International"); John Hancock
Funds, Inc., ("John Hancock
Funds"); John Hancock Investor
Services Corporation ("Investor
Services"), Transamerica Fund
Management Company ("TFMC") and
Sovereign Asset Management
Corporation ("SAMCorp");
(hereinafter the Adviser, the
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Investor Services
and SAMCorp are collectively
referred to as the "Affiliated
Companies"); Chairman, First
Signature Bank & Trust; Director,
John Hancock Freedom Securities
Corp., John Hancock Capital Corp.,
New England/Canada Business
Council; Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; President, the Adviser
(until July 1992); Chairman, John
Hancock Distributors, Inc.
("Distributors") until April 1994.
* An "interested person" of the Company, as such term is defined in the
Investment Company Act of 1940 (the "Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
20
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Trust During Past 5 Years
- ----------------- ---------- -------------------
Dennis S. Aronowitz Trustee (1,2) Professor of Law, Boston University
Boston University School of Law; Trustee, Brookline
Boston, Massachusetts Savings Bank.
June 1931
Richard P. Chapman, Jr. Trustee (1,2) President, Brookline Savings Bank.
160 Washington Street Director, Federal Home Loan Bank of
Brookline, Massachusetts Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University
(education); Director, Depositors
Insurance Fund, Inc. (insurance).
William J. Cosgrove Trustee (1,2) Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, New Jersey N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
Resource Evaluation Inc.
(consulting, October 1991 - October
1993); Trustee, the Hudson City
Savings Bank (until October 1995).
* An "interested person" of the Company, as such term is defined in the
Investment Company Act of 1940 (the "Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
21
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Trust During Past 5 Years
- ----------------- ---------- -------------------
Douglas M. Costle Trustee (1,2,3) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, Vermont 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991). Dean, Vermont Law
School (until 1991). Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
MITRE Corporation (governmental
consulting services).
Leland O. Erdahl Trustee (1,2) Director of Santa Fe Ingredients
9449 Navy Blue Court Company of California, Inc. and
Las Vegas, NV 89117 Santa Fe Ingredients Company, Inc.
December 1928 (private food processing
companies); Director of Uranium
Resources, Inc.; President of
Stolar, Inc. (from 1987-1991) and
President of Albuquerque Uranium
Corporation (from 1985-1992);
Director of Freeport-McMoRan Copper
& Cold Company Inc., Hecla Mining
Company, Canyon Resources
Corporation and Original Sixteen to
One Mine, Inc. (from 1984-1987 and
from 1991 to 1995) (management
consultant).
* An "interested person" of the Company, as such term is defined in the
Investment Company Act of 1940 (the "Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
22
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Trust During Past 5 Years
- ----------------- ---------- -------------------
Richard A. Farrell Trustee (1,2) President of Farrell, Healer & Co.,
Farrell, Healer & Company, Inc. (venture capital management firm)
160 Federal Street -- 23rd Floor (since 1980); Prior to 1980, headed
Boston, MA 02110 the venture capital group at Bank
November 1932 of Boston Corporation.
Gail D. Fosler Trustee (1,2) Vice President and Chief Economist,
4104 Woodbine Street The Conference Board (non-profit
Chevy Chase, MD economic and business research).
December 1947
William F. Glavin Trustee (1,2) President, Babson College; Vice
Babson College Chairman, Xerox Corporation until
Horn Library June 1989; Director, Caldor Inc.,
Babson Park, MA 02157 Reebok, Ltd. (since 1994), and Inco
March 1931 Ltd.
Dr. John A. Moore Trustee (1,2) President and Chief Executive
Institute for Evaluating Officer, Institute for Evaluating
Health Risks Health Risks, (nonprofit
1101 Vermont Avenue N.W. institution) ( since September
Suite 608 1989).
Washington, DC 20005
February 1939
Patti McGill Peterson Trustee (1,2) President, St. Lawrence University;
St. Lawrence University Director, Niagara Mohawk Power
110 Vilas Hall Corporation and Security Mutual
Canton, NY 13617 Life.
May 1943
* An "interested person" of the Company, as such term is defined in the
Investment Company Act of 1940 (the "Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
23
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Trust During Past 5 Years
- ----------------- ---------- -------------------
John W. Pratt Trustee (1,2) Professor of Business
2 Gray Gardens East Administration at Harvard
Cambridge, MA 02138 University Graduate School of
September 1931 Business Administration (since
1961).
*Richard S. Scipione Trustee (3) General Counsel, the Life Insurance
John Hancock Place Company; Director, the Adviser, the
P.O. Box 111 Affiliated Companies, John Hancock
Boston, Massachusetts Distributors, Inc., JH Networking
August 1937 Insurance Agency, Inc., John
Hancock Subsidiaries, Inc.,
SAMCorp, NM Capital and John
Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993); Trustee; The
Berkeley Group;
Edward J. Spellman, CPA Trustee (1,2,4) Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Lauderdale, FL
November 1932
Anne C. Hodsdon Trustee and President (3)(4) President and Chief Operating
101 Huntington Avenue Officer, the Adviser; Executive
Boston, MA 02199 Vice President, the Adviser (until
April 1953 December 1994); Senior Vice
President; the Adviser (until
December 1993); Vice President, the
Adviser, 1991.
* An "interested person" of the Company, as such term is defined in the
Investment Company Act of 1940 (the "Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
24
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Trust During Past 5 Years
- ----------------- ---------- -------------------
*Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief Investment
July 1938 Investment Officer (2) Officer, the Adviser; President,
the Adviser (until December 1994);
Director, the Adviser, Advisers
International, John Hancock Funds,
Investor Services, SAMCorp., and NM
Capital; Senior Vice President, The
Berkeley Group.
*James B. Little Senior Vice President, Senior Vice President, the Adviser,
February 1935 Chief Financial Officer The Berkeley Group, John Hancock
Funds and Investor Services; Senior
Vice President and Chief Financial
Officer, each of the John Hancock
funds.
*John A. Morin Vice President Vice President and Secretary, the
July 1950 Adviser; Vice President, Investor
Services, John Hancock Funds and
each of the John Hancock funds;
Compliance Officer, certain John
Hancock funds; Counsel, the Life
Company; Vice President and
Assistant Secretary, The Berkeley
Group.
* An "interested person" of the Company, as such term is defined in the
Investment Company Act of 1940 (the "Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
26
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Trust During Past 5 Years
- ----------------- ---------- -------------------
*Susan S. Newton Vice President, Secretary Vice President and Assistant
March 1950 Secretary, the Adviser; Vice
President and Secretary, certain
John Hancock funds; Vice President
and Secretary, John Hancock Funds,
Investor Services and John Hancock
Distributors, Inc. (until 1994);
Secretary, SAMCorp; Vice President,
The Berkeley Group.
*James J. Stokowski Vice President and Treasurer Vice President, the Adviser; Vice
November 1946 President and Treasurer, each of
the John Hancock funds.
* An "interested person" of the Company, as such term is defined in the
Investment Company Act of 1940 (the "Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
26
<PAGE>
All of the officers listed are officers or employees of the Adviser or the
Affiliated Companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
The following table provides information regarding the compensation paid by
the Fund during its most recently completed fiscal year and the other investment
companies in the John Hancock Fund Complex to the Independent Trustees for their
services. Trustees not listed below were not Trustees of the Fund during its
most recently completed fiscal year. The three non-Independent Trustees, Messrs.
Boudreau and Scipione and Ms. Hodsdon and each of the officers of the Fund are
interested persons of the Adviser, are compensated by the Adviser and/or its
affiliates and receive no compensation from the Fund for their services.
Total Compensation
Aggregate From the Fund and
Independent Compensation John Hancock Fund
Trustees From the Fund 1 Complex to Trustees 2
-------- --------------- ---------------------
William A. Barron, III* $ 4,232 $ 41,750
Douglas M. Costle 4,232 41,750
Leland O. Erdahl 4,232 41,750
Richard A. Farrell 4,388 43,250
William F. Glavin+ 3,877 37,500
Patrick Grant* 4,440 43,750
Ralph Lowell, Jr.* 4,232 41,750
Dr. John A. Moore 4,232 41,750
Patti McGill Peterson 4,232 41,750
John W. Pratt 4,232 41,750
Total $42,329 $416,750
* Messrs. Barron, Grant and Lowell retired from their respective positions as
Trustees effective January 1, 1996.
1 Compensation for the fiscal year ended October 31, 1995.
2 The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1995.
+ As of December 31, 1995, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Fund Complex for Mr.
Glavin was $32,061 under the John Hancock Deferred Compensation Plan for
Independent Trustees.
27
<PAGE>
As of June 16, 1996, the officers and trustees of the Trust as a group
owned less than 1% of the outstanding shares of each class of the Fund.
As of June 16, 1996, the Fund is unaware of any shareholders who
beneficially owned 5% of or more of the outstanding shares of the Funds.
INVESTMENT ADVISORY AND OTHER SERVICES
The Fund receives its investment advice from the Adviser. Investors should
refer to the Prospectus for a description of certain information concerning the
investment management contract.
Each of the Trustees and principal officers of the Fund who is also an
affiliated person of the Adviser is named above, together with the capacity in
which such person is affiliated with the Fund and the Adviser.
The Fund has entered into an investment management contract with the
Adviser. Under the investment management contract, the Adviser provides the Fund
(i) with a continuous investment program, consistent with the Fund's stated
investment objective and policies and (ii) supervision of all aspects of the
Fund's operations except those delegated to a custodian, transfer agent or other
agent. The Adviser is responsible for the management of the Fund's portfolio
assets.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provides investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more other funds or clients are selling the same security. If opportunities for
the purchase or sale of securities by the Adviser or for other funds or clients,
for which the Adviser renders investment advice, arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds or clients in a manner deemed equitable to
all of them. To the extent that transactions on behalf of more than one client
of the Adviser or its affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
No person other than the Adviser and its directors and employees regularly
furnishes advice to the Fund with respect to the desirability of the Fund's
investing in, purchasing or selling securities. The Adviser may from time to
time receive statistical or other similar factual information, and information
regarding general economic factors and trends, from the Life Company and its
affiliates.
All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Fund (including fees of Trustees of the Fund
28
<PAGE>
who are not "interested persons," as such term is defined in the Investment
Company Act, but excluding certain distribution related activities required to
be paid by the Adviser or John Hancock Funds) and the continuous public offering
of the shares of the Fund are borne by the Fund.
As provided by the investment management contract, the Fund pays the
Adviser monthly an investment management fee, which is based on a stated
percentage of the Fund's average daily net assets as follows:
Net Asset Value Annual Rate
--------------- -----------
First $250,000,000 0.60%
Next $500,000,000 0.50%
Amount over $750,000,000 0.45%
From time to time, the Adviser may reduce its fee or make other
arrangements to limit the Fund's expenses to a specified percentage of average
daily net assets. The Adviser retains the right to re-impose a fee and recover
any other payments to the extent that, at the end of any fiscal year, the Fund's
annual expenses fall below this limit.
For the years ended October 31, 1993, 1994, and 1995, the Adviser received
fees of $809,781, $1,432,184 and $1,247,519, respectively. For the fiscal years
ended October 31, 1993, 1994 and 1995, the Adviser agreed not to impose
management fees in the amount of $733,749, $131,878 and $113,411, respectively.
The expense limitation may be discontinued at any time.
If the total of all ordinary business expenses of the Fund for any fiscal
year exceeds limitations prescribed by any state in which shares of the Fund are
qualified for sale, the fee payable to the Adviser will be reduced to the extent
required by these limitations. At this time, the most restrictive limit on
expenses imposed by a state requires that expenses charged to the Fund in any
fiscal year not exceed 2 1/2% of the first $30,000,000 of the Fund's average net
assets, 2% of the next $70,000,000 of such net assets, and 1 1/2% of the
remaining average net assets. When calculating the above limit, the Fund may
exclude interest, brokerage commissions and extraordinary expenses.
Pursuant to its investment management contract, the Adviser is not liable
to the Fund or its shareholders 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
investment management contract relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
29
<PAGE>
performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the investment management contract.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and presently has more than $19 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,080,000 shareholders.
The Adviser is an affiliate of the Life Company, one of the most recognized and
respected financial institutions in the nation. With total assets under
management of $80 billion, the Life Company is one of the ten largest life
insurance companies in the United States, and carries high ratings from S&P's
and A. M. Best. Founded in 1862, the Life Company has been serving clients for
over 130 years.
Under the investment management contract, the Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a name or any other name indicating that it is
advised by or otherwise connected with the Adviser. In addition, the Adviser or
the Life Company may grant the nonexclusive right to use the name "John Hancock"
or any similar name to any other corporation or entity, including but not
limited to any investment company of which the Life Company or any subsidiary or
affiliate thereof or any successor to the business of any subsidiary or
affiliate thereof shall be the investment adviser.
The investment management contract continues in effect from year to year if
approved annually by vote of a majority of the Trustees who are not interested
persons of one of the parties to the contract, cast in person at a meeting
called for the purpose of voting on such approval, and by either the Trustees or
the holders of a majority of the Fund's outstanding voting securities. The
contract automatically terminates upon assignment and may be terminated without
penalty on 60 days' notice at the option of either party to the contract or by
vote of a majority of the outstanding voting securities of the Fund.
DISTRIBUTION CONTRACT
The Fund has a distribution contract with John Hancock Funds. Under the
contract, 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. 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. In connection with the sale of Class A and
Class B shares, John Hancock Funds and Selling Brokers receive compensation in
the form of a sales charge imposed, in the case of Class A shares, at the time
30
<PAGE>
of sale or, in the case of Class B shares, on a deferred basis. The sales
charges are discussed further in the Prospectus.
The Fund's Trustees adopted Distribution Plans with respect to the Class A
and Class B shares (the "Plans") pursuant to Rule 12b-1 under the Investment
Company Act. Under the Plans, the Fund will pay distribution and service fees at
an aggregate annual rate of up to 0.30% and 1.00% for Class A and Class B,
respectively, of the Fund's daily net assets attributable to shares of that
class. However, the service fee will not exceed 0.25% of the Fund's daily net
assets attributable to each class of shares. The distribution fees will be used
to reimburse the Distributor for its distribution expenses, including but not
limited to: (i) initial and ongoing sales compensation to Selling Brokers and
others (including affiliates of the Distributor) engaged in the sale of Fund
shares; (ii) marketing, promotional and overhead expenses incurred in connection
with the distribution of Fund shares; and (iii) with respect to Class B shares
only, interest expenses on unreimbursed distribution expenses. The service fees
will be used to compensate Selling Brokers for providing personal and account
maintenance services to shareholders. In the event that John Hancock Funds is
not fully reimbursed for expenses incurred by it under the Class B Plan in any
fiscal year, John Hancock Funds may carry these expenses forward, provided,
however that the Trustees may terminate the Class B Plan and, thus, the Fund's
obligation to make further payments at any time. Accordingly, the Fund does not
treat unreimbursed expenses relating to the Class B shares as a liability of the
Fund. The Plans were approved by a majority of the voting securities of the
Fund. The Plans and all amendments were approved by the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plans (the
"Independent Trustees"), by votes cast in person at meetings called for the
purpose of voting on these Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides the
Fund with a written report of the amounts expended under the Plans and the
purpose for which these expenditures were made. The Trustees review these
reports on a quarterly basis.
During the fiscal year ended October 31, 1995, the Fund paid John Hancock
Funds the following amounts of expenses with respect to the Class A shares and
Class B shares of the Fund:
31
<PAGE>
<TABLE>
<CAPTION>
Expense Items
Printing and
Mailing of
Prospectus Compensation Expenses of Interest Carrying
to New to Selling John Hancock or Other Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C>
Class A shares $11,757 $515 $ 38,408 $ 32,699 $ -
Class B shares 72,409 0 981,260 182,342 731,696
</TABLE>
Each of the Plans provides that it 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. Each of the Plans provides that it may be
terminated without penalty (a) by vote of a majority of the Independent
Trustees, (b) by 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. Each of the Plans further provides
that it may not be amended to increase the maximum amount of the fees for the
services described therein without the approval of a majority of the outstanding
shares of the class of the Fund which has voting rights with respect to the
Plan. And finally, each of the Plans provides that no material amendment to the
Plan will, in any event, be effective unless it is approved by a vote of the
Trustees and the Independent Trustees of the Fund. The holders of Class A shares
and Class B 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 each Plan will benefit the holders of the applicable class of shares of the
Fund.
When the Fund seeks an Independent Trustee to fill a vacancy or as a
nominee for election by shareholders, the selection or nomination of the
Independent Trustee is, under resolutions adopted by the Trustees
contemporaneously with their adoption of the Plans, committed to the discretion
of the Committee on Administration of the Trustees. The members of the Committee
on Administration are all Independent Trustees and are identified in this
Statement of Additional Information under the heading "Those Responsible for
Management."
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
32
<PAGE>
utilize electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or
less are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
The Fund will not price its securities on the following national holidays:
New Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day;
Labor Day; Thanksgiving Day; and Christmas Day.
INITIAL SALES CHARGE ON CLASS A SHARES
Class A 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"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then they will only be issued for full shares. The Trustees reserve the
right to change or waive the Fund's minimum investment requirements and to
reject any order to purchase shares (including purchase by exchange) when in the
judgment of the Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares of the Fund owned
by the investor, 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 Investor Services Inc.
(Investor 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.
Combined Purchases. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined if made by
(a) an individual, his 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) certain
groups of four or more individuals making use of salary deductions or similar
group methods of payment whose funds are combined for the purchase of mutual
fund shares. Further information about combined purchases, including certain
33
<PAGE>
restrictions on combined group purchases, is available from Investor Services or
a Selling Broker's representative.
Without Sales Charges. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee/Director or officer of the Fund; a Director or officer of the
Adviser and its affiliates 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, mother, father, sister, brother, mother-in-law,
father-in-law) 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 an 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 an approved affinity group financial services plan.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception of
the Fund account, may purchase Class A shares with no initial sales charge.
However, if the shares are redeemed within 12 months after the end of the
calendar year in which the purchase was made, a CDSC will be imposed at the
following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 million to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
34
<PAGE>
Class A shares may also be acquired without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
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 then being invested but
also the purchase price or current value of the Class A shares already held by
such person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of
the Fund and shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. The reduced sales charges are also applicable to
investments made over a specified period pursuant to a Letter of Intention (the
"LOI"), which should be read carefully prior to its execution by an investor.
The Fund offers two options regarding the specified period for making
investments under the LOI. All investors have the option of making their
investments over a specified period of thirteen (13) months. Investors who are
using the Fund as a funding medium for a qualified retirement plan, however, may
opt to make the necessary investments called for by the LOI over a forty-eight
(48) month period. These qualified retirement plans include group IRA, SEP,
SARSEP, TSA, 401(k), 403(b) and Section 457 plans. Such an investment (including
accumulations and combinations) must aggregate $100,000 or more invested during
the specified period from the date of the LOI or from a date within ninety (90)
days prior thereto, upon written request to Investor 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
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 Investor Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow Class A shares will be released. If the total investment specified in
the LOI is not completed, the Class A shares held in escrow may be redeemed and
the proceeds used as required to pay such sales charge as may be due. By signing
the LOI, the investor authorizes Investor Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
35
<PAGE>
DEFERRED SALES CHARGE ON CLASS B 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 shares which are redeemed within
six years of purchase will be subject to a contingent deferred sales charge
("CDSC") at the rates set forth in the Prospectus as a percentage of the dollar
amount subject to the CDSC. The charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
Class B shares being redeemed. Accordingly, no CDSC will be imposed on increases
in account value above the initial purchase prices, including Class B shares
derived from reinvestment of dividends or capital gains distributions. No CDSC
will be imposed on shares derived from reinvestment of dividends or capital
gains distributions.
Class B shares are not available to full-service defined contribution plans
administered by Investor Services or the Life Company 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 this number, 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 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 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. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
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.
36
<PAGE>
Example:
You have purchased 100 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:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
----
* Amount subject to CDSC $400
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 shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase. See the
Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the 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.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other plans qualified under
the Code) unless otherwise noted.
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code after age 70 1/2.
* Returns of excess contributions made to these plans.
37
<PAGE>
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans such as 401(k), 403(b), 457. In
all cases, the distribution must be free from penalty under the Code.
* Redemptions made to effect distributions from an Individual Retirement
Account either before age 59 1/2 or after age 59 1/2, as long as the
distributions are based on your life expectancy or the joint-and-last
survivor life expectancy of you and your beneficiary. These distributions
must be free from penalty under the 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.
For non-retirement accounts (please see above for retirement account waivers):
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 10% of your account value at
the time you established your periodic withdrawal plan and 10% of the value
of subsequent investments (less redemptions) in that account at the time
you notify Investor Services. (Please note, this waiver does not apply to
periodic withdrawal plan redemptions of Class A shares that are subject to
a CDSC.)
Please see matrix for reference.
38
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived 10% of account
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
Between 59 1/2 Only Life 10% of account
and 70 1/2 Waived Waived Waived Expectancy value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived for
rollover, or
annuity
payments. Not 10% of account
waived if paid Waived for Waived for Waived for value annually
directly to annuity annuity annuity in periodic
participant. payments 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
- ------------------------------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- ------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services at the time you make your redemption. The waiver will be
granted once Investor 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, he would incur a brokerage charge. Any such
securities would be valued for the purposes of making such payment at the same
value as used in determining net asset value. 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.
39
<PAGE>
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of
the Fund for shares of the same class in any other John Hancock fund offering
that class.
Systematic Withdrawal Plan. The Fund permits the establishment of a
Systematic Withdrawal Plan. Payments under this plan represent proceeds from the
redemption of Fund shares. Since the redemption price of the Fund shares may be
more or less than the shareholder's 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 recognition 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 Class A or Class B
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 shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase Class A and Class B shares
of the Fund 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 Investor Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is explained
more fully 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 Monthly Automatic
Accumulation Program may be revoked by Investor 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
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the processing date of any investment.
Reinvestment Privilege. 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 in any other 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 other John Hancock funds. If a CDSC was paid
40
<PAGE>
upon a redemption, a shareholder may reinvest the proceeds from this redemption
at net asset value in additional shares of the class from which the redemption
was made. The shareholder's account will be credited with the amount of any CDSC
charged upon the prior redemption and the new shares will continue to be subject
to the CDSC. The holding period of the shares acquired through reinvestment
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares. The Fund may modify or
terminate the reinvestment privilege 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."
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Fund 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 [two] series of the Trust, including
the Fund. The Declaration of Trust also authorizes the Trustees to classify and
reclassify the shares of the Fund, or any other series of the Fund, into one or
more classes. As of the date of this Statement of Additional Information, the
Trustees have authorized the issuance of two classes of shares of the Fund,
designated as Class A and Class B shares.
Class A and Class B shares of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
The holders of Class A shares and Class B shares have certain exclusive
voting rights on matters relating to their respective Rule 12b-1 distribution
plans.
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 and Class B shares
will be borne exclusively by that class, (ii) Class B shares will pay higher
distribution and service fees than Class A shares and (iii) each class of shares
will bear any other class expenses properly attributable to that class of
shares, subject to the conditions imposed by the Internal Revenue Service in
issuing rulings to funds with a multiple-class structure. Similarly, the net
asset value per share may vary depending on the class of shares purchased.
41
<PAGE>
In the event of liquidation, shareholders are entitled to share pro rata in
the net assets of the Fund available for distribution to such 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 by the Fund, 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 Fund'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 Fund.
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 Fund shareholder held
personally liable by reason of being or having been a shareholder. 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.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
TAX STATUS
The Fund is treated as a separate entity from any other series of the Trust
for federal income tax purposes. The Fund has qualified and has elected to be
treated as a "regulated investment company" under Subchapter M of the Code, and
intends to continue to so 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 taxable and
tax-exempt income (including net realized capital gains, if any) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
42
<PAGE>
The Fund will be subject to a four percent non-deductible Federal excise
tax on certain amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to seek to avoid or
minimize liability for such tax by satisfying such distribution requirements.
The Fund expects to qualify to pay "exempt-interest dividends," as defined
in the Code. To qualify to pay exempt-interest dividends, the Fund must, at the
close of each quarter of its taxable year, have at least 50% of the value of its
total assets invested in municipal securities whose interest is excluded from
gross income under Section 103(a) of the Code. In purchasing municipal
securities, the Fund intends to rely on opinions of nationally recognized bond
counsel for each issue as to the excludability of interest on such obligations
from gross income for federal income tax purposes. The Fund will not undertake
independent investigations concerning the tax-exempt status of such obligations,
nor does it guarantee or represent that bond counsels' opinions are correct.
Bond counsels' opinions will generally be based in part upon covenants by the
issuers and related parties regarding continuing compliance with federal tax
requirements. Tax laws enacted principally during the 1980's not only had the
effect of limiting the purposes for which tax-exempt bonds could be issued and
reducing the supply of such bonds, but also increased the number and complexity
of requirements that must be satisfied on a continuing basis in order for bonds
to be and remain tax-exempt. If the issuer of a bond or a user of a
bond-financed facility fails to comply with such requirements at any time,
interest on the bond could become taxable, retroactive to the date the
obligations was issued. In that event, a portion of the Fund's distributions
attributable to interest the Fund received on such bond for the current year and
for prior years could be characterized or recharacterized as taxable income. The
availability of tax-exempt obligations and the value of the Fund's portfolio may
be affected by restrictive federal income tax legislation enacted in recent
years or by similar future legislation.
If the Fund satisfies the applicable requirements, dividends paid by the
Fund which are attributable to tax exempt interest on municipal securities and
designated by the Fund as exempt-interest dividends in a written notice mailed
to its shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. The recipient of tax-exempt income is required
to report such income on his federal income tax return. However, a shareholder
is advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" under Section 147(a)(1) with respect to some or
all of the tax-exempt obligations held by the Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund is not deductible to the extent it is deemed related to the Fund's
exempt- interest dividends. Pursuant to published guidelines, the Internal
Revenue Service may deem indebtedness to have been incurred for the purpose of
43
<PAGE>
purchasing or carrying shares of the Fund even though the borrowed funds may not
be directly traceable to the purchase of shares.
Although all or a substantial portion of the dividends paid by the Fund may
be excluded by the Fund's shareholders from their gross income for federal
income tax purposes, the Fund may purchase specified private activity bonds, the
interest from which (including the Fund's distributions attributable to such
interest) may be a preference item for purposes of the federal alternative
minimum tax (both individual and corporate). All exempt-interest dividends from
the Fund, whether or not attributable to private activity bond interest, may
increase a corporate shareholder's liability, if any, for corporate alternative
minimum tax and will be taken into account in determining the extent to which a
shareholder's Social Security or certain railroad retirement benefits are
taxable.
Distributions other than exempt-interest dividends 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. Taxable distributions include distributions
from the Fund that are attributable to (i) taxable income, including but not
limited to taxable bond interest, recognized market discount income, original
issue discount income accrued with respect to taxable bonds, income from
repurchase agreements, income from securities lending, income from dollar rolls,
income from interest rate swaps, caps, floors and collars, and a portion of the
discount from certain stripped tax-exempt obligations or their coupons or (ii)
capital gains from the sale of securities or other investments (including from
the disposition of rights to when-issued securities prior to issuance) or from
options and futures contracts. 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.
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. Amounts that are not allowable as a deduction in computing
taxable income, including expenses associated with earning tax-exempt interest
income, do not reduce the Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of the Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
44
<PAGE>
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.
After the close of each calendar year, the Fund will inform shareholders of
the federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative minimum tax. Shareholders who have not held shares of
the Fund for its full taxable year may have designated as tax-exempt or as a tax
preference item a percentage of distributions which is not equal to the actual
amount of tax-exempt income or tax preference item income earned by the Fund
during the period of their investment in the Fund.
The amount of 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 or to enter into options
or futures transactions. At the time of an investor's purchase of Fund shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio. Consequently, subsequent distributions on
these shares from such appreciation may be taxable to such investor even if the
net asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) 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 Class A shares of the Fund cannot be taken into account for purposes
of determining gain or loss on the redemption or exchange of such shares within
ninety (90) days after their purchase to the extent Class A shares of the Fund
or another John Hancock fund are subsequently acquired without payment of a
sales charge pursuant to the reinvestment or exchange privilege. This
disregarded charge will result in an increase in the shareholder's tax basis in
the shares subsequently acquired. Also, any loss realized on a redemption or
45
<PAGE>
exchange may be disallowed to the extent the shares disposed of are replaced
with other shares of the Fund within a period of sixty-one (61) days beginning
thirty (30) days before and ending thirty (30) days after the shares are
disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be disallowed to the extent of any
exempt-interest dividends paid with respect to such shares and, to the extent in
excess of the disallowed amount, 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.
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 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 this excess
and his pro rata share of these taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and, as noted above, would not be distributed to
shareholders. The Fund has no carryforwards available.
Dividends and capital gain distributions from the Fund will not qualify for
the dividends-received deduction for corporations.
The Fund is required to accrue income on any debt securities that have more
than a de minimis amount of original issue discount (or debt securities acquired
at a market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options and futures contracts may also
require the Fund to recognize gain without a concurrent receipt of cash.
However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
46
<PAGE>
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 intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations or municipal
obligations of issuers in the state in which a shareholder is subject to tax,
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 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. However, the Fund's
taxable distributions may not be subject to backup withholding if the Fund can
reasonably estimate that at least 95% of its distributions for the year will be
exempt-interest dividends. 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.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions. Certain options and futures transactions undertaken by the Fund
may cause the Fund to recognize gains or losses from marking to market even
though its positions have not been sold or terminated and affect the character
as long-term or short-term and timing of some capital gains and losses realized
by the Fund. Also, some of the Fund's losses on its transactions involving
options and futures contracts and/or offsetting or successor portfolio positions
may be deferred rather than being taken into account currently in calculating
the Fund's taxable income or gain. Certain of such transactions may also cause
47
<PAGE>
the Fund to dispose of investments sooner than would otherwise have occurred.
These transactions may thereafter affect the amount, timing and character of the
Fund's distributions to shareholders. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options and futures transactions in order to seek to minimize any potential
adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as insurance companies and financial institutions. Dividends
(including exempt-interest 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 nonresident alien withholding tax at the rate of 30% (or a lower
rate under an applicable tax treaty), on amounts treated as ordinary dividends
from the Fund and, unless an effective IRS Form W-8 or authorized substitute for
Form W-8 is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisors regarding such
treatment and the application of foreign taxes to an investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended April 30, 1996, the annualized yield on Class A
and Class B shares of the Fund was 4.96% and 4.49%, respectively. The average
annual total return of the Class B shares of the Fund for the 1 and 5 year
periods ended April 30, 1996 and since inception on August 29, 1986 was 1.22%,
6.45% and 7.95%, respectively and reflect payment of the applicable CDSC at the
end of the period.
The average annual total return of Class A shares of the Fund for the 1
year period ended April 30, 1996 and since inception on January 3, 1992 was
2.13% and 5.48%, respectively and reflect payment of the maximum sales charge of
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<PAGE>
4.5%. 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:
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:
Yield = 2 ([( a - b) + 1] 6 - 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).
The Fund may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Fund which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt. The tax equivalent yields for the
Fund's Class A and Class B Shares at the 36% tax rate for the 30-day period
ended April 30, 1996, were 7.75% and 7.02%, respectively.
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1 year, 5 year and 10 year periods that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
n _____
T = \ /ERV/P - 1
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<PAGE>
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of hypothetical $1,000 investment made at the
beginning of the 1 year, 5 year and life-of-fund periods.
Because each share has its own sales charge and fee structure, the classes
have different performance results. In the case of Class A shares or Class B
shares, this calculation assumes the maximum sales charge is included in the
initial investment or the CDSC applied at the end of the period. This
calculation also assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period.
In addition to average annual total returns, the 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 4.5% sales charge
on Class A shares or the 5% CDSC on Class B shares into account. 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 on Class A shares and the CDSC on Class B shares from a total return
calculation produces a higher total return figure.
In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest is
used in lieu of the yield to maturity. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value exceeds the then-remaining portion of original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value is less than the then-remaining portion of original issue discount
(market premium), the yield to maturity is based on the market value.
From time to time, in reports and promotional literature, the Fund's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income Fund
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<PAGE>
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MORNINGSTAR, and BARRON'S may also be utilized.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by its investment committee, 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." Investments in debt securities are generally traded on a net
basis through dealers acting for their own account as principals and not as
brokers; no brokerage commissions are payable on such transactions.
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 in 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
51
<PAGE>
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 make no commitment to allocate portfolio
transactions upon any prescribed basis. While the 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 on October 31, 1995, 1994, and 1993, the Fund paid brokerage
commissions in the amount of $0, $10,051, and $0, 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 October 31,
1995, the Fund did not pay commissions to compensate brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Freedom Securities Corporation and its subsidiaries,
Tucker Anthony Incorporated, John Hancock Distributors, Inc. ("Distributors")
and Sutro & Company, Inc., ("Sutro") (each an "Affiliated Broker"). Pursuant to
procedures established by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through Affiliated Brokers. During the years ended October 31, 1995, 1994 and
1993, the Fund did not execute any portfolio transactions with Affiliated
Brokers.
Any of the Affiliated Brokers may act as broker for the Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the Investment
Company Act. Commissions paid to an Affiliated Broker must be at least as
favorable as those which the Trustees believe to be contemporaneously charged by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold. A transaction would not be placed with an
Affiliated Broker if the Fund would have to pay a commission rate less favorable
than the Affiliated Broker's contemporaneous charges for comparable transactions
for its other most favored, but unaffiliated, customers except for accounts for
which the Affiliated Broker acts as a clearing broker for another brokerage
52
<PAGE>
firm, and any customers of the Affiliated Broker not comparable to the Fund as
determined by a majority of the Trustees who are not interested persons (as
defined in the Investment Company Act) of the Fund, the Adviser or the
Affiliated Broker. Because the Adviser, which is affiliated with the Affiliated
Brokers, has, as an investment adviser to the Fund, the obligation to provide
investment management services, which includes elements of research and related
investment skills, such research and related skills will not be used by the
Affiliated Brokers as a basis for negotiating commissions at a rate higher than
that determined in accordance with the above criteria. The Fund will not effect
principal transactions with Affiliated Brokers.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation ("Investor Services"), P.O. Box
9116, Boston, MA 02205-9116, a wholly-owned indirect subsidiary of the Life
Company, is the transfer and dividend paying agent of the Fund. The Fund pays an
annual fee of $19.00 per Class A shareholder account and $21.50 per Class B
shareholder account, plus certain out-of-pocket expenses. These expenses are
aggregated and charged to the Fund and allocated to each class on the basis of
the relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and Investors Bank & Trust Company, 89 South Street, Boston,
Massachusetts 02110. Under the custodian agreement, Investors Bank & Trust
Company performs custody, portfolio and fund accounting services.
INDEPENDENT ACCOUNTANTS
The independent Accountants of the Fund are Price Waterhouse LLP, 160
Federal Street, Boston, Massachusetts 02110. Price Waterhouse LLP audits and
renders an opinion on the Fund's annual financial statements and prepares the
Fund's annual Federal income tax return.
53
<PAGE>
APPENDIX A
Moody's describes its lower ratings for corporate bonds as follows:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterized
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represented obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Standard & Poor's 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.
A-1
<PAGE>
Moody's describes its three highest ratings for commercial paper as follows:
Issuers rated P-1 (or related supporting institutions) have a superior capacity
for repayment of short-term promissory obligations. P-1 repayment capacity will
normally be evidenced by the following characteristics: (1) leading market
positions in well- established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate reliance on
debt and ample asset protections; (4) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated P-2 (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Standard & Poor's describes its lower ratings for corporate bonds as follows:
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C Debt rated 'BB', 'B', 'CCC', 'CC" and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
A-2
<PAGE>
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
Standard & Poor's describes its three highest ratings for commercial paper as
follows:
A-1. This designation indicated that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Issuers rated P-2 (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
A-3
<PAGE>
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.
A-4
<PAGE>
APPENDIX B
EQUIVALENT YIELDS:
Tax Exempt vs. Taxable Yield
The table below shows the effect of the tax status of municipal obligations
on the yield received by their holders under the regular federal income tax laws
that apply to 1996. It gives the approximate yield a taxable security must earn
at various income brackets to produce after-tax yields.
<TABLE>
<CAPTION>
TAX-FREE YIELDS 1996 TAX TABLE
Single Return Joint Return Marginal Tax-Exempt Yield
- ------------- ------------ Income ---------------------------------------------------
(Taxable Income) Tax 4% 5% 6% 7% 8% 9% 10%
---------------- Bracket
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-24,000 $0-40,100 15.0% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
$24,001-58,150 $40,101-96,900 28.0% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
$58,151-121,300 $96,901-147,700 31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
$121,301-263,750 $147,701-263,750 36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
Over $263,750 Over $263,750 39.6% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
</TABLE>
It is assumed that an investor filing a single return is not a "head of
household," a "married individual filing a separate return," or a "surviving
spouse." The table does not take into account the effects of reductions in the
deductibility of itemized deductions or the phaseout of personal exemptions for
taxpayers with adjusted gross incomes in excess of specified amounts. Further,
the table does not attempt to show any alternative minimum tax consequences,
which will depend on each shareholder's particular tax situation and may vary
according to what portion, if any, of the Fund's exempt-interest dividends is
attributable to interest on certain private activity bonds for any particular
taxable year. No assurance can be given that the Fund will achieve any specific
tax- exempt yield or that all of its income distributions will be tax-exempt.
Distributions attributable to any taxable income or capital gains realized by
the Fund will not be tax- exempt.
The information set forth above is as of the date of this Statement of
Additional Information. Subsequent tax law changes could result in prospective
or retroactive changes in the tax brackets, tax rates, and tax-equivalent yields
set forth above.
B-1
<PAGE>
This table is for illustrative purposes only and is not intended to imply
or guarantee any particular yield from the Fund. While it is expected that a
substantial portion of the interest income distributed to the Fund's
shareholders will be exempt from federal income taxes, portions of such
distributions from time to time may be subject to federal income taxes.
B-2
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
PART C.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements listed below are included in and incorporated
by reference into Part B of the Registration Statement from the 1995 Annual
Report to Shareholders for John Hancock Tax-Exempt Series Fund for the year
ended August 31, 1995 (filed electronically on October 25, 1995 file nos.
811-5079 and 33-12947; accession numbers 000950135-95-002209 and from the 1996
Semi-Annual to Shareholders for the period ended February 29, 1996 (filed
electronically on May 7, 1996 file no. 811-5079 and 33-12947; accession numbers
0001010521-96-000060 and the 1995 Annual Report to Shareholders for John Hancock
Managed Tax-Exempt Fund for the year ended October 31, 1995 (filed
electronically on January 3,, 1996 file nos. 811-3999 and 2-90305; accession
numbers 000950135-96-000057 and from the 1996 Semi-Annual to Shareholders for
the period ended April 30, 1996 (filed electronically on July 1, 1996 file
811-3999 and 2-90305; accession numbers 0001010521-96-000188.
John Hancock California Tax-Free Fund
John Hancock New York Tax-Free Fund
Statement of Assets and Liabilities as of August 31, 1995.
Statement of Operations from the year ended August 31, 1995.
Statement of Changes in Net Assets for each of the two years in the
period ended December 31.
Financial Highlights for each of the periods indicated therein.
Notes to Financial Statements.
Schedule of Investments as of August 31, 1995.
Statement of Assets and Liabilities as of February 29, 1996.
Statement of Operations from the year ended February 29, 1996.
Statement of Changes in Net Assets for each of the two years in the
period ended February 29.
Financial Highlights for each of the periods indicated therein.
Notes to Financial Statements.
Schedule of Investments as of February 29, 1996.
John Hancock Managed Tax-Exempt Fund
Statement of Assets and Liabilities as of October 31, 1995.
Statement of Operations from the year ended October 31, 1995.
Statement of Changes in Net Assets for each of the two years in the
period ended October 31.
Financial Highlights for each of the periods indicated therein.
Notes to Financial Statements.
Schedule of Investments as of October 31, 1995.
C-1
<PAGE>
Statement of Assets and Liabilities as of April 30, 1996.
Statement of Operations from the year ended April 30, 1996.
Statement of Changes in Net Assets for each of the two years in the
period ended April 30.
Financial Highlights for each of the periods indicated therein.
Notes to Financial Statements.
Schedule of Investments as of April 30, 1996.
(b) Exhibits:
The exhibits to this Registration Statement are listed in the Exhibits
Index hereto and are incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant
No person is directly or indirectly controlled by or under common control
with Registrant.
C-2
<PAGE>
Item 26. Number of Holders of Securities
As of June 30, 1996 the number of record holders of shares of Registrant
was as follows:
Title of Class Number of Record Holders
-------------- ------------------------
(Shares of Beneficial Interest,
without par value)
John Hancock Tax-Exempt Series Fund-
Massachusetts Tax-Free 2,280
New York Tax-Free 2,454
Managed Tax-Exempt Fund - Class A 1,235
Managed Tax-Exempt Fund - Class B 4,136
Item 27. Indemnification
(a) Under Registrant's Declaration of Trust. Sections 4.1, 4.2 and 4.3 of
Article VI of the Registrant's Amended and Restated Declaration of Trust provide
for indemnification of the Registrant's Trustees and Officers under certain
circumstances. A copy of the Registrant's Amended and Restated Declaration of
Trust is attached as Exhibit 1 to this Post-Effective Amendment No. 10 to the
Registration Statement of the Registrant.
(b) Under the Distribution Agreement. Under Section 12 of the Distribution
Agreement, John Hancock Funds, Inc. ("John Hancock Funds" ) has agreed to
indemnify the Registrant and its Trustees, officers and controlling persons
against claims arising out of certain acts and statements of John Hancock Funds.
Section 9(a) of the By-Laws of the Insurance Company provides, in effect,
that the Insurance Company will, subject to limitations of law, indemnify each
present and former director, officer and employee of the of the Insurance
Company who serves as a Trustee or officer of the Registrant at the direction or
request of the Insurance Company against litigation expenses and liabilities
incurred while acting as such, except that such indemnification does not cover
any expense or liability incurred or imposed in connection with any matter as to
which such person shall be finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best interests of the
Insurance Company. In addition, no such person will be indemnified by the
Insurance Company in respect of any liability or expense incurred in connection
with any matter settled without final adjudication unless such settlement shall
have been approved as in the best interests of the Insurance Company either by
vote of the Board of Directors at a meeting composed of directors who have no
interest in the outcome of such vote, or by vote of the policyholders. The
Insurance Company may pay expenses incurred in defending an action or claim in
advance of its final disposition, but only upon receipt of an undertaking by the
person indemnified to repay such payment if he should be determined to be
entitled to indemnification.
C-3
<PAGE>
Article IX of the respective By-Laws of John Hancock Funds and the Adviser
provide as follows:
"Section 9.01. Indemnity: Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall be indemnified by the Corporation
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and the liability was not
incurred by reason of gross negligence or reckless disregard of the duties
involved in the conduct of his office, and expenses in connection therewith may
be advanced by the Corporation, all to the full extent authorized by the law."
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such as person."
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of
Registrant pursuant to the Registrant's Amended and Restated Articles of
Incorporation, Article 10.1 of the Registrant's By-Laws, The underwriting
Agreement, the By-Laws of Distributors, the Adviser, or the Insurance Company or
otherwise, Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Investment
Adviser, reference is made to Forms ADV (801-8124) filed under the Investment
Advisers Act of 1940, herein incorporated by reference.
Item 29. Principal Underwriters
The Registrant's sole principal underwriter is JH Funds, Inc., which also
acts as principal underwriter for the following investment companies: John
Hancock Institutional Series Trust, John Hancock Sovereign Bond Fund, John
Hancock Sovereign Investors Fund, Inc., John Hancock Special Equities Fund,
C-4
<PAGE>
John Hancock Strategic Series, John Hancock Tax-Exempt Series Fund, John
Hancock Technology Series, Inc., John Hancock Limited-Term Government Fund,
John Hancock World Fund, Freedom Investment Trust, Freedom Investment Trust
II, Freedom Investment Trust III, John Hancock Bond Fund, John Hancock
California Tax-Free Income Fund, John Hancock Cash Reserve, Inc., John
Hancock Current Interest, John Hancock Investment Trust, John Hancock
Series, Inc. and John Hancock Tax-Free Bond Trust.
(b) The following table lists, for each director and officer of JH Funds,
Inc., the information indicated.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. Director, Chairman, President and Trustee, Chairman and Chief
101 Huntington Avenue Chief Executive Officer Executive Officer
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Chief Compliance
P.O. Box 111 Officer
Boston, Massachusetts
Robert G. Freedman Director Chairman and Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
Stephen M. Blair Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
James W. McLaughlin Senior Vice President None
101 Huntington Avenue and
Boston, Massachusetts Chief Financial Officer
David A. King Director None
101 Huntington Avenue
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
C-5
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
William S. Nichols Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
John A. Morin Vice President and Secretary Vice President
101 Huntington Avenue
Boston, Massachusetts
Susan S. Newton Vice President Vice President
101 Huntington Avenue and Secretary
Boston, Massachusetts
Christopher M. Meyer Second Vice President and None
101 Huntington Avenue Treasurer
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John Goldsmith Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-6
<PAGE>
Richard O. Hansen Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Foster L. Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David F. D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington avenue
Boston, Massachusetts
Anthony P. Petrucci Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Suite 950
Albuquerque, New Mexico
Keith Harstein Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
</TABLE>
(c) None.
C-7
<PAGE>
Item 30. Location of Accounts and Records
Registrant maintains the records required to be maintained by it under Rules
31a-1 (a), 31a-a(b), and 31a-2(a) under the Investment Company Act of 1940 as
its principal executive offices at 101 Huntington Avenue, Boston Massachusetts
02199-7603. Certain records, including records relating to Registrant's
shareholders and the physical possession of its securities, may be maintained
pursuant to Rule 31a-3 at the main office of Registrant's Transfer Agent and
Custodian.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable
(c) The Registrant on behalf of each of its each of its series undertakes
to furnish each person to whom a prospectus is delivered with a copy of such
series' annual report to shareholders, upon request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boston, and the Commonwealth of Massachusetts on the
12th day of July, 1996.
JOHN HANCOCK TAX EXEMPT SERIES FUND
By: /s/ Edward J. Boudreau, Jr.
---------------------------
Edward J. Boudreau, Jr.*
Chairman
Pursuant to the requirements of the Securities Act of 1933, the
Registration has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
- ------------------------ Chairman
Edward J. Boudreau, Jr.* (Principal Executive Officer)
/s/James B. Little
- ------------------------ Senior Vice President and Chief
James B. Little Financial Officer (Principal July 12, 1996
Financial and Accounting Officer)
- ------------------------ Trustee
Dennis S. Aronowitz*
- ------------------------ Trustee
Richard P. Chapman, Jr.*
- ------------------------ Trustee
William J. Cosgrove*
- ------------------------ Trustee
Douglas M. Costle*
- ------------------------ Trustee
Leland O. Erdahl*
- ------------------------ Trustee
Richard A. Farrell*
- ------------------------ Trustee
Gail D. Fosler*
- ------------------------ Trustee
William F. Glavin*
- ------------------------ Trustee
Anne C. Hodsdon*
C-9
<PAGE>
- ------------------------ Trustee
John A. Moore
- ------------------------ Trustee
Patti McGill Peterson*
- ------------------------ Trustee
John W. Pratt*
- ------------------------ Trustee
Richard S. Scipione*
- ------------------------ Trustee
Edward J. Spellman*
*By: /s/Susan S. Newton July 12, 1996
------------------
Susan S. Newton
Attorney-in-Fact under
Powers of Attorney dated
May 21, 1996, filed herewith
</TABLE>
C-10
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee of each of the above listed Trusts, each a
Massachusetts business trust, does hereby severally constitute and appoint
EDWARD J. BOUDREAU, JR., SUSAN S. NEWTON, AND JAMES B. LITTLE, 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 21st day of May, 1996.
/s/Dennis S. Aronowitz /s/William F. Glavin
- ----------------------------- ------------------------------
Dennis S. Aronowitz William F. Glavin
/s/Edward J. Boudreau, Jr. /s/ Anne C. Hodsdon
- ----------------------------- ------------------------------
Edward J. Boudreau, Jr. Anne C. Hodsdon
/s/Richard P. Champman, Jr. /s/Patti McGill Peterson
- ----------------------------- ------------------------------
Richard P. Chapman, Jr. Patti McGill Peterson
/s/William J. Cosgrove
- ----------------------------- ------------------------------
William J. Cosgrove John A. Moore
/s/Douglas M. Costle /s/John W. Pratt
- ----------------------------- ------------------------------
Douglas M. Costle John W. Pratt
/s/Leland O. Erdahl /s/Richard S. Scipione
- ----------------------------- ------------------------------
Leland O. Erdahl Richard S. Scipione
/s/Richard A. Farrell /s/Edward J. Spellman
- ----------------------------- ------------------------------
Richard A. Farrell Edward J. Spellman
/s/Gail D. Fosler
- -----------------------------
Gail D. Fosler
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
99.B1 Declaration of Trust of Registrant dated March 24, 1987.*
99.B1.1 Amendment to Declaration of Trust dated March 24, 1987*
99.B1.2 Amendment to Declaration of Trust Termination of Series dated
September 15, 1995.*
99.B2 By-Laws as adopted on March 24, 1987.*
99.B3 None.
99.B4 Specimen share certificate for John Hancock Tax-Exempt Series
Fund, New York Portfolio.*
.
99.B4.1 Specimen share certificate for John Hancock Tax-Exempt Series
Fund, Massachusetts Portfolio.*
99.B5 Investment Management Contract between the Registrant and John
Hancock Advisers, Inc. dated May 5, 1987 and Amendment dated
December 19, 1989.*
99.B6 Distribution Agreement with John Hancock Broker Distribution
Services, Inc. dated August 1, 1991.*
99.B6.1 Form of Soliciting Dealer Agreement between John Hancock Broker
Distribution Services, Inc. and Selected Dealers.*
99.B7 None.
99.B8 Master Custodian Agreement with Registrant and Investors Bank
and Trust Company.*
99.B9 Transfer Agency and Service Agreement between Registrant and
John Hancock Fund Services, Inc. dated January 1, 1991.*
99.B10 None
99.B11 Auditors Consent+
99.B12 None
99.B13 Subscription Agreement between Registrant and John Hancock
Advisers, Inc.*
<PAGE>
99.B14 None
99.B15 Amended and Restated Distribution Plan for Class A shares
between John Hancock Tax-Exempt Series Fund and John Hancock
Funds, Inc.*
99.B16 Working papers showing yield calculation for yield and total
return.*
27.1 Tax-Exempt Series-MA-Annual+
27.2 Tax-Exempt Series-NY-Annual+
27.3 Tax-Exempt Series-MA-Semi+
27.4 Tax-Exempt Series-NY-Semi+
27.5 Managed Tax-Exempt Class A Annual+
27.6 Managed Tax-Exempt Class B Annual+
27.7 Managed Tax-Exempt Class A Semi+
27.8 Managed Tax-Exempt Class B Semi+
* Previously filed electronically with post-effective amendment number 10
(file nos. 811-5079 and 33-12947) on December 25, 1995, accession number
0000950156-95-000881.
+ Filed herewith.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statements of Additional Information constituting parts of this Post Effective
Amendment No. 11 to the Registration Statement on Form N-1A (the "Registration
Statement") of our reports dated October 17, 1995 and December 18, 1995,
relating to the financial statements and financial highlights appearing in the
August 31, 1995 and October 31, 1995 Annual Reports to Shareholders of the John
Hancock Tax-Exempt Series Fund (Massachusetts Portfolio and New York Portfolio)
and John Hancock Managed Tax-Exempt Fund, respectively, which financial
statements and financial highlights are also incorporated by reference into the
Registration statement. We also consent to the references to us under the
headings "Independent Accountants" in such Statements of Additional Information
and under the heading "Financial Highlights" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
Boston, Massachusetts
July 11, 1996
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<NAME> JOHN HANCOCK MASSACHUSETTS TAX-FREE INCOME FUND
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<NAME> JOHN HANCOCK MANAGED TAX-EXEMPT FUND, CLASS A
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<NAME> JOHN HANCOCK MANAGED TAX-EXEMPT FUND, CLASS B
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