JOHN HANCOCK
TAX-EXEMPT SERIES FUND
Massachusetts Tax-Free Income Fund
New York Tax-Free Income Fund
Class A and Class B Shares
Statement of Additional Information
January 1, 1997
This Statement of Additional Information provides information about
John Hancock Tax-Exempt Series Fund (the "Trust") and its two series, the
Massachusetts Tax-Free Income Fund and the New York Tax-Free Income Fund (each a
"Fund" and together, the "Funds"), in addition to the information that is
contained in the combined Tax-Free Income Funds' Prospectus (the "Prospectus").
The Funds are non-diversified series of the Trust.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus, a copy of which can be obtained free
of charge by writing or telephoning:
John Hancock Signature Services, Inc.
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Trust ............................................. 2
Investment Objective and Policies ..................................... 2
Special Risks ......................................................... 13
Ratings................................................................ 18
Investment Restrictions ............................................... 20
Those Responsible For Management ...................................... 23
Investment Advisory And Other Services ................................ 33
Distribution Contracts ................................................ 35
Net Asset Value ....................................................... 37
Initial Sales Charge on Class A Shares ................................ 38
Deferred Sales Charge on Class B Shares ............................... 40
Special Redemptions ................................................... 42
Additional Services And Programs ...................................... 43
Description Of The Fund's Shares ...................................... 44
Tax Status ............................................................ 45
State Income Tax Information .......................................... 49
Calculation Of Performance ............................................ 51
Brokerage Allocation .................................................. 53
Transfer Agent Services ............................................... 55
Custody Of Portfolios ................................................. 55
Independent Accountants ............................................... 55
Appendix............................................................... A-1
Financial Statements .................................................. F-1
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ORGANIZATION OF THE TRUST
The Trust is an open-end management investment company presently
consisting of two non-diversified series which are described below.
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 Fund. Prior to July 1,
1996, the Massachusetts Tax-Free Income Fund (the "Massachusetts Fund") and the
New York Tax-Free Income Fund (the "New York Fund") were known as the
Massachusetts Portfolio and the New York Portfolio, respectively. 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
Massachusetts Fund. The Massachusetts Fund 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. The
Massachusetts Fund seeks to provide the maximum level of tax-exempt income that
is consistent with preservation of capital.
New York Fund. The New York Fund 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. The New
York Fund seeks to provide the maximum level of tax-exempt income that is
consistent with preservation of capital.
There is no assurance that the Funds will achieve their respective
investment objectives.
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 regard to whether the interest income
thereon is exempt from the personal income tax of any state.
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 Fund will be made in:
(1) Tax-Exempt Bonds which at the time of purchase 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.
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(2) Tax-Exempt Bonds which are rated BBB or BB by Standard &
Poor's or by Fitch or Baa or Ba by Moody's, or which are
unrated but are considered by the Adviser to be of comparable
quality. Not more than one-third of a Fund'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, 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.
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.
The interest income on certain private activity bonds (including each
Fund's distributions to its shareholders attributable to such interest) may be
treated as a tax preference item under the Federal alternative minimum tax. The
Funds will not include tax-exempt bonds generating this income for purposes of
measuring compliance with the 80% fundamental investment policy described in the
Prospectus.
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:
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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.
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. Neither Fund 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 Fund.
Lower Rated High Yield "High Risk" Debt Obligations. Each Fund 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 respond to short-term market developments to a greater extent than for
higher rated securities, because these developments 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 Fund's exposure to the risks associated
with lower rated securities. Because each Fund invests in securities in the
lower rated categories, the achievement of each Fund's goals is more dependent
on the Adviser's ability than would be the case if each Fund 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, the portfolio manager
of each Fund 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 Fund 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, because of their lower acquisition
cost tend to sell on a yield basis approximating current interest rates.
Additional Risks. Securities in which a Fund 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
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may well be introduced in the future. If it appeared that the availability of
Tax-Exempt Bonds for investment by a Fund and the value of the Fund's
investments could be materially affected by such changes in law, the Trustees
would reevaluate such Fund's investment objective and policies and consider
changes in the structure of the Fund or its dissolution.
Short-Term Trading and Portfolio Turnover. Each Fund may attempt to maximize
current income through short-term portfolio trading. This will involve selling
portfolio instruments and purchasing different instruments to take advantage of
yield disparities in different segments of the market for government
obligations. Short- term trading may have the effect of increasing portfolio
turnover rate. The portfolio turnover rate for a Fund is calculated by dividing
the lower of that Fund'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 Fund during the year. A high rate of portfolio turnover (100%
or greater) involves corresponding higher transaction expenses and may make it
more difficult for a Fund to qualify as a regulated investment company for
Federal income tax purposes.
Non-Diversification. Each Fund has registered as a "non-diversified" investment
company, permitting the Adviser to invest more than 5% of the assets of each
Fund in the obligations of any one issuer. Since a relatively high percentage of
a Fund's assets may be invested in the obligations of a limited number of
issuers, the value of Fund shares may be more susceptible to any single
economic, political or regulatory event than 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
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.
Forward Commitment and When-Issued Securities. The Funds may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. A Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, a Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When a Fund engages in forward commitment and when-issued transactions,
it relies on the seller to consummate the transaction. The failure of the issuer
or seller to consummate the transaction may result in the 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 a Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities 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.
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Repurchase Agreements. In a repurchase agreement the Fund buys a security for a
relatively short period (usually not more than 7 days) subject to the obligation
to sell it back to the issuer at a fixed time and price plus accrued interest.
The Funds 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 Funds enter into repurchase agreements.
Each 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, a Fund could experience delays in liquidating
the underlying securities during the period in which the Fund seeks to enforce
its rights thereto, possible subnormal levels of income decline in value of the
underlying securities or lack of access to income during this period as well as
the expense of enforcing its rights. It is a non-fundamental policy of each Fund
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. A 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 a 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. A Fund will not enter into reverse repurchase
agreements and other borrowings exceeding in the aggregate 33 1/3% of the market
value of its total assets. To minimize various risks associates with reverse
repurchase agreements, the Fund will establish and maintain with the Funds
custodian a separate account consisting of highly liquid, marketable securities
in an amount at least equal to the repurchase prices of these securities (plus
accrued interest thereon) under such agreements. In addition, the Fund will not
purchase additional securities while all borrowings are outstanding. The Funds
will enter into reverse repurchase agreements only with federally insured banks
or savings and loan associations which are approved in advance as being
creditworthy by the Trustees. Under procedures established by the Trustees, the
Adviser will monitor the creditworthiness of the banks involved.
Options on Securities and Securities Indices. Each Fund may purchase
and write (sell) call and put options on any securities in which it may invest
on any securities index based on securities in which it may invest. These
options may be listed on national domestic securities exchanges or traded in the
over-the-counter market. Each Fund may write covered put and call options and
purchase put and call options to enhance total return, as a substitute for the
purchase or sale of securities, or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities written by a Fund
obligates a Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by a Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
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securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive a Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive a Fund of the opportunity
to profit from a decrease in the market price of the securities to be acquired
for its portfolio.
All call and put options written by each Fund are covered. A written
call option or put option may be covered by (i) maintaining cash or liquid
securities in a segregated account maintained by a Fund's custodian with a value
at least equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position. A written call option on
securities is typically covered by maintaining the securities that are subject
to the option in a segregated account. A Fund may cover call options on a
securities index by owning securities whose price changes are expected to be
similar to those of the underlying index.
A Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written.
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. Each Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. A Fund may also sell call and put options to close out its purchased
options.
The purchase of a call option would entitle a Fund, in return for the
premium paid, to purchase specified securities at a specified price during the
option period. A Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities or currency
exceeded the sum of the exercise price, the premium paid and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the
call option.
The purchase of a put option would entitle a Fund, in exchange for the
premium paid, to sell specified securities at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of a Fund's portfolio securities. Put
options may also be purchased by a Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not own. A
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying securities decreased below the exercise price sufficiently to
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
a Fund's portfolio securities. Under certain circumstances, the Fund may not be
treated as the tax owner of a security if the Fund has purchased a put option on
the same security. If this occurred, the interest on the security would be
taxable.
Each Fund's options transactions will be subject to limitations
established by each of the exchanges, boards of trade or other trading
facilities on which such options are traded. These limitations govern the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Adviser. An exchange, board of trade or
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other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that
a liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited
than with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To seek to increase
total return or hedge against changes in interest rates or securities prices,
each Fund may purchase and sell various kinds of futures contracts, and purchase
and write call and put options on these futures contracts. Each Fund may also
enter into closing purchase and sale transactions with respect to any of these
contracts and options. The futures contracts may be based on various securities
(such as U.S. Government securities), securities indices, and any other
financial instruments and indices. All futures contracts entered into by a Fund
are traded on U.S. exchanges or boards of trade that are licensed, regulated or
approved by the Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures contracts on securities will usually
be liquidated in this manner, a Fund may instead make, or take, delivery of the
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underlying securities whenever it appears economically advantageous to do so. A
clearing corporation associated with the exchange on which futures contracts are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with
more certainty than would otherwise be possible the effective price or rate of
return on portfolio securities or securities that a Fund proposes to acquire.
When interest rates are rising or securities prices are falling, a Fund can seek
to offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When interest rates are falling or securities prices
are rising, a Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
A Fund may, for example, take a "short" position in the futures market
by selling futures contracts in an attempt to hedge against an anticipated rise
in interest rates or a decline in market prices that would adversely affect the
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by the Fund or securities
with characteristics similar to those of the Fund's portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for a Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in a
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Adviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any differential by
having the Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting the
Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the
value of portfolio securities will be substantially offset by appreciation in
the value of the futures position. On the other hand, any unanticipated
appreciation in the value of a Fund's portfolio securities would be
substantially offset by a decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing
futures contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. A Fund may also purchase futures
contracts as a substitute for transactions in securities to alter the investment
characteristics of portfolio securities or to gain or increase its exposure to a
particular securities market.
Options on Futures Contracts. A Fund may purchase and write options on
futures for the same purposes as its transactions in futures contracts. The
purchase of put and call options on futures contracts will give a Fund the right
(but not the obligation) for a specified price to sell or to purchase,
respectively, the underlying futures contract at any time during the option
period. As the purchaser of an option on a futures contract, a Fund obtains the
benefit of the futures position if prices move in a favorable direction but
limits its risk of loss in the event of an unfavorable price movement to the
loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By writing
a call option, a Fund becomes obligated, in exchange for the premium (upon
exercise of the option) to sell a futures contract if the option is exercised,
which may have a value higher than the exercise price. Conversely, the writing
of a put option on a futures contract generates a premium which may partially
offset an increase in the price of securities that a Fund intends to purchase.
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However, the Fund becomes obligated (upon exercise of the option) to purchase a
futures contract if the option is exercised, which may have a value lower than
the exercise price. The loss incurred by a Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. A Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. Each Fund will engage in futures and related
options transactions either for bona fide hedging purposes or to seek to
increase total return as permitted by the CFTC. To the extent that a Fund is
using futures and related options for hedging purposes, futures contracts will
be sold to protect against a decline in the price of securities that the Fund
owns or futures contracts will be purchased to protect the Fund against an
increase in the price of securities it intends to purchase. Each Fund will
determine that the price fluctuations in the futures contracts and options on
futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. As evidence of its hedging intent, each Fund expects
that on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities in the cash market at the time when the futures or option
position is closed out. However, in particular cases, when it is economically
advantageous for a Fund to do so, a long futures position may be terminated or
an option may expire without the corresponding purchase of securities or other
assets.
To the extent that a Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. Each Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualifications as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts and
options obligating a Fund to purchase securities, require the Fund to establish
with the custodian a segregated account consisting of cash or liquid securities
in an amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may
reduce certain risks, these transactions themselves entail certain other risks.
For example, unanticipated changes in interest rates or securities prices may
result in a poorer overall performance for the Fund than if it had not entered
into any futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge each Fund's portfolio are various futures
on U.S. Government securities and securities indices. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and a
Fund may be exposed to risk of loss.
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Some futures contracts or options on futures may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit trading in a futures contract or related
option, which may make the instrument temporarily illiquid and difficult to
price. Commodity exchanges may also establish daily limits on the amount that
the price of a futures contract or related option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent a Fund from closing out
positions and limiting its losses.
Restricted Securities. Each Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. However, a Fund will not invest more than 15% of its
net assets in illiquid investments, which include repurchase agreements maturing
in more than seven days, securities that are not readily marketable and
restricted securities. However, if the Trustees determines, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, then such securities may be purchased
without regard to the 15% limit. The Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor each Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
Each Fund may acquire other restricted securities including securities
for which market quotations are not readily available. These securities may be
sold only in privately negotiated transactions or in public offerings with
respect to which a registration statement is in effect under the 1933 Act. Where
registration is required, a Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted securities will be priced at
fair market value as determined in good faith by the Fund's Trustees.
Lending of Securities. Each Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. Each
Fund may reinvest any cash collateral in short-term securities or money market
funds. When a Fund lends portfolio securities, there is a risk that the borrower
may fail to return the securities involved in the transaction. As a result, the
Fund may incur a loss or, in the event of the borrower's bankruptcy, the Fund
may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of each Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. Each Fund's investments
in participation interests are subject to its 15% of net assets limitation on
investments in illiquid securities. A Fund may purchase only those participation
interest that mature in 60 days or less, or, if maturing in more than 60 days,
that have a floating rate that is automatically adjusted at least once every 60
days.
The investment objective and policies described above under the caption
"Investment Objective and Policies" are not fundamental and may be changed by
the Trustees without shareholder approval. The policy of each Fund requiring
that under normal circumstances at least 80% of the Fund's net assets consist of
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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.
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 September unemployment rate in the
Commonwealth was 4.2% while the national unemployment rate was 5.2%.
The financial condition of the Commonwealth has improved over the last
five 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 to increased by 7.9% to approximately $12 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.
Prior Fiscal Years
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 totaled 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
Fiscal 1994 totaled $15.523 billion, approximately 5.6% higher than the Fiscal
1993 budgeted expenditures.
Fiscal 1995. Fiscal 1995 tax revenue collections totaled $11.163 billion.
Budgeted revenues and other sources, including non-tax revenue collected in
fiscal 1995 totaled $16.387 billion, approximately $837 million, or 5.4%, above
1994 budgeted revenues of $15.550 billion. Budgeted expenditures and other uses
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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 totaling $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.
The Commonwealth ended Fiscal Year 1996 showing a gain of 5.5% in total
revenues and an operating surplus of 2.8%. An unexpected increase in income tax
revenues accounted produced sufficient revenues to fully fund the Stabilization
Reserve to $543 million, a threshold set equal to 5% of tax revenues less debt
service, and establish a tax reduction reserve equal to $234 million. Monies in
the tax reduction reserve will be applied as one-time tax credit for Fiscal Year
1997.
Current Fiscal Year
Fiscal 1997. On June 30, 1996, the Governor enacted the Fiscal Year 1997 budget
into law. The 1997 budget provides for expenditures of $17.7 billion, an
increase of 4.8% over Fiscal 1996. This budget incorporates an expected decline
in income tax revenues and projects to maintain balance through the use of
reserves.
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. During the
first quarter of Fiscal 1997, tax collections were running about 2.6% above the
same period in Fiscal 1996 or close to the mid-range forecast for the
Commonwealth.
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.
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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
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 a Fund, a Fund's
net asset value, a Fund's ability to preserve or realize capital appreciation or
a Fund's liquidity could be impaired.
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
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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 Fund, even though securities of the
defaulting entity may not be held by the Fund.
Regional Economy
The New York State economy continues its slow recovery from the
national recession of 1990. Based upon forecasts for the national economy, the
State's Budget Division projects continuation of modest employment, wage and
income growth throughout the remainder of 1996 and the first half of 1997.
Employment should increase by 0.8% in 1996, representing a 0.2% improvement or
net expansion of 60,000 jobs over the 1995. The unemployment rate forecast calls
for 1996 to remain at about 6.4% or more than 1% above the national average.
This modest increase reflects an expected slowdown in the national economy,
restrained government spending, and restructuring in the health care and
financial sectors. Compared with the peak rate of 9.3% recorded in 1992, the
expected rate for 1996 and 1997 represent favorable improvements. Mirroring
national trends, personal income should grow by over 5% in 1996 with a slightly
lower rate expected for 1997. In part, the more robust 1996 growth stems from
increases in expected financial sector bonus payments.
1996-1997 Fiscal Year. On July 13, 1996, the Legislature enacted the State
Budget encompassing the 1996-1997 Fiscal Year extending from April 1, 1996 to
March 30, 1997. The Governor released the State's Financial Plan for Fiscal Year
1996-1997 on July 25, 1996. The Plan calls for General Fund revenues to increase
by $80 million or 0.25% over Fiscal 1996 representing a decline of 1.5% over
Fiscal 1995. Overall, State expenditures are anticipated to increase by 4.1%.
General Fund receipts are anticipated to total $33.1 billion and all state
revenues including Federal Funds should exceed $66 billion. The Financial Plan
continues tax reduction programs enacted in Fiscal 1995-1996 and includes a
repeal of the property gains tax. These programs project to reduce state tax
receipts by over $511 million during the current fiscal years which would be
partially offset by the transfer of sales tax receipts no longer needed to
agency debt service requirements, receipts from tax amnesty programs and
increased user fee revenues.
General Fund disbursements and transfers to other governmental funds,
combined, are estimated to total $33.1 billion in Fiscal Year 1996-97, a 2.5%
increase over the previous year. Expenditures for education, public protection,
and economic affairs project noteworthy increases over the previous year. These
increases are expected to partially offset by reductions for health and human
services, environmental affairs, transportation, general government and capital
expenditures. The expenditure program incorporates a $15 million deposit to the
Tax Stabilization Reserve Fund and $85 million to the Contingency Reserve Fund
which would bring the total General Fund balance to $337 million or 1% of
expenditures.
Borrowings for capital purposes are anticipated to total approximately
$2.7 billion in general obligation and contractual obligation debt. Of this
issuance, general obligations will total only $411 million or 15%. Major
projects to be undertaken with these funds include highway and bridge
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improvements, mental hygiene facilities, university building improvements,
housing programs and prison facilities.
During the first two quarters of Fiscal Year 1996-1997, tax receipts
exceeded expectations by $276 million. The majority of this improvement have
stemmed from increases in personal income taxes and business taxes. These
additional revenues have more than offset lower than expected user fee
collections to date. Disbursements over this period have been $415 million less
than planned, principally due to processing delays caused by the delayed
enactment of the State budget.
1995-1996 Fiscal Year. The State ended the 1995-1996 Fiscal Year with a surplus
of $129 million or 0.4% or expenditures. The closing fund balance of $287
million reflects balances of about $237 million in Tax Stabilization Reserve and
$50 million in the Contingency Reserve Fund.
General Fund receipts totaled $32.8 billion during the Fiscal Year.
Although revenues missed the targeted amounts by over $300 million, program cuts
enabled the state to generate an operating surplus. Reductions in personal
income tax and business tax rates lowered revenues by over $600 million, an
amount in line with projections. This shortfall in revenues was partially offset
by transfers which increased by about $200 million over Fiscal Year 1994-1995.
Disbursements from the General Fund declined by about $800 million or
2.4% over the previous fiscal year. The major shift in expenditures stemmed from
a $768 million reduction in Grants to local governments attributed primarily to
staff reductions and the implementation of program efficiencies in social
welfare programs. In addition, state operations fell by $355 million or 5.6%
compared with Fiscal Year 1994-1995.
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
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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 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.
Ratings
The current General Obligation ratings for the State of New York are A
by Moody's, A- by Standard & Poor's and A+ by Fitch Investors Services.
Current Budget. The Fiscal Year 1996-1997 budget which projects to generate a
slight surplus contains certain risks related to the underlying assumptions of
the budget. These risks relate primarily to the economy and tax collections over
the second half of the fiscal year. In the event that increases in interest
rates, changes in the health care industry, or other sectors could result in
slower economic growth and a deterioration in State revenues.
The recent enactment of Federal Welfare reform also could impact the
ability of the state to maintain budget balance. This new legislation places
additional performance burdens upon the state regarding caseload and work
activity compliance. Development of a suitable implementation plan strategy may
require the state to invest additional funds in anticipation of new
administrative responsibilities for the new programs. Failure by the state to
adopt appropriate legislation and develop an acceptable implementation plan by
July 1, 1997 could jeopardize the receipt of $2.3 billion in Federal block grant
funding available to the state.
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, 1996, there was outstanding a $38.2 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
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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
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 Fund.
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 since 1981, 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 $2.4 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 $17.3 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.
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 1996-1997 State Financial Plan projects total receipts of the
State's General Fund to be $33.1 billion, an increase of $81 million from the
prior fiscal year. State General Fund disbursements and transfers will be $597
million above the level of disbursements in 1995-1996. Grants to local
governments anticipated to increase include school aid and are projected to
increase $640 million from the prior fiscal year. Social services, including
19
<PAGE>
Medicaid, welfare and other social services, will be cut $50 million, largely
due to a reduction 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 1996-97 fiscal years and thereafter. Fiscal
difficulties experienced by the City of Troy, for example, could result in State
actions to allocate State resources in amounts that cannot yet be determined. 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 $15.9 billion as of the localities' fiscal year
ending during 1994. 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, and the City of
Troy commencing in 1995, under an appointed control board in response to fiscal
crises encountered by these municipalities.
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) computation of reimbursement for services to disabled students;
(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) contract
and tort claims; (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 Funds observe the following fundamental restrictions. The Funds 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
Funds' investment policies, and the pledge, mortgage or
hypothecation of the Funds' 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
20
<PAGE>
33-1/3% of the Fund's total assets (including the amount
borrowed) taken at market value. The Fund 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 pledging, mortgaging or hypothecating does not exceed 10%
of the Fund's total assets taken at market value.
(4) Act as an underwriter, except to the extent that in connection
with the disposition of Fund securities, the Fund may be
deemed to be an underwriter for purposes of the Securities Act
of 1933. A Fund 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 Fund from investing in
Tax-Exempt Bonds secured by real estate or interests therein.
(6) Make loans, except that the Fund (1) may lend portfolio
securities in accordance with the Fund's investment policies
in an amount up to 33 1/3% of the Fund's total assets taken at
market value, (2) enter into repurchase agreements, and (3)
purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit,
bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
(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 Fund's
investment policies.
(8) Purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after
such purchase, the value of its investments in such industry
would exceed 25% of its total assets taken at market value at
the time of each investment. (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 Fund.
The Funds observe the following non-fundamental restrictions. The Funds
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 Fund 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.
21
<PAGE>
(2) Purchase securities on margin or make short sales unless by
virtue of its ownership of other securities, the Fund has the
right to obtain securities equivalent in kind and amount to
the securities sold short and, if the right is conditional,
the sale is made upon the same conditions, except that the
Fund may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities.
(3) Purchase securities of an issuer (other than the U.S.
Government, its agencies or instrumentalities), if to the
Fund's knowledge, one or more of the Trustees or officers of
the Trust 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 Fund 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
Fund's total assets would be invested in the securities of
other investment companies, (ii) the Fund would hold more than
3% of the total outstanding voting securities of any one
investment company, or (iii) more than 5% of the Fund's total
assets would be invested in the securities of any one
investment company. These limitations do not apply to (a) the
investment of cash collateral, received by the Fund in
connection with lending the Fund's portfolio securities, in
the securities of open-end investment companies or (b) the
purchase of shares of any investment company in connection
with a merger, consolidation, reorganization or purchase of
substantially all of the assets of another investment company.
Subject to the above percentage limitations, the Fund may, in
connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase
securities of other investment companies within the John
Hancock Group of Funds. 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.
(5) Except for investments which, in the aggregate, taken at cost
do not exceed 5 percent of the Fund'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 Fund, taken at market value, would be invested in such
securities.
In order to permit the sale of the Funds 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 Fund and its
shareholders, the Fund 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.
22
<PAGE>
The fundamental restrictions of a Fund may not be changed without
approval of a majority of the outstanding voting securities of the respective
Fund. 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 Fund 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 Trust is managed by the Trustees of the Trust who
elect officers who are responsible for the day-to-day operations of the Trust
and the Funds and who execute policies formulated by the Trustees. Several of
the officers and Trustees of the Trust are also officers and directors of the
Adviser or officers and Trustees of the Funds' principal distributor, John
Hancock Funds, Inc. ("John Hancock Funds").
23
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), John
Hancock Signature Services, Inc.
("Signature Services"), First
Signature Bank and Trust Company and
Sovereign Asset Management
Corporation ("SAMCorp."); Director,
John Hancock Freedom Securities
Corporation, John Hancock Insurance
Agency, Inc. ("Insurance Agency,
Inc."), John Hancock Capital
Corporation and New England/Canada
Business Council; Member, Investment
Company Institute Board of
Governors; Director, Asia Strategic
Growth Fund, Inc.; Trustee, Museum
of Science; Vice Chairman and
President, the Adviser (until July
1992); Chairman, John Hancock
Distributors, Inc. (until April,
1994).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
24
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Dennis S. Aronowitz Trustee (3) Professor of Law, Emeritus, Boston
Boston University University School of Law; Trustee,
Boston, Massachusetts Brookline 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, MA 02147 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 (3) Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 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).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
25
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Douglas M. Costle Trustee (1, 3) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 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).
Leland O. Erdahl Trustee (3) Director, Santa Fe Ingredients
8046 Mackenzie Court Company of California, Inc. and
Las Vegas, NV 89129 Santa Fe Ingredients Company, Inc.
December 1928 (private food processing companies),
Uranium Resources, Inc.; President,
Stolar, Inc. (1987-1991); President,
Albuquerque Uranium Corporation
(1985-1992); Director,
Freeport-McMoRan Copper & Gold
Company, Inc., Hecla Mining Company,
Canyon Resources Corporation and
Original Sixteen to One Mines, Inc.
(1984-1987 and 1991-1995)
(management consultant).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
26
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard A. Farrell Trustee(3) President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 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 20815 economic and business research);
December 1947 Director, Unisys Corp. and H.B.
Fuller Company.
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, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Director,
Boston, MA 02199 The Berkeley Group, John Hancock
April 1953 Funds, Signature Services (since
October 1996); Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
27
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Dr. John A. Moore Trustee (3) President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee (3) Cornell Institute of Public Affairs,
Cornell University Cornell University (since August
Institute of Public Affairs 1996); President Emeritus of Wells
364 Upson Hall College and St. Lawrence University;
Ithica, NY 14853 Director, Niagara Mohawk Power
May 1943 Corporation (electric utility) and
Security Mutual Life (insurance).
John W. Pratt Trustee (3) Professor of Business Administration
2 Gray Gardens East at Harvard University Graduate
Cambridge, MA 02138 School of Business Administration
September 1931 (since 1961).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
28
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, Signature Services, John
August 1937 Hancock Distributors, Inc.,
Insurance Agency, Inc., John Hancock
Subsidiaries, Inc., SAMCorp. and NM
Capital; Trustee, The Berkeley
Group; Director, JH Networking
Insurance Agency, Inc.; Director,
John Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993)
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat Marwick LLP
259C Commercial Bldg. (retired June 1990).
Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, Signature
Services, SAMCorp., Insurance
Agency, Inc., Southeastern Thrift &
Bank Fund and NM Capital; Senior
Vice President, The Berkeley Group;
President, the Adviser (until
December 1994);
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
29
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds and Signature Services.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Counsel, John Hancock Mutual
Life Insurance Company.
Susan S. Newton Vice President and Secretary Vice President and Assistant
101 Huntington Avenue Secretary, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds,
March 1950 Signature Services; Secretary,
SAMCorp; Vice President, The
Berkeley Group, John Hancock
Distributors, Inc. (until 1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
30
<PAGE>
As of November 29, 1996, the officers and Trustees of the Trust as a
group beneficially owned less than 1% of the outstanding shares of the Fund. On
such date, the following shareholders were the only record holders and
beneficial owners of 5% or more of the Fund:
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers or
Trustees of one or more of the other funds for which the Adviser serves as
investment adviser.
<TABLE>
<CAPTION>
Class Number of shares Percentage of total
of beneficial interest outstanding shares of the
Name and Address of Shareholder Shares owned class of the Fund
- ------------------------------- ------ ----- -----------------
<S> <C> <C> <C>
Massachusetts
Wexford Clearing Corp FBO B 2,781.4680 46.40%
Eleanor Fiorello
7 Hampshire Circle
Woburn, MA 01801-5314
Nathaniel Rochester B 1,683.1950 28.08%
313 Washington St.
Duxbury, MA 02332-4543
Edward P. Boland B 1,194.0120 19.92%
Mary E. Boland JT Ten
87 Ridgeway Circle
Springfield, MA 01118-1129
Leonard Bono B 333.4240 5.56%
Patricia Bono JT Ten
7 Harold Street
Brockton, MA 02402-3439
New York B
Wexford Clearing Services Corp FBO B 8,596.9560 39.43%
Judith Ann Phetteplace
Box 162
Tribes Hill, NY 12177-0162
Wexford Clearing Services Corp FBO B 3,045.4140 13.97%
Ellison L. Elmer &
Phyllis H. Elmer JT Ten
226 Midland Ave.
Buffalo, NY 14223-2539
Wexford Clearing Services Corp FBO B 2,660.8720 12.20%
Mr. Louis I. Papineau &
Mrs. Dorothea L. Papineau JT Ten
424 College Heights, Apt. 3
Watertown, NY 13601-1847
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Class Number of shares Percentage of total
of beneficial interest outstanding shares of the
Name and Address of Shareholder Shares owned class of the Fund
- ------------------------------- ------ ----- -----------------
<S> <C> <C> <C>
New York
Bertram B. Campbell B 2,522.6040 11.57%
Delores A. Campbell JT Ten
2 Colonial Woods Lane
Building 2, Apt. A
Guilderland, NY 12084-3601
John Savello B 1,750.6970 8.03%
84-47 127th St
Kew Gardens, NY 11415-2826
Wexford Clearing Services Corp FBO B 1,444.9170 6.63%
Joseph Saborowski DPM &
Patricia Saborowski JT Ten
442 Guy Park Ave.
Amsterdam, NY 12010-1005
Laura Markowitz B 1,244.2410 5.71%
68 East Seamen
Freemont, NY 11580
</TABLE>
The following table provides information regarding the compensation
paid by the Funds 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 Trust are interested persons of the Adviser, are
compensated by the Adviser and receive no compensation from the Funds for their
services. The Trustees not listed below were not Trustees of the Fund during its
fiscal year ended August 31, 1996.
32
<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation From the
From the Funds1 funds and John Hancock Funds
Independent Trustees MA NY Complex to Trustees2
- -------------------- -- -- --------------------
<S> <C> <C> <C>
Dennis S. Aronowitz $ 811 $ 823 $ 72,450
Richard P. Chapman+ 830 842 75,200
William J. Cosgrove+ 811 823 72,450
Douglas Costle 29 30 75,350
Leland Erdahl 25 25 72,350
Richard Farrell 29 30 75,350
Gail D. Fosler 766 778 68,450
William Glavin+ 25 25 72,250
Bayard Henry* 751 762 23,700
Dr. John Moore 25 25 68,350
Patti McGill Peterson 25 25 72,100
John Pratt 25 25 72,350
Edward J. Spellman 816 828 73,950
------ ------ --------
TOTAL $4,968 $5,041 $894,300
</TABLE>
1 Compensation for the fiscal year ended August 31, 1996.
2 The total compensation paid by the John Hancock Funds Complex to the
Independent Trustees is as of December 31, 1996. As of this date there were
sixty-eight funds in the John Hancock Fund Complex, of which each of the
Independent Trustees served 36.
* Mr. Henry retired from his position as a Trustee effective April 26, 1996.
+ As of November 30, 1996, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for
Mr. Chapman was $63,475, Mr. Cosgrove was $132,535 and for Mr. Glavin was
$108,590 under the John Hancock Group of Funds Deferred Compensation Plan
for Independent Trustees.
INVESTMENT ADVISORY AND OTHER SERVICES
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 Funds and
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.
33
<PAGE>
Securities held by a Fund 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 Fund 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 Fund 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.
The Trust, on behalf of each Fund, has entered into investment advisory
agreements (collectively, the "Advisory Agreements"), each dated as of July 1,
1996, between the Trust and the Adviser. Pursuant to the respective Advisory
Agreements, the Adviser agreed to act as investment adviser and manager to the
Funds. As manager and investment adviser, the Adviser will: (a) furnish
continuously an investment program for the Funds 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 Funds' 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 Fund a fee computed and paid monthly based on a
stated percentage of the respective Fund'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 Fund bears all costs of its organization and operation, including
expenses of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund'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 Funds (including an allocable portion of the cost of the
Adviser's employees rendering such services to the subject Fund); the
compensation and expenses of Trustees who are not otherwise affiliated with the
Trust, the Funds, the Adviser or any of their affiliates; expenses of Trustees'
and shareholders' meetings; trade association memberships; insurance premiums;
and any extraordinary expenses.
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
Funds also approved their respective Fund's Advisory Agreement on June 26, 1996.
Each Advisory Agreement will continue in effect from year to year, provided that
34
<PAGE>
continuance is approved annually both (i) by the holders of a majority of the
outstanding voting securities of each Fund or by the
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 Fund'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 Fund's
annual expenses fall below this limit.
For the year ended August 31, 1994 as a result of the expense
limitations described in the Prospectus, the Adviser did not receive a fee from
either Fund. For the year ended August 31, 1995, the management fee paid by the
Massachusetts and New York Funds to the Adviser amounted to $62,994 and $57,450,
respectively. For the year ended August 31, 1996, the management fee paid by the
Massachusetts and New York Funds to the Adviser amounted to $39,064 and $48,077
respectively.
Pursuant to the Advisory Agreements, the Adviser is not liable to the
Trust or its shareholders for any error of judgment or mistake of law or for any
loss suffered by the Trust 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.
Under the investment management contract, the Trust and each 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 Trust (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.
Accounting and Legal Services Agreement The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Funds with certain tax, accounting
and legal services. For the fiscal year ended August 31, 1996, the Massachusetts
Tax Free Income and New York Tax Free Income Fund paid the Adviser $6,958 and
$7,059, for services respectively.
DISTRIBUTION CONTRACT
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each 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 continually offered at net asset
value next determined, plus an applicable sales charge, if any. In connection
with the sale of Class A or 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 of sale or, in the case of Class B shares, on a
deferred basis. The sales charges are discussed further in the Prospectus.
35
<PAGE>
The Fund's Trustees adopted Distribution Plans with respect to Class A
and Class B shares (the "Plans") pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Under the Plans, the Fund will pay distribution and service
fees at an aggregate annual rate of up to 0.30% and 1.00%, 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 average daily net assets
attributable to each class of shares. In each case, up to 0.25% is for service
expenses and the remaining amount is for distribution expenses. The distribution
fees will be used to reimburse John Hancock Funds for their distribution
expenses, including but not limited to: (i) initial and ongoing sales
compensation to Selling Brokers and others (including affiliates of John Hancock
Funds) engaged in the sale of Fund shares; (ii) marketing, promotional and
overhead expenses incurred in connection with the distribution of Fund shares;
and (iii) with respect to Class B 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 the John Hancock Funds is not fully reimbursed for payments or
expenses they incur under the Class A Plan, these expenses will not be carried
beyond twelve months from the date they were incurred. Unreimbursed expenses
under the Class B Plan will be carried forward together with interest on the
balance of these unreimbursed expenses. The Fund does not treat unreimbursed
expenses under the Class B Plan as a liability of the Fund because the Trustees
may terminate Class B Plan at any time. For the fiscal year ended August 31,
1996, an aggregate of $938,714 of distribution expenses or 3.59% of the average
net assets of the Class B shares of the Fund, was not reimbursed or recovered by
John Hancock Funds through the receipt of deferred sales charges or Rule 12b-1
fees in prior periods.
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 such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provide
the Fund with a written report of the amounts expended under the Plans and the
purpose for which these expenditures were made. The Trustees review these
reports on a quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as
their continuance is approved at least annually by a majority of both the
Trustees and Independent Trustees. The Plans provide that they may be terminated
without penalty, (a) by vote of a majority of the Independent Trustees, (b) by a
vote of a majority of the Fund's outstanding shares of the applicable class upon
60 days' written notice to John Hancock Funds, and (c) automatically in the
event of assignment. The Plans further provide that they may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to that Plan. Each plan provides, that
no material amendment to the Plans will, in any event, be effective unless it is
approved by a vote of a majority of the Trustees and the Independent Trustees of
the Fund. The holders of Class A 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 the Plans will benefit the holders of the applicable
class of shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund
will not be used to pay the expenses incurred with respect to any other class of
shares of the Fund; provided, however, that expenses attributable to the Fund as
a whole will be allocated, to the extent permitted by law, according to a
formula based upon gross sales dollars and/or average daily net assets of each
such class, as may be approved from time to time by vote of a majority of
36
<PAGE>
Trustees. From time to time, the Fund may participate in joint distribution
activities with other Funds and the costs of those activities will be borne by
each Fund in proportion to the relative net asset value of the participating
Funds.
During the fiscal year ended August 31, 1996, the Funds paid John
Hancock Funds the following amounts of expenses with respect to the Class A and
Class B shares of the Fund:
<TABLE>
<CAPTION>
Expense Items
Printing and
Mailing of Interest Carrying
Prospectuses to Compensation to Expense of or Other Finance
Advertising New Shareholders Selling Brokers Distributors Charges
----------- ---------------- --------------- ------------ -------
<S> <C> <C> <C> <C> <C>
New York Fund $21,596 $2,245 $107,395 $38,470 $0
Massachusetts Fund $22,099 $2,605 $105,406 $37,358 $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 Fund 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 Fund 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 Fund. 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 Trust. The holders of Class A
and Class B shares of each Fund 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 Fund.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of Fund 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.
The NAV for each fund and class is determined each business day at the
close of regular trading on the New York Stock Exchange (typically 4:00 p.m.
Eastern Time) by dividing a class' net assets by the number of its shares
outstanding.
37
<PAGE>
INITIAL SALES CHARGE ON CLASS A SHARES
The sales charge applicable to purchases of Class A shares of a Fund is
described in the 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 Fund, 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 Signature Services, Inc. ("Signature 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 Trust; 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,
grandchildren, 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 a Fund.
o A member of an approved affinity group financial services
plan.
o A member of a class action lawsuit against insurance companies
who is investing settlement proceeds.
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 shares with no initial sales charge. However, if
38
<PAGE>
the shares are redeemed within 12 months after the end of the
calendar year in which the purchase was made, a CDSC will be
imposed at the following rate:
Amount Invested CDSC Rate
- --------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares of a 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 Fund 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.
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
Signature Services. The sales charge applicable to all amounts invested under
the LOI is computed as if the aggregate amount intended to be invested had been
invested immediately. If such aggregate amount is not actually invested, the
difference in the sales charge actually paid and the sales charge payable had
the LOI not been in effect is due from the investor. However, for the purchases
actually made within the specified period the sales charge applicable will not
be higher than that which would have applied (including accumulations and
combinations) had the LOI been for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient
Class A shares (approximately 5% of the aggregate) to make up any difference in
sales charges on the amount intended to be invested and the amount actually
invested, until such investment is completed within the specified period, at
which time the escrow shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Signature Services to act as his
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. An LOI does not constitute a binding commitment by an
investor to purchase or by the subject Fund to sell any additional Class A
shares and may be terminated at any time.
39
<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 Funds 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. 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. However, you cannot redeem appreciation value only in order to
avoid a CDSC.
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 of a Fund 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
40
<PAGE>
Proceeds from the CDSC are paid to John Hancock Funds and are used in
whole or in part by John Hancock Funds to defray its expenses related to
providing distribution-related services to the Funds in connection with the sale
of the Class B 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 each Fund to sell its 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 of each Fund that are
subject to a CDSC, unless indicated otherwise, in the circumstances defined
below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account
value, including reinvested dividends, at the time you established your
periodic withdrawal plan and 12% of the value of subsequent investments
(less redemptions) in that account at the time you notify Investor
Services. (Please note, this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC.)
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other qualified
plans as described in the Code) unless otherwise noted.
* Redemptions made to effect mandatory distributions under the Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under Section
401(a) of the Code (such as 401(k), Money Purchase Pension Plans and
Profit-Sharing Plans).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
41
<PAGE>
<TABLE>
<CAPTION>
- --------------------- -------------------- ----------------- ---------------- ----------------- ---------------
Type of Distribution 401(a) Plan 403(b) 457 IRA, IRA Non-Retirement
(401(k), MPP, Rollover
PSP)
- --------------------- -------------------- ----------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- --------------------- -------------------- ----------------- ---------------- ----------------- ---------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account value
distributions annually in
or 12% of periodic
account value payments
annually in
periodic
payments.
- --------------------- -------------------- ----------------- ---------------- ----------------- ---------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of
and 70 1/2 Expectancy or account value
12% of account annually in
value annually periodic
in periodic payments
payments.
- --------------------- -------------------- ----------------- ---------------- ----------------- ---------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of
annuity annuity annuity account value
payments (72t) payments (72t) payments (72t) annually in
or 12% of or 12% of or 12% of periodic
account value account value account value payments
annually in annually in annually in
periodic periodic periodic
payments. payments. payments.
- --------------------- -------------------- ----------------- ---------------- ----------------- ---------------
Loans Waived Waived N/A N/A N/A
- --------------------- -------------------- ----------------- ---------------- ----------------- ---------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- --------------------- -------------------- ----------------- ---------------- ----------------- ---------------
Hardships Waived Waived Waived N/A N/A
- --------------------- -------------------- ----------------- ---------------- ----------------- ---------------
Return of Excess Waived Waived Waived Waived N/A
- --------------------- -------------------- ----------------- ---------------- ----------------- ---------------
</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, each Fund has the right to pay
the redemption price of its shares in whole or in part in portfolio securities
as prescribed by the Trustees of the Trust. 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 Funds
have, however, elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, each Fund must redeem its shares for cash except to the
extent that the redemption payments to any shareholder during any 90-day period
would exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
42
<PAGE>
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. Each Fund permits exchanges of its shares of any class for
shares of the same class in any other John Hancock fund offering that class.
Systematic Withdrawal Plan. Each of the Funds permits the establishment of a
Systematic Withdrawal Plan. Payments under this plan represent proceeds arising
from the redemption of a Fund's shares. Since the redemption price of the shares
of a Fund 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 Fund shares at the
same time as a Systematic Withdrawal Plan is in effect. The Funds reserve 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 Signature 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
Signature Services or upon written notice to Signature Services which is
received at least five (5) business days prior to the due date of any
investment.
Reinvestment Privilege. A shareholder who has redeemed shares of a Fund 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 Fund or in any of the other John Hancock mutual funds, subject to the
minimum investment limit in any fund. Each of the Funds 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 Fund reinvested in Class A shares of any of the other John Hancock
funds 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 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 shares will be treated as described under the heading "Tax
Status."
43
<PAGE>
DESCRIPTION OF THE FUNDS' SHARES
The Trustees of the Trust are responsible for the management and
supervision of the Funds. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Funds, without par value. Under the Declaration of Trust, the Trustees have the
authority to create and classify shares of beneficial interest in separate
series, without further action by shareholders. As of the date of this Statement
of Additional Information, the Trustees have authorized the issuance of two
series of shares -- the Massachusetts Fund and the New York 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 Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
Holders of Class A shares and Class B shares have certain exclusive voting
rights on matters relating to their respective distribution plans. The different
classes of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Funds, 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
that class of shares, subject to the conditions the Internal Revenue Service
imposes with respect to the multiple- class structures. Similarly, the net asset
value per share may vary depending on whether Class A or Class B shares are
purchased.
In the event of liquidation, shareholders of each class are entitled to
share pro rata in the net assets of the subject Fund available for distribution
to these shareholders. Shares entitle their holders to one vote per share, are
freely transferable and have no preemptive, subscription or conversion rights.
When issued, shares are fully paid and non-assessable by the Trust, except as
set forth below.
Unless otherwise required by the Investment Company Act or the
Declaration of Trust, the Trust has no intention of holding annual meetings of
shareholders. Trust shareholders may remove a Trustee by the affirmative vote of
at least two-thirds of the Trust's outstanding shares and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Trust's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations or affairs of
the Funds. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder of that Fund held
personally liable by reason of being or having been a shareholder. The
Declaration of Trust also provides that no series of the Trust shall be liable
for the liabilities of any other series. Furthermore, no fund included in the
Fund's prospectus shall be liable for the liabilities of any other John Hancock
Fund. Liability is therefor limited to circumstances in which the subject Fund
itself would be unable to meet its obligations, and the possibility of this
occurrence is remote.
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In order to avoid conflicts with portfolio trades for the Funds, the
Adviser and the Trust 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
Funds and their shareholders come first.
A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts.
TAX STATUS
Federal Income Taxation. Each Fund is treated as a separate entity for
accounting and tax purposes and each has qualified and elected to be treated 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 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.
Each Fund 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 Fund intends under normal circumstances to seek
to avoid or minimize liability for such tax by satisfying such distribution
requirements.
Each Fund expects to qualify to pay "exempt-interest dividends," as
defined in the Code. To qualify to pay exempt-interest dividends, a 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 Funds intend 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. A 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 a 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 a Fund's portfolio may
be affected by restrictive federal income tax legislation enacted in recent
years or by similar future legislation.
If a 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
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all of the tax-exempt obligations held by a Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
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
purchasing or carrying shares of a Fund even though the borrowed money may not
be directly traceable to the purchase of shares.
Although all or a substantial portion of the dividends paid by a Fund
may be excluded by the Fund's shareholders from their gross income for federal
income tax purposes, each Fund may purchase specified private activity bonds,
the interest from which (including the Portfolio'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
a 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 a 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 a 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 a Fund's "investment company taxable income," they will be taxable as
ordinary income; and if they are paid from a 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 or
losses, other than those gains and losses included in computing net capital
gain, after reduction by deductible expenses.) Some distributions from
investment company taxable income and/or net capital gain 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 a 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 a Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of a 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.
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, each 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
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not held shares of a 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 a Fund's 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 Fund securities and/or engage in options or futures transactions that
will generate capital gains. At the time of an investor's purchase of a Fund's
shares, a portion of the purchase price is often attributable to realized or
unrealized appreciation in the Fund's holdings. Consequently, subsequent
distributions of 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 (or portions thereof) in reality represent a return of a portion
of the purchase price.
Upon a redemption of shares of a 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 shares of a Fund cannot be taken into account for purposes of
determining gain or loss on the redemption or exchange of such shares within 90
days after their purchase to the extent shares of the Fund or another John
Hancock Trust 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 Fund
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of, such as pursuant to automatic dividend reinvestments. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
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 all
exempt-interest dividends paid with respect to such shares and, to the extent in
excess of the amount disallowed, 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, each Fund reserves the right to
retain and reinvest all or any portion of the excess of net capital gain over
net short-term capital loss in any year. A 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 year 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 Trust 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 each excess
and his pro rata share of such taxes.
For Federal income tax purposes, each of the Funds is permitted to
carryforward a net capital loss in any year to offset its own 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
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federal income tax liability to the Fund and, as noted above, would not be
distributed to shareholders. The Massachusetts Fund has a realized capital loss
carryforward of $567,282, of this amount $2,465 expires August 31, 2002,
$396,511 expires August 31, 2003 and $168,306 expires August 31, 2004. The New
York Fund has a realized capital loss carryforward of $347,989 of this amount
$77,663 expires August 31, 2003 and $270,326 expires August 31, 2004.
Each 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 a Fund to recognize gain without a concurrent receipt of cash.
However, each 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, a Fund may have to dispose of its
Fund securities under disadvantageous circumstances to generate cash, or may
have to leverage itself by borrowing the cash, to satisfy these distribution
requirements.
Each 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, a 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 Funds may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
The Funds may invest in debt obligations that are in the lower rating
categories or are unrated, including debt obligations of issuers not currently
paying interest as well as issuers who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
Funds. Tax rules are not entirely clear about issues such as when the Funds may
cease to accrue interest, original issue discount, or market discount, when and
to what extent deductions may be taken for bad debts or worthless securities,
how payments received on obligations in default should be allocated between
principal and income, and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the Funds, in
the event they invest in such securities, in order to seek to ensure that they
distribute sufficient income to preserve their status as regulated investment
companies and seek to avoid becoming subject to Federal income or excise tax.
Dividends and capital gain distributions from a Fund will not qualify
for the dividends-received deduction for corporate shareholders.
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Limitations imposed by the Code on regulated investment companies like
the Funds may restrict each Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by a Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of a Fund's losses on its transactions involving options or
futures contracts and/or offsetting or successor Fund positions may be deferred
rather than being taken into account currently in calculating the Fund's gains.
Some of these transactions may also cause a Fund to dispose of investments
sooner than would otherwise have occurred. These transactions may therefore
affect the amount, timing and character of the Fund's distributions to
shareholders. The Funds will take into account the special tax rules (including
consideration of available elections) applicable to options and futures
contracts 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. Dividends (including exempt-interest dividends), capital gain
distributions, and ownership of or gains realized on the redemption (including
an exchange) of Fund shares may also be subject to state and local taxes, except
as described below under "State Income Tax Information." 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 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 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 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 a
Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in a Fund.
STATE INCOME TAX INFORMATION
MASSACHUSETTS TAXES
The Funds are not subject to Massachusetts corporate excise or
franchise taxes. Provided that each Fund qualifies as a regulated investment
company under the Code, it will also not be required to pay any Massachusetts
income tax.
To the extent that exempt-interest dividends paid to shareholders by
the Massachusetts Fund are derived from interest on tax-exempt bonds of the
Commonwealth of Massachusetts and its political subdivisions or Puerto Rico, the
U.S. Virgin Islands or Guam and are properly designated as such, these
distributions will be exempt from Massachusetts personal income tax. For
Massachusetts personal income tax purposes, dividends from the Fund's taxable
net investment income, tax-exempt income from obligations not described in the
preceding sentence, and short-term capital gains, if any, will generally be
taxable as ordinary income, whether received in cash or additional shares.
However, any dividends that are properly designated as attributable to interest
the Fund receives on direct U.S. Government obligations will not be subject to
Massachusetts personal income tax. Dividends properly designated as from net
capital gain are generally taxable as long-term capital gains, regardless of how
long shareholders have held their Fund shares. However, a portion of such a
long-term capital gains distribution will be exempt from Massachusetts personal
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income tax if it is properly designated as attributable to gains realized on the
sale of certain tax-exempt bonds issued pursuant to Massachusetts statutes that
specifically exempt such gains from Massachusetts taxation. Dividends from
investment income (including exempt- interest dividends) and from capital gains
will be subject to, and shares of the Fund will be included in the net worth of
intangible property corporations for purposes of, the Massachusetts corporation
excise tax if received by a corporation subject to such tax. Long-term capital
gains from the sale of a capital asset are generally 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, are subject to this tax structure with
respect to redemption, exchanges or other dispositions of their shares of the
Massachusetts Fund in their taxable years beginning after 1995, assuming that
they hold their shares of the Massachusetts Fund as capital assets for purposes
of the Act. The Act does not address the Massachusetts tax treatment of
dividends paid by the Massachusetts Fund that are designated and treated as
long-term capital gains for Federal income tax purposes, and it is accordingly
not clear what tax rate applies to such dividends for Massachusetts tax purposes
for taxable years beginning after 1995.
NEW YORK TAXES
Exempt-interest dividends derived from interest on tax-exempt bonds of
New York State and its political subdivisions and authorities and certain other
governmental entities (for example, U.S. possessions), paid by the New York Fund
to New York resident individuals, estates and trusts otherwise subject to these
taxes, will not be subject to New York State and New York City personal income
taxes and certain municipal tax surcharges.
Dividends, whether received in cash or additional shares, derived from
the New York Fund's other investment income (including interest on Tax-Exempt
Bonds other than those described in the preceding paragraph), and from the
Fund's net realized short-term capital gains, are taxable for New York State and
New York City personal income tax purposes as ordinary income. Tax surcharges
will also apply. Dividends derived from net realized long-term capital gains of
the Fund are taxable as long-term capital gains for New York State and New York
City personal income tax purposes regardless of the length of time shareholders
have held their shares.
Dividends derived from investment income and capital gains, including
exempt- interest dividends, will be subject to the New York State franchise tax
and the New York City General Corporation Tax if received by a corporation
subject to those taxes. Certain distributions may, however, be eligible for a
50% dividend subtraction. Shares of the Fund will be included in a corporate
shareholder's investment capital in determining its liability, if any, for these
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.
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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 Fund 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 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 Fund to corporations, will be included in
entire net income in the computation of the New York State franchise tax and New
York City business taxes and shares of the Fund 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 Fund, will not be deductible by the investor
for New York State and New York City personal income tax purposes.
CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1996, the Funds' annualized
yield and tax-equivalent yields for Class A shares at the maximum tax rates were
5.08% and 9.56% for Massachusetts and 4.94% and 8.81% for New York,
respectively. The average annual total returns of the Funds' Class A shares for
the 1 year, 5 years and the life-of-fund periods ended August 31 were
respectively 0.09%, 6.24% and 7.72% for Massachusetts and 0.48%, 6.37% and 7.90%
for New York.
The Funds advertise yield, where appropriate. Each 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:
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Yield = 2 ([(a - b) + 1] 6 - 1)
---
cd
Where:
a = dividends and interest earned during the period.
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 Fund'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 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 load from the
distribution rate produces a higher rate.
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
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obligation with original issue discount, the discount based on the current
market value exceeds the then-remaining portion or 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.
In addition to average annual total returns, each Fund may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's sales charge on
Class A shares or the CDSC on Class B shares into account. 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.
From time to time, in reports and promotional literature, a Fund's
yield and total return will be compared to indices of mutual funds and bank
deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed
Income Fund Performance Analysis," a monthly publication which tracks net
assets, total return, and yield on fixed income mutual funds in the United
States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes as well as the Russell and Wilshire Indices. Comparisons
may also be made to bank certificates of deposit, ("CDs") which differ from
mutual funds, such as the Funds, 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 publication 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 Fund's promotional and sales literature may make
reference to the fund's "beta". Beta is a reflection of the market-related risk
of the Fund by showing how responsive the Fund is to the market.
The performance of a Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of a
Fund for any period in the future. The performance of a Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of securities held by a Fund
and the allocation of brokerage commissions are made by the officers of the
Adviser pursuant to recommendations made by an investment committee of the
Adviser, which consists of officers and directors of the Adviser and affiliates,
and officers and Trustees who are interested persons of the Trust. For each
Fund, orders for purchases and sales of securities are placed in a manner which,
in the opinion of the officers 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 maker reflect a "spread."
Debt securities are generally traded on a net basis through dealers acting for
their own account as principals and not as brokers; no brokerage commissions are
payable on such transactions.
53
<PAGE>
The primary policy of each Fund 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 Fund as a factor in the selection of
broker-dealers to execute the Funds' portfolio transactions.
To the extent consistent with the foregoing, the Funds 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
Funds, and their value and expected contribution to the performance of the
Funds. It is not possible to place a dollar value on information and services to
be received from brokers and dealers, since it is only supplementary to the
research efforts of the Adviser. 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 Trust. The Funds will make no commitment to allocate portfolio
transactions upon any prescribed basis. While the Adviser's officers will be
primarily responsible for the allocation of the Trust'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,
1994 the Trust paid no brokerage commissions. For the year ended August 31, 1995
and 1996, the Massachusetts Tax Free Fund paid negotiated brokerage commissions
in the amount of $2,470 and 5,721, respectively and the New York Tax Free Fund
paid negotiated brokerage commissions in the amount of $3,267 and $4,655,
respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Funds may pay to a broker which provides brokerage and research services to
the Funds 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,
1996, neither Fund 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" or Affiliated
Broker"). Pursuant to procedures determined by the Trustees and consistent with
the above policy of obtaining best net results, each Fund may execute portfolio
transactions with or through Affiliated Brokers. During the year ending August
31, 1996, neither Fund executed any portfolio transactions with Affiliated
Brokers.
Any of the Affiliated Brokers may act as broker for the Funds on
exchange transactions, subject, however, to the general policy of the Trust 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 Trust 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 Trust as determined by a majority of the Trustees who are not interested
54
<PAGE>
persons (as defined in the Investment Company Act) of the Trust, the Adviser or
the Affiliated Broker. Because the Adviser, which is affiliated with the
Affiliated Brokers, has, as an investment adviser to the Trust, the obligation
to provide investment management services, which includes elements of research
and related investment skills, such research and related skills will not be used
by the Affiliated Brokers as a basis for negotiating commissions at a rate
higher than that determined in accordance with the above criteria.
Other investment advisory clients advised by the Adviser may also
invest in the same securities and the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser may average the
transaction as to price and allocate the amount of available investments in a
manner which the Adviser believes to be equitable to each client, including the
Fund. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtainable for
it. On the other hand, to the extent permitted by law, the adviser may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 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 Funds. The Funds pay Signature
Services an annual fee of $20.00 for each Class A shareholder and $22.50 for
each Class B shareholder, plus certain out-of-pocket expenses. These expenses
are aggregated and charged to the Funds on the basis of the relative net asset
value.
CUSTODY OF PORTFOLIOS
Securities of each Fund are held pursuant to a custodian agreement
between the Trust and Investors Bank & Trust Company, 89 South Street, Boston,
MA 02111. 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 Fund's annual financial statements and reviews each
Fund's annual Federal income tax return.
55
<PAGE>
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.
"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.
A-1
<PAGE>
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:
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.
A-2
<PAGE>
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.
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:
A-3
<PAGE>
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+"
Massachusetts Fund
Quality Distribution. The average weighted quality distribution of the
securities in the portfolio for the year ended August 31, 1996.
<TABLE>
<CAPTION>
Rating Rating
% of Assigned by % of Assigned by % of
Security Ratings Average Value Portfolio Adviser Portfolio Service Portfolio
- ---------------- ------------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA $15,820,131 28.8% 0 0.0% $15,820,131 28.8%
AA 5,035,902 9.2% 0 0.0% 5,035,902 9.2%
A 22,830,002 41.5% 0 0.0% 22,830,002 41.5%
BBB 11,276,807 20.5% 727,274 1.3% 10,549,533 19.2%
BB 0 0.0% 0 0.0% 0 0.0
B 0 0.0% 0 0.0% 0 0.0
Debt-Unrated 0 0.0% 0 0.0% 0 0.0
----------- ------- -----------
Debt Securities 54,962,842 100.0% 727,274 1.3% $54,235,568 98.7%
Options Securities 530 0.0%
Short-Term Securities 0 0.0%
-----------
Total Portfolio 54,963,373 100.0%
Other Assets -- Net 1,076,513
-----------
Net Assets 56,039,887
===========
</TABLE>
The ratings are described in the Statement of Additional Information.
A-4
<PAGE>
New York Fund
Quality Distribution. The average weighted quality distribution of the
securities in the portfolio for the year ended August 31, 1996.
<TABLE>
<CAPTION>
Rating Rating
% of Assigned by % of Assigned by % of
Security Ratings Average Value Portfolio Adviser Portfolio Service Portfolio
- ---------------- ------------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA $12,758,268 23.6% 0 0.0% $12,758,268 23.6%
AA 12,247,873 22.6% 0 0.0% 12,247,873 22.6%
A 13,161,753 24.3% 0 0.0% 13,161,753 24.3%
BBB 13,502,309 24.9% 575,154 1.0% 13,502,309 24.9%
BB 2,197,921 4.1% 1,173,104 2.2% 1,024,817 1.9%
B 0 0.0% 0 0.0% 0 0.0%
CCC 0 0.0% 0 0.0% 0 0.0%
CC 0 0.0% 0 0.0% 0 0.0%
C 0 0.0% 0 0.0% 0 0.0%
Debt-Unrated 0 0.0% 0 0.0% 0 0.0%
----------- --------- -----------
Debt-Securities 53,868,124 99.5% 1,748,258 3.2% $52,695,021 97.3%
Options Securities 0 0.0%
Short-Term Securities 257,385 0.5%
-------
Total Portfolio 54,125,509 100.0%
Other Assets -- Net 913,805
-------
Net Assets $55,039,315
===========
</TABLE>
The ratings are described in the Statement of Additional Information.
A-5
<PAGE>
FINANCIAL STATEMENTS
F-1
