FILE NO. 33-12947
FILE NO. 811-5079
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 13 (X)
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 14 (X)
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JOHN HANCOCK TAX-EXEMPT SERIES FUND
(Exact Name of Registrant as Specified in Charter)
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, (617) 375-1700
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SUSAN S. NEWTON
Vice President and Secretary
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b) of Rule 485
(X) on January 1, 1998 pursuant to paragraph (b) of Rule 485
( ) 75 days after filing pursuant to paragraph (a) of Rule 485
( ) on (date) pursuant to paragraph (a) of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of securities under the Securities Act of 1933.
The Registrant filed the notice required by Rule 24F-2NT for its most recent
fiscal year on or about November 4, 1997.
<PAGE>
<TABLE>
<CAPTION>
Item Number Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------ ------------------ -------------------
<S> <C> <C>
1 Front Cover Page *
2 Overview; Investor Expenses; *
3 Financial Highlights *
4 Overview; Goal and Strategy; Portfolio *
Securities; Risk Factors; Business
Structure; More About Risk
5 Overview; Business Structure; *
Manager/Subadviser; Investor Expenses
6 Choosing a Share Class; Buying Shares; *
Selling Shares; Transaction Policies;
Dividends and Account Policies;
Additional Investor Services
7 Choosing a Share Class; How Sales Charges *
are Calculated; Sales Charge Deductions
and Waivers; Opening an Account; Buying
Shares; Transaction Policies; Additional
Investor Services
8 Selling Shares; Transaction Policies; *
Dividends and Account Policies
9 Not Applicable *
10 * Front Cover Page
11 * Table of Contents
12 * Organization of the Fund
13 * Investment Objectives and Policies;
Certain Investment Practices;
Investment Restrictions
14 * Those Responsible for Management
15 * Those Responsible for Management
16 * Investment Advisory; Subadvisory
and Other Services; Distribution
Contract; Transfer Agent Services;
Custody of Portfolio; Independent
Auditors
17 * Brokerage Allocation
18 * Description of Fund's Shares
19 * Net Asset Value; Additional
Services and Programs
20 * Tax Status
21 * Distribution Contract
22 * Calculation of Performance
23 * Financial Statements
</TABLE>
<PAGE>
JOHN HANCOCK
Tax-Free
Income Funds
[GRAPHIC OMITTED]
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Prospectus
January 1, 1998
This prospectus gives vital information about these funds. For your own benefit
and protection, please read it before you invest and keep it on hand for future
reference.
Please note that these funds:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank or government agency
o are not guaranteed to achieve their goal(s)
High Yield Tax-Free Fund may invest up to 85% in junk bonds; read risk
information carefully.
Like all mutual fund shares, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
California Tax-Free Income Fund
High Yield Tax-Free Fund
Massachusetts Tax-Free
Income Fund
New York Tax-Free Income Fund
Tax-Free Bond Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
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A fund-by-fund look at goals, California Tax-Free Income Fund 4
strategies, risks, expenses
and financial history. High Yield Tax-Free Fund 6
Massachusetts Tax-Free Income Fund 8
New York Tax-Free Income Fund 10
Tax-Free Bond Fund 12
Policies and instructions for Your account
opening, maintaining and closing Choosing a share class 14
an account in any How sales charges are calculated 14
tax-free income fund. Sales charge reductions and waivers 15
Opening an account 15
Buying shares 16
Selling shares 17
Transaction policies 19
Dividends and account policies 19
Additional investor services 20
Details that apply to the Fund details
tax-free income funds as a group. Business structure 21
Sales compensation 22
More about risk 24
For more information back cover
<PAGE>
Overview
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GOAL OF THE TAX-FREE INCOME FUNDS
John Hancock tax-free income funds seek to offer income that is exempt from
federal and, in some cases, state and local income tax. Each fund has its own
strategy and its own risk/reward profile. Each fund invests at least 80% of
assets in municipal securities exempt from federal (and in some funds, state)
income tax as well as the federal alternative minimum tax. However, a portion of
a tax-free fund's income may be subject to these taxes. Because you could lose
money by investing in these funds, be sure to read all risk disclosure carefully
before investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are in higher income brackets
o want regular monthly income
o are interested in lowering their income tax burden
o pay California, Massachusetts or New York income tax (state-specific funds)
Tax-free income funds may NOT be appropriate if you:
o are not subject to a high level of state or federal income tax
o are seeking an investment for a tax-deferred retirement account
o are investing for maximum return over a long time horizon
o require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock tax-free income funds are managed by John Hancock Advisers,
Inc. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John
Hancock Mutual Life Insurance Company and manages more than $22 billion in
assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clipart] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clipart] Portfolio securities The primary types of securities in which the fund
invests. Secondary investments are described in "More about risk" at the end of
the prospectus.
[Clipart] Risk factors The major risk factors associated with the fund.
[Clipart] Portfolio management The individual or group designated by the
investment adviser to handle the fund's day-to-day management.
[Clipart] Expenses The overall costs borne by an investor in the fund, including
sales charges and annual expenses.
[Clipart] Financial highlights A table showing the fund's financial performance
for up to ten years, by share class. A bar chart showing total return allows you
to compare the fund's historical risk level to those of other funds.
<PAGE>
California Tax-Free Income Fund
REGISTRANT NAME: JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
TICKER SYMBOL CLASS A: TACAX CLASS B: TSCAX
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GOAL AND STRATEGY
[Clipart] The fund seeks income that is exempt from federal and California
personal income taxes. The fund seeks to provide the maximum current income that
is consistent with preservation of capital. To pursue this goal, the fund
invests primarily in municipal securities exempt from these taxes.
PORTFOLIO SECURITIES
[Clipart] The fund's municipal securities may include bonds, notes and
commercial paper of any maturity. Under normal circumstances, the fund invests
at least 80% of assets in California municipal securities, particularly bonds.
These are primarily investment grade, although up to 20% of assets may be
invested in junk bonds rated BB/Ba and their unrated equivalents. No more than
25% of assets may be invested in unrated securities.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
investment-grade short-term securities. For defensive purposes, it may invest
more assets in these securities. The fund also may invest in private activity
bonds and certain higher-risk investments, and may engage in other investment
practices.
RISK FACTORS
[Clipart] As with most income funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including municipal securities).
Although the fund is diversified, it concentrates in securities of California
issuers and its performance is largely dependent on factors that may
disproportionately affect these issuers. Factors may include:
o local economic or policy changes
o tax base erosion
o state constitutional limits on tax increases
o changes in the ratings assigned to the state's municipal issuers
o the possibility of credit problems, such as the 1994 bankruptcy of Orange
County
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[Clipart] Dianne Sales, CFA, leader of the fund's portfolio management team
since April 1995, is a second vice president of the adviser. Ms. Sales joined
John Hancock Funds in 1989 and has been in the investment business since 1984.
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INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
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Shareholder transaction expenses Class A Class B
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Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
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Annual fund operating expenses (as a % of average net assets)
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Management fee (after expense limitation)(3) 0.48% 0.48%
12b-1 fee (net of reduction)(4) 0.15% 0.90%
Other expenses 0.12% 0.12%
Total fund operating expenses (after limitation)(3) 0.75% 1.50%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
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Share class Year 1 Year 3 Year 5 Year 10
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Class A shares $52 $68 $85 $134
Class B shares
Assuming redemption
at end of period $65 $77 $102 $159
Assuming no redemption $15 $47 $82 $159
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.55% for each class and total fund
operating expenses would be 0.82% for Class A and 1.57% for Class B.
(4) Without the reduction, 12b-1 fees would be 1.00% for Class B shares.
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
4 CALIFORNIA TAX-FREE INCOME FUND
<PAGE>
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FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The table below is represented here as a bar graph.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 6.13 12.26 9.15 13.60 (9.31) 21.88 0.61(5) 9.71
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
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Class A - period ended: 12/90 12/91 12/92 12/93
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<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.91 $10.32 $10.41
Net investment income 0.74 0.69 0.66(3) 0.62
Net realized and unrealized gain (loss)
on investments (0.16) 0.47 0.25 0.76
Total from investment operations 0.58 1.16 0.91 1.38
Less distributions:
Dividends from net investment income (0.67) (0.70) (0.67) (0.62)
Distributions from net realized gain
on investments sold -- (0.05) (0.15) (0.32)
Total distributions (0.67) (0.75) (0.82) (0.94)
Net asset value, end of period $9.91 $10.32 $10.41 $10.85
Total investment return at net asset
value(4) (%) 6.13 12.26 9.15 13.60
Total adjusted investment return at net
asset value(4,6) (%) 5.29 11.86 8.90 13.42
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 80,200 163,693 217,014 279,692
Ratio of expenses to average net assets (%) 0.00 0.40 0.58 0.69
Ratio of adjusted expenses to average
net assets(9) (%) 0.84 0.80 0.83 0.87
Ratio of net investment income (loss)
to average net assets (%) 7.11 6.75 6.36 5.69
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) 6.27 6.35 6.11 5.51
Portfolio turnover rate (%) 62 45 34 51
Fee reduction per share ($) 0.09 0.04 0.03(3) 0.02
<CAPTION>
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Class A - period ended: 12/94(1) 12/95 8/96(2) 8/97
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<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.85 $9.28 $10.69 $10.36
Net investment income 0.58 0.57(3) 0.39(3) 0.57(3)
Net realized and unrealized gain (loss)
on investments (1.57) 1.41 (0.33) 0.41
Total from investment operations (0.99) 1.98 0.06 0.98
Less distributions:
Dividends from net investment income (0.58) (0.57) (0.39) (0.57)
Distributions from net realized gain
on investments sold -- -- -- --
Total distributions (0.58) (0.57) (0.39) (0.57)
Net asset value, end of period $9.28 $10.69 $10.36 $10.77
Total investment return at net asset
value(4) (%) (9.31) 21.88 0.61(5) 9.71
Total adjusted investment return at net
asset value(4,6) (%) (9.45) 21.73 0.55(5) 9.64
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 241,583 309,305 291,072 291,167
Ratio of expenses to average net assets (%) 0.75 0.75 0.76(7,8) 0.75
Ratio of adjusted expenses to average
net assets(9) (%) 0.89 0.90 0.84(7) 0.82
Ratio of net investment income (loss)
to average net assets (%) 5.85 5.76 5.57(7) 5.42
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) 5.71 5.61 5.48(7) 5.35
Portfolio turnover rate (%) 62 37(10) 30 15
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01(3)
<CAPTION>
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Class B - period ended: 12/92 12/93 12/94(1) 12/95 8/96(2) 8/97
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<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.32 $10.41 $10.85 $9.28 $10.68 $10.36
Net investment income 0.58(3) 0.54 0.51 0.50(3) 0.33(3) 0.49(3)
Net realized and unrealized gain (loss) on investments 0.25 0.76 (1.57) 1.40 (0.31) (0.41)
Total from investment operations 0.83 1.30 (1.06) 1.90 (0.02) 0.90
Less distributions:
Dividends from net investment income (0.59) (0.54) (0.51) (0.50) (0.34) (0.49)
Distributions from net realized gain on investments sold (0.15) (0.32) -- -- -- --
Total distributions (0.74) (0.86) (0.51) (0.50) (0.34) (0.49)
Net asset value, end of period $10.41 $10.85 $9.28 $10.68 $10.36 $10.77
Total investment return at net asset value(4) (%) 8.35 12.76 (9.99) 20.87 0.20(5) 8.88
Total adjusted investment return at net asset value(4, 6) (%) 8.10 12.58 (10.13) 20.72 0.14(5) 8.81
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 26,595 65,437 77,365 84,673 83,253 89,493
Ratio of expenses to average net assets (%) 1.35 1.44 1.50 1.50 1.52(7,8) 1.50
Ratio of adjusted expenses to average net assets(9) (%) 1.60 1.62 1.64 1.65 1.59(7) 1.57
Ratio of net investment income (loss) to average net assets (%) 5.43 4.82 5.10 4.97 4.81(7) 4.66
Ratio of adjusted net investment income (loss) to
average net assets(9) (%) 5.18 4.64 4.96 4.82 4.72(7) 4.59
Portfolio turnover rate (%) 34 51 62 37(10) 30 15
Fee reduction per share ($) 0.03(3) 0.02 0.01 0.01(3) 0.01(3) 0.01(3)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Effective August 31, 1996, the fiscal period changed from December 31 to
August 31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) For the period ended August 31, 1996, the Ratio of Expenses to Average Net
Assets for the Fund excludes the effect of expense offsets. If expense
offsets were included, the Ratio of Expenses to Average Net Assets would
be 0.75% for Class A and 1.50% for Class B.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover excludes merger activity.
CALIFORNIA TAX-FREE INCOME FUND 5
<PAGE>
High Yield Tax-Free Fund
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST
TICKER SYMBOL CLASS A: JHTFX CLASS B: TSHTX
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GOAL AND STRATEGY
[Clipart] The fund seeks a high level of current income that is largely exempt
from federal income tax and is consistent with preservation of capital. To
pursue this goal, the fund invests primarily in a diversified portfolio of
tax-exempt municipal debt securities.
PORTFOLIO SECURITIES
[Clipart] The fund's municipal securities may include bonds, notes and
commercial paper of any maturity. Under normal circumstances, the fund invests
at least 80% of assets in municipal bonds rated A, BBB/Baa or BB/Ba and their
unrated equivalents. Up to 5% of assets may be invested in bonds rated B,
CCC/Caa or CC/Ca. Bonds rated BB/Ba or lower are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
investment-grade short-term securities. For defensive purposes, it may invest
more assets in these securities. The fund also may invest in private activity
bonds and certain higher-risk investments, including various derivative
securities primarily used in the fund's capital preservation
strategies, and may engage in other investment practices.
RISK FACTORS
[Clipart] As with most income funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including municipal securities).
Investors should expect greater fluctuations in share price, yield and total
return compared to less aggressive tax-free income funds. These fluctuations,
whether positive or negative, may be sharp and unanticipated.
Issuers of BBB/Baa rated bonds and junk bonds are typically in weaker financial
health than issuers of high quality bonds, and their ability to pay interest and
principal is less certain. These issuers are more likely to encounter financial
difficulties and to be materially affected by these difficulties when they do
encounter them. Junk bond markets may react strongly to adverse news about an
issuer or the economy, or to the perception of adverse news. Before you invest,
please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[Clipart] Frank A. Lucibella, CFA, leader of the fund's portfolio management
team since April 1995, is a second vice president of the adviser. Mr. Lucibella
joined John Hancock Funds in 1988 and has been in the investment business since
1982.
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INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
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Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
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Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.58% 0.58%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.23% 0.23%
Total fund operating expenses 1.06% 1.81%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
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Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $55 $77 $101 $169
Class B shares
Assuming redemption
at end of period $68 $87 $118 $193
Assuming no redemption $18 $57 $98 $193
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6 HIGH YIELD TAX-FREE FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) (5.13)(6) 15.88 7.54 4.60 10.07 7.89 13.69 (4.44) 13.99 1.36(6) 7.51
(scale varies from fund to fund) eight
months
</TABLE>
<TABLE>
<CAPTION>
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Class A - period ended: 10/94(1) 10/95(2) 8/96(3) 8/97
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<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.85 $8.82 $9.47 $9.16
Net investment income 0.48(4) 0.57 0.49(4) 0.56(4)
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.94) 0.70 (0.30) 0.18
Total from investment operations (0.46) 1.27 0.19 0.74
Less distributions:
Dividends from net investment income (0.48) (0.58) (0.50) (0.56)
Distributions in excess of net investment income (0.09) (0.04) -- --
Total distributions (0.57) (0.62) (0.50) (0.56)
Net asset value, end of period $8.82 $9.47 $9.16 $9.34
Total investment return at net asset value(5) (%) 4.96(6) 14.85 1.96(6) 8.29
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 15,401 14,225 23,663 32,199
Ratio of expenses to average net assets (%) 1.15(7) 1.06 1.10(7) 1.06
Ratio of net investment income (loss) to average net assets (%) 6.08(7) 6.36 6.39(7) 6.00
Portfolio turnover rate (%) 62 64 38 51
<CAPTION>
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Class B - period ended: 10/87(8) 10/88 10/89 10/90 10/91
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<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.49 $8.62 $9.25 $9.29 $9.07
Net investment income 0.37 0.62 0.55 0.55 0.54
Net realized and unrealized gain (loss) on
investments sold and financial futures contracts (0.87) 0.70 0.13 (0.14) 0.34
Total from investment operations (0.50) 1.32 0.68 0.41 0.88
Less distributions:
Dividends from net investment income (0.37) (0.66) (0.51) (0.55) (0.54)
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized gain on investments sold -- (0.03) -- -- --
Distributions from capital paid-in -- -- (0.13) (0.08) (0.10)
Total distributions (0.37) (0.69) (0.64) (0.63) (0.64)
Net asset value, end of period $8.62 $9.25 $9.29 $9.07 $9.31
Total investment return at net asset value(5) (%) (5.13)(6) 15.88 7.54 4.60 10.07
Total adjusted investment return at net asset value(5,9) (%) -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 15,026 24,278 29,841 35,820 51,467
Ratio of expenses to average net assets (%) 0.61(6) 2.05 2.32 2.20 2.36
Ratio of adjusted expenses to average net assets(10) (%) 0.82(6) -- -- -- --
Ratio of net investment income to
average net assets (%) 4.05(6) 6.66 5.79 5.96 5.61
Ratio of adjusted net investment income (loss)
to average net assets(10) (%) 3.84(6) -- -- -- --
Portfolio turnover rate (%) 42 82 29 41 83
Fee reduction per share ($) 0.02 -- -- -- --
<CAPTION>
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Class B - period ended: 10/92 10/93 10/94 10/95(2) 8/96(3) 8/97
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.31 $9.39 $9.98 $8.82 $9.47 $9.16
Net investment income 0.55 0.53 0.48 0.51 0.44(4) 0.49(4)
Net realized and unrealized gain (loss) on
investments sold and financial futures contracts 0.17 0.72 (0.90) 0.69 (0.31) 0.18
Total from investment operations 0.72 1.25 (0.42) 1.20 0.13 0.67
Less distributions:
Dividends from net investment income (0.55) (0.56) (0.48) (0.51) (0.44) (0.49)
Distributions in excess of net investment income -- -- (0.07) (0.04) -- --
Distributions from net realized gain on investments sold (0.09) (0.10) (0.19) -- -- --
Distributions from capital paid-in -- -- -- -- -- --
Total distributions (0.64) (0.66) (0.74) (0.55) (0.44) (0.49)
Net asset value, end of period $9.39 $9.98 $8.82 $9.47 $9.16 $9.34
Total investment return at net asset value(5) (%) 7.89 13.69 (4.44) 13.99 1.36(6) 7.51
Total adjusted investment return at net asset value(5,9) (%) -- -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 65,933 113,442 151,069 155,234 147,669 139,385
Ratio of expenses to average net assets (%) 2.17 2.06 1.85 1.79 1.81(7) 1.81
Ratio of adjusted expenses to average net assets(10) (%) -- -- -- -- -- --
Ratio of net investment income to
average net assets (%) 5.78 5.23 5.36 5.61 5.65(7) 5.28
Ratio of adjusted net investment income (loss)
to average net assets(10) (%) -- -- -- -- -- --
Portfolio turnover rate (%) 40 100 62 64 38 51
Fee reduction per share ($) -- -- -- -- -- --
</TABLE>
(1) Class A shares commenced operations on December 31, 1993.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective August 31, 1996, the fiscal period end changed from October 31
to August 31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Annualized.
(8) For the period May 1, 1987 to October 31, 1987.
(9) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(10) Unreimbursed, without fee reduction.
HIGH YIELD TAX-FREE FUND 7
<PAGE>
Massachusetts Tax-Free Income Fund
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: JHMAX CLASS B: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks income that is exempt from federal and Massachusetts
personal income taxes. The fund seeks to provide the maximum current income that
is consistent with preservation of capital. To pursue this goal, the fund
invests primarily in municipal securities exempt from these taxes.
PORTFOLIO SECURITIES
[Clipart] The fund's municipal securities may include bonds, notes and
commercial paper of any maturity. Under normal circumstances, the fund invests
at least 80% of net assets in Massachusetts municipal securities. Up to 33.3% of
assets may be invested in municipal securities rated BBB/Baa or BB/Ba and their
unrated equivalents. The balance of the fund's investments must be rated at
least A or be of equivalent quality. Bonds rated BB/Ba are considered junk
bonds.
For liquidity and flexibility, the fund may place up to 20% of net assets in
taxable investment-grade short-term securities. For defensive purposes, it may
invest more assets in these securities. The fund also may invest in private
activity bonds and certain higher-risk investments, and may engage in other
investment practices.
RISK FACTORS
[Clipart] As with most income funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including municipal securities).
Because the fund is not diversified and because it concentrates in securities of
Massachusetts issuers, certain factors may disproportionately affect the fund's
investments.
These factors may include:
o local economic or policy changes
o tax base erosion
o state constitutional limits on tax increases
o changes in the ratings assigned to the state's municipal issuers
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[Clipart] Dianne Sales, CFA, leader of the fund's portfolio management team
since April 1995, is a second vice president of the adviser. Ms. Sales joined
John Hancock Funds in 1989 and has been in the investment business since 1984.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.11% 0.11%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.29% 0.29%
Total fund operating expenses (after limitation)(3) 0.70% 1.40%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $52 $66 $82 $128
Class B shares
Assuming redemption
at end of period $64 $74 $97 $149
Assuming no redemption $14 $44 $77 $149
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation and the effect of expense offsets, management fees would be
0.50% for each class and total fund operating expenses would be 1.09% for
Class A and 1.79% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
8 MASSACHUSETTS TAX-FREE INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The table below is represented here as a bar graph.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 13.13(3) 9.67 3.49 12.10 12.11 13.29 (0.97) 7.66 4.78 9.85
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/88(1) 8/89 8/90 8/91 8/92
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.63 $10.94 $10.63 $11.15
Net investment income 0.65 0.70 0.69 0.73 0.71
Net realized and unrealized gain (loss) on investments 0.63 0.31 (0.31) 0.53 0.60
Total from investment operations 1.28 1.01 0.38 1.26 1.31
Less distributions:
Dividends from net investment income (0.65) (0.70) (0.69) (0.73) (0.71)
Distributions from net realized gain on investments sold -- -- -- (0.01) --
Total distributions (0.65) (0.70) (0.69) (0.74) (0.71)
Net asset value, end of period $10.63 $10.94 $10.63 $11.15 $11.75
Total investment return at net asset value(2) (%) 13.13(3) 9.67 3.49 12.10 12.11
Total adjusted investment return at net asset value(2,4) (%) 10.38(3) 9.16 2.72 10.66 10.93
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,757 9,138 9,968 15,015 29,113
Ratio of expenses to average net assets (%) 1.00(3) 1.00 1.00 0.60 0.60
Ratio of adjusted expenses to average net assets(6) (%) 3.75(3) 1.51 1.77 2.04 1.78
Ratio of net investment income (loss) to average net assets (%) 6.28(3) 6.35 6.31 6.64 6.18
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) 3.53(3) 5.84 5.54 5.20 5.00
Portfolio turnover rate (%) 20 2 2 29 56
Fee reduction per share ($) 0.28 0.11 0.08 0.16 0.14
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/93 8/94 8/95 8/96 8/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.75 $12.43 $11.56 $11.76 $11.66
Net investment income 0.67 0.63 0.65 0.65 0.66
Net realized and unrealized gain (loss) on investments 0.82 (0.75) 0.20 (0.10) 0.46
Total from investment operations 1.49 (0.12) 0.85 0.55 1.12
Less distributions:
Dividends from net investment income (0.67) (0.63) (0.65) (0.65) (0.66)
Distributions from net realized gain on investments sold (0.14) (0.12) -- -- --
Total distributions (0.81) (0.75) (0.65) (0.65) (0.66)
Net asset value, end of period $12.43 $11.56 $11.76 $11.66 $12.12
Total investment return at net asset value(2) (%) 13.29 (0.97) 7.66 4.78 9.85
Total adjusted investment return at net asset value(2,4) (%) 12.38 (1.50) 7.21 4.30 9.45
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 50,019 54,122 54,416 55,169 54,253
Ratio of expenses to average net assets (%) 0.67 0.70 0.70 0.75(5) 0.71(5)
Ratio of adjusted expenses to average net assets(6) (%) 1.58 1.23 1.15 1.18 1.11
Ratio of net investment income (loss) to average net assets (%) 5.61 5.28 5.67 5.53 5.59
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) 4.70 4.75 5.22 5.05 5.19
Portfolio turnover rate (%) 79 29 24 36 12
Fee reduction per share ($) 0.11 0.06 0.05 0.06 0.05
</TABLE>
- --------------------------------------------------------------------------------
Class B - period ended: 8/97(1)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $11.84
Net investment income 0.54
Net realized and unrealized gain (loss) on investments 0.28
Total from investment operations 0.82
Less distributions:
Dividends from net investment income (0.54)
Net asset value, end of period $12.12
Total investment return at net asset value(2) (%) 7.08(7)
Total adjusted investment return at net asset value(2,4) (%) 6.72(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,418
Ratio of expenses to average net assets (%) 1.41(3,5)
Ratio of adjusted expenses to average net assets(6) (%) 1.81(3)
Ratio of net investment income (loss) to average net assets (%) 4.82(3)
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) 4.42(3)
Portfolio turnover rate (%) 12
Fee reduction per share ($) 0.04
(1) Class A shares commenced operations on September 3, 1987. Class B shares
commenced operations on October 3, 1996.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Annualized.
(4) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(5) The Ratio of Expenses to Average Net Assets for the fund excludes the
effect of expense offsets. If expense offsets were included, the Ratio of
Expenses to Average Net Assets would be 0.70% and 1.40% for Class A and
Class B, respectively.
(6) Unreimbursed, without fee reduction.
(7) Not annualized.
MASSACHUSETTS TAX-FREE INCOME FUND 9
<PAGE>
New York Tax-Free Income Fund
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: JHNYX CLASS B: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks income that is exempt from federal income taxes as well
as New York State and New York City personal income taxes. The fund seeks to
provide the maximum current income that is consistent with preservation of
capital. To pursue this goal, the fund invests primarily in municipal securities
exempt from these taxes.
PORTFOLIO SECURITIES
[Clipart] The fund's municipal securities may include bonds, notes and
commercial paper of any maturity. Under normal circumstances, the fund invests
at least 80% of net assets in New York municipal securities. Up to 33.3% of
assets may be invested in municipal securities rated BBB/Baa or BB/Ba and their
unrated equivalents. The balance of the fund's investments must be rated at
least A or be of equivalent quality. Bonds rated BB/Ba are considered junk
bonds.
For liquidity and flexibility, the fund may place up to 20% of net assets in
taxable investment-grade short-term securities. For defensive purposes, it may
invest more assets in these securities. The fund also may invest in private
activity bonds and certain higher-risk investments, and may engage in other
investment practices.
RISK FACTORS
[Clipart] As with most income funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including municipal securities).
Because the fund is not diversified and it concentrates in securities of New
York issuers, certain factors may disproportionately affect the fund's
investments.
These factors may include:
o local economic or policy changes
o tax base erosion
o limited flexibility to raise taxes
o changes in the ratings assigned to the state's municipal issuers
o the legacy of past credit problems of New York City and other issuers
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[Clipart] Frank A. Lucibella, CFA, leader of the fund's portfolio management
team since April 1995, is a second vice president of the adviser. He joined John
Hancock Funds in 1988 and has been in the investment business since 1982.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.11% 0.11%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.29% 0.29%
Total fund operating expenses (after limitation)(3) 0.70% 1.40%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $52 $66 $82 $128
Class B shares
Assuming redemption
at end of period $64 $74 $97 $149
Assuming no redemption $14 $44 $77 $149
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation and the effect of expense offsets, management fees would be
0.50% for each class and total fund operating expenses would be 1.09% for
Class A and 1.79% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10 NEW YORK TAX-FREE INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The table below is represented here as a bar graph.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 11.40(3) 11.87 3.74 12.24 12.17 13.70 (1.05) 7.19 5.21 9.48
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/88(1) 8/89 8/90 8/91 8/92
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.48 $11.01 $10.74 $11.29
Net investment income 0.61 0.68 0.67 0.72 0.72
Net realized and unrealized gain
(loss) on investments 0.48 0.55 (0.25) 0.55 0.63
Total from investment operations 1.09 1.23 0.42 1.27 1.35
Less distributions:
Dividends from net investment income (0.61) (0.68) (0.67) (0.72) (0.72)
Distributions from net realized gain
on investments sold -- (0.02) (0.02) -- (0.02)
Total distributions (0.61) (0.70) (0.69) (0.72) (0.74)
Net asset value, end of period $10.48 $11.01 $10.74 $11.29 $11.90
Total investment return at net asset
value(2) (%) 11.40(3) 11.87 3.74 12.24 12.17
Total adjusted investment return at net
asset value(2,4) (%) 7.56(3) 11.22 3.05 11.02 11.09
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,306 8,795 13,357 20,878 33,806
Ratio of expenses to average net assets (%) 1.00(3) 1.00 1.00 0.60 0.60
Ratio of adjusted expenses to average
net assets(6) (%) 4.84(3) 1.65 1.69 1.82 1.68
Ratio of net investment income (loss) to
average net assets (%) 6.11(3) 6.30 6.17 6.57 6.22
Ratio of adjusted net investment income
(loss) to average net assets(6) (%) 2.27(3) 5.65 5.48 5.35 5.14
Portfolio turnover rate (%) 16 10 10 12 48
Fee reduction per share ($) 0.38 0.13 0.08 0.13 0.13
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/93 8/94 8/95 8/96 8/97
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.90 $12.63 $11.73 $11.88 $11.83
Net investment income 0.68 0.64 0.65 0.66 0.67
Net realized and unrealized gain
(loss) on investments 0.87 (0.77) 0.15 (0.05) 0.42
Total from investment operations 1.55 (0.13) 0.80 0.61 1.09
Less distributions:
Dividends from net investment income (0.68) (0.64) (0.65) (0.66) (0.67)
Distributions from net realized gain
on investments sold (0.14) (0.13) -- -- --
Total distributions (0.82) (0.77) (0.65) (0.66) (0.67)
Net asset value, end of period $12.63 $11.73 $11.88 $11.83 $12.25
Total investment return at net asset
value(2) (%) 13.70 (1.05) 7.19 5.21 9.48
Total adjusted investment return at net
asset value(2,4) (%) 12.83 (1.58) 6.74 4.77 9.08
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 52,444 55,690 55,753 56,229 54,086
Ratio of expenses to average net assets (%) 0.67 0.70 0.70 0.73(5) 0.71(5)
Ratio of adjusted expenses to average
net assets(6) (%) 1.54 1.23 1.15 1.14 1.11
Ratio of net investment income (loss) to
average net assets (%) 5.63 5.28 5.67 5.51 5.61
Ratio of adjusted net investment income
(loss) to average net assets(6) (%) 4.76 4.75 5.22 5.07 5.21
Portfolio turnover rate (%) 56 23 70 76 46
Fee reduction per share ($) 0.11 0.06 0.05 0.05 0.05
</TABLE>
- --------------------------------------------------------------------------------
Class B - period ended: 8/97(1)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $11.99
Net investment income 0.54
Net realized and unrealized gain (loss) on investments 0.26
Total from investment operations 0.80
Less distributions:
Dividends from net investment income (0.54)
Net asset value, end of period $12.25
Total investment return at net asset value(2) (%) 6.82(7)
Total adjusted investment return at net asset value(2,4) (%) 6.46(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2.414
Ratio of expenses to average net assets (%) 1.41(3,5)
Ratio of adjusted expenses to average net assets(6) (%) 1.81(3)
Ratio of net investment income (loss) to average net assets (%) 4.79(3)
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) 4.39(3)
Portfolio turnover rate (%) 46
Fee reduction per share ($) 0.04
(1) Class A shares commenced operations on September 11, 1987. Class B shares
commenced operations on October 3, 1996.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Annualized.
(4) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(5) The Ratio of Expenses to Average Net Assets for the fund excludes the
effect of expense offsets. If expense offsets were included, the Ratio of
Expenses to Average Net Assets would be 0.70% and 1/40% for Class A and
Class B, respectively.
(6) Unreimbursed, without fee reduction.
(7) Not annualized.
NEW YORK TAX-FREE INCOME FUND 11
<PAGE>
Tax-Free Bond Fund
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST
TICKER SYMBOL CLASS A: TAMBX CLASS B: TSMBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks as high a level of interest income exempt from federal
income tax as is consistent with preservation of capital. To pursue this goal,
the fund invests in a diversified portfolio of municipal securities. Under
normal circumstances, the fund will place at least 80% of assets in municipal
bonds.
PORTFOLIO SECURITIES
[Clipart] The fund's municipal bonds may include investment-grade bonds, notes
and commercial paper of any maturity. Less than 35% of assets may be invested in
municipal bonds rated BB/Ba or B (junk bonds) and their unrated equivalents. The
fund may not invest more than 25% of assets in private activity bonds of issuers
in any one industry. There is no limit on the fund's investments in issuers
located in any one state.
For liquidity and flexibility, the fund may place up to 20% of
assets in taxable investment-grade short-term securities. For defensive
purposes, it may invest more assets in these securities. The fund also may
invest in private activity bonds and certain higher-risk investments, and may
engage in other investment practices.
RISK FACTORS
[Clipart] As with most income investments, the value of your investment will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed income securities (including
municipal securities). Bonds with longer maturities are especially sensitive to
interest rate movements.
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[Clipart] Thomas C. Goggins has been the leader of the fund's portfolio
management team since joining John Hancock Funds in April 1995. A senior vice
president of the adviser, Mr. Goggins has been in the investment business since
1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.47% 0.47%
12b-1 fee(3,4) 0.15% 0.90%
Other expenses 0.23% 0.23%
Total fund operating expenses(4) 0.85% 1.60%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $53 $71 $90 $145
Class B shares
Assuming redemption
at end of period $66 $81 $107 $170
Assuming no redemption $16 $51 $87 $170
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
(4) The adviser has agreed to limit total fund operating expenses to 0.85% for
Class A and 1.60% for Class B. Without this limitation, management fees
would be 0.53% for each class and total fund operating expenses would be
0.91% for Class A and 1.66% for Class B.
12 TAX-FREE BOND FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The table below is represented here as a bar graph.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 6.04(6) 14.78 10.97 15.15 (9.28) 20.20 (0.01)(6) 9.44
(scale varies from fund to fund) eight
months
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/90(1) 12/91 12/92 12/93
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.90 $10.24 $10.47
Net investment income 0.71 0.69 0.67 0.62
Net realized and unrealized gain (loss) on investments (0.13) 0.72 0.42 0.93
Total from investment operations 0.58 1.41 1.09 1.55
Less distributions:
Dividends from net investment income (0.68) (0.68) (0.68) (0.62)
Distributions from net realized gain on investments sold -- (0.39) (0.18) (0.44)
Total distributions (0.68) (1.07) (0.86) (1.06)
Net asset value, end of period $9.90 $10.24 $10.47 $10.96
Total investment return at net asset value(5) (%) 6.04(6) 14.78 10.97 15.15
Total adjusted investment return at net asset value(5,7) (%) 5.19(6) 14.40 10.67 14.98
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 45,437 73,393 99,523 136,521
Ratio of expenses to average net assets (%) 0.40(6) 0.60 0.66 0.78
Ratio of adjusted expenses to average net assets(9) (%) 1.25(6) 0.98 0.96 0.95
Ratio of net investment income (loss) to average net assets (%) 7.09(6) 6.86 6.46 5.57
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 6.24(6) 6.48 6.16 5.40
Portfolio turnover rate (%) 64 123 79 116
Fee reduction per share ($) 0.08 0.04 0.03 0.02
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/94(2) 12/95 8/96(3) 8/97
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.96 $9.39 $10.67 $10.27
Net investment income 0.58 0.57(4) 0.40 0.59
Net realized and unrealized gain (loss) on investments (1.58) 1.28 (0.41) 0.36
Total from investment operations (1.00) 1.85 (0.01) 0.95
Less distributions:
Dividends from net investment income (0.57) (0.57) (0.39) (0.59)
Distributions from net realized gain on investments sold -- -- -- --
Total distributions (0.57) (0.57) (0.39) (0.59)
Net asset value, end of period $9.39 $10.67 $10.27 $10.63
Total investment return at net asset value(5) (%) (9.28) 20.20 (0.01)(6) 9.44
Total adjusted investment return at net asset value(5,7) (%) (9.39) 20.08 (0.09)(6) 9.38
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 114,539 118,797 560,863 590,185
Ratio of expenses to average net assets (%) 0.85 0.85 0.85(8) 0.85
Ratio of adjusted expenses to average net assets(9) (%) 0.96 0.97 0.98(8) 0.91
Ratio of net investment income (loss) to average net assets (%) 5.72 5.67 5.75(8) 5.61
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 5.61 5.55 5.62(8) 5.55
Portfolio turnover rate (%) 107 113 116(10) 46(10)
Fee reduction per share ($) 0.01 0.01(4) 0.01(4) 0.01
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/92 12/93 12/94(2) 12/95 8/96(3) 8/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.24 $10.47 $10.96 $9.38 $10.67 $10.27
Net investment income 0.59(4) 0.54 0.50 0.50(4) 0.34 0.51
Net realized and unrealized gain (loss) on investments 0.42 0.93 (1.58) 1.28 (0.40) 0.36
Total from investment operations 1.01 1.47 (1.08) 1.78 (0.06) 0.87
Less distributions:
Dividends from net investment income (0.60) (0.54) (0.50) (0.49) (0.34) (0.51)
Distributions from net realized gain on investments sold (0.18) (0.44) -- -- -- --
Total distributions (0.78) (0.98) (0.50) (0.49) (0.34) (0.51)
Net asset value, end of period $10.47 $10.96 $9.38 $10.67 $10.27 $10.63
Total investment return at net asset value(5) (%) 10.15 14.30 (10.05) 19.41 (0.51)(6) 8.63
Total adjusted investment return at net
asset value(5,7) (%) 9.85 14.13 (10.16) 19.29 (0.59)(6) 8.57
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,272 56,384 70,243 76,824 81,177 204,621
Ratio of expenses to average net assets (%) 1.43 1.53 1.60 1.60 1.60(8) 1.60
Ratio of adjusted expenses to average net assets(9) (%) 1.73 1.70 1.71 1.72 1.73(8) 1.66
Ratio of net investment income (loss) to average
net assets (%) 5.57 4.66 4.97 4.90 4.91(8) 4.85
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 5.27 4.49 4.86 4.78 4.78(8) 4.79
Portfolio turnover rate (%) 79 116 107 113 116(10) 46(10)
Fee reduction per share ($) 0.03(4) 0.02 0.01 0.01(4) 0.01(4) 0.01
</TABLE>
(1) Class A shares commenced operations on January 5, 1990.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective August 31, 1996, the fiscal period changed from December 31 to
August 31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover excludes merger activity.
TAX-FREE BOND FUND 13
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock tax-free income funds offer two classes of shares, Class A and
Class B. Each class has its own cost structure, allowing you to choose the one
that best meets your requirements. Your financial representative can help you
decide.
- --------------------------------------------------------------------------------
Class A Class B
- --------------------------------------------------------------------------------
o Front-end sales charges, as o No front-end sales charge;
described below. There are all your money goes to work
several ways to reduce for you right away.
these charges, also
described below. o Higher annual expenses than
Class A shares.
o Lower annual expenses than
Class B shares. o A deferred sales charge on
shares you sell within six
years of purchase, as
described below.
o Automatic conversion to Class A
shares after eight years, thus
reducing future annual expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 3.00% 3.09%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
Investments of $1 million or more Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments
- --------------------------------------------------------------------------------
Your investment CDSC on shares being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the LAST day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
Class B Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a contingent deferred sales charge
(CDSC) on shares you sell within six years of buying them. There is no CDSC on
shares acquired through reinvestment of dividends. The CDSC is based on the
original purchase cost or the current market value of the shares being sold,
whichever is less. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after purchase CDSC on shares being sold
1st year 5.00%
2nd year 4.00%
3rd or 4th year 3.00%
5th year 2.00%
6th year 1.00%
After 6 years None
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the FIRST day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
14 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
o Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge.
o Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had
been purchased at once.
o Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Signature Services to add these options (see
the back cover of this prospectus).
Group Investment Program A group may be treated as a single purchaser under the
accumulation and combination privileges. Each investor has an individual
account, but the group's investments are lumped together for sales charge
purposes, making the investors potentially eligible for reduced sales charges.
There is no charge, no obligation to invest (although initial investments must
total at least $250) and individual investors may close their accounts at any
time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify, or consult the SAI (see the back cover of this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for either share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI.
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge as long as Signature Services is
notified before you reinvest. If you paid a CDSC when you sold your shares, you
will be credited with the amount of the CDSC. All accounts involved must have
the same registration.
To utilize: contact your financial representative or Signature Services.
Waivers for certain investors Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
o government entities that are prohibited from paying mutual fund sales
charges
o financial institutions or common trust funds investing $1 million or more
for non-discretionary accounts
o selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds
o individuals transferring assets from an employee
benefit plan into a John Hancock fund
o members of an approved affinity group financial services program
o certain insurance company contract holders (one-year CDSC usually applies)
o participants in certain retirement plans with at least 100 members
(one-year CDSC applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
your financial representative or Signature Services, or consult the SAI.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must
invest at least $25 a month
o fee-based clients of selling brokers who placed at least $2 billion
in John Hancock funds: $500
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges section of the
application. By applying for privileges now, you can avoid the delay and
inconvenience of having to file an additional application if you want to
add privileges later.
5 Make your initial investment using the table on the next page. You and
your financial representative can initiate any purchase, exchange or sale
of shares.
YOUR ACCOUNT 15
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clipart] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable
"John Hancock Signature to "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to your investment slip from an
financial representative, or account statement. If no
mail them to Signature Services slip is available, include
(address on next page). a note specifying the fund
name, your share class,
your account number and
the name(s) in which the
account is registered.
o Deliver the check and your
investment slip or note to
your financial
representative, or mail
them to Signature Services
(address on next page).
By exchange
[Clipart] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
By wire
[Clipart] o Deliver your completed o Instruct your bank to wire
application to your financial the amount of your
representative, or mail investment to:
it to Signature Services. First Signature Bank & Trust
Account # 900000260
o Obtain your account number Routing # 211475000
by calling your financial Specify the fund name, your
representative or share class, your account
Signature Services. number and the name(s)
in which the account is
o Instruct your bank to wire registered. Your bank may
the amount of your investment charge a fee to wire funds.
to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the new
account number and the name(s)
in which the account is
registered. Your bank may charge
a fee to wire funds.
By phone
[Clipart] See "By wire" and "By exchange." o Verify that your bank or
credit union is a member of
the Automated Clearing
House (ACH) system.
o Complete the "Invest-By-
Phone" and "Bank
Information" sections on
your account application.
o Call Signature Services to
verify that these features
are in place on your account.
o Tell the Signature Services
representative the fund name,
your share class, your
account number, the name(s)
in which the account is
registered and the amount
of your investment.
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
16 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clipart] o Accounts of any type. o Write a letter of instruction
o Sales of any amount. or complete a stock power
indicating the fund name, your
share class, your account
number, the name(s) in which
the account is registered and
the dollar value or number of
shares you wish to sell.
o Include all signatures and any
additional documents that may
be required (see next page).
o Mail the materials to Signature
Services.
o A check will be mailed to the
name(s) and address in which
the account is registered, or
otherwise according to your
letter of instruction.
By phone
[Clipart] o Most accounts. o For automated service 24 hours
o Sales of up to $100,000. a day using your touch-tone
phone, call the EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John Hancock
Funds, call Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most business
days.
By wire or electronic funds transfer (EFT)
[Clipart] o Requests by letter to o Fill out the "Telephone
sell any amount (accounts Redemption" section of your
of any type). new account application.
o Requests by phone to sell o To verify that the telephone
up to $100,000 (accounts redemption privilege is in
with telephone redemption place on an account, or to
privileges). request the forms to add it
to an existing account, call
Signature Services.
o Amounts of $1,000 or more will
be wired on the next business
day. A $4 fee will be deducted
from your account.
o Amounts of less than $1,000
may be sent by EFT or by check.
Funds from EFT transactions
are generally available by
the second business day.
Your bank may charge a fee
for this service.
By exchange
[Clipart] o Accounts of any type. o Obtain a current prospectus for
o Sales of any amount. the fund into which you are
exchanging by calling your
financial representative or
Signature Services.
o Call your financial
representative or Signature
Services to request an exchange.
- ----------------------------------------
Address
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone
1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- ----------------------------------------
To sell shares through a systematic withdrawal plan, see "Additional investor
services."
YOUR ACCOUNT 17
<PAGE>
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
[Clipart]
- --------------------------------------------------------------------------------
Owners of individual, joint, o Letter of instruction.
sole proprietorship, UGMA/UTMA o On the letter, the signatures and
(custodial accounts for minors) titles of all persons authorized to
or general partner accounts. sign for the account, exactly as
the account is registered.
o Signature guarantee if applicable
(see above).
Owners of corporate or o Letter of instruction.
association accounts. o Corporate resolution, certified
within the past twelve months.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Signature guarantee if applicable
(see above).
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of
the trustee(s).
o If the names of all trustees are
not registered on the account,
please also provide a copy of the
trust document certified within the
past twelve months.
o Signature guarantee if applicable
(see above).
Joint tenancy shareholders whose o Letter of instruction signed by
co-tenants are deceased. surviving tenant.
o Copy of death certificate.
o Signature guarantee if applicable
(see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor.
o Signature guarantee if applicable
(see above).
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or instruction.
account types not listed above.
18 YOUR ACCOUNT
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time) by dividing a class's net assets
by the number of its shares outstanding.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Signature Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, Signature Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are not taken, Signature Services is
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone transactions are not
permitted on accounts whose names or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
Exchanges You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B shares
will continue to age from the original date and will retain the same CDSC rate
as they had before the exchange, except that the rate will change to that of the
new fund if the new fund's rate is higher. A CDSC rate that has increased will
drop again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may also refuse any exchange order.
A fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
Certificated shares Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Signature Services. Certificated
shares can only be sold by returning the certificates to Signature Services,
along with a letter of instruction or a stock power and a signature guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
Eligibility by state You may only invest in, or exchange into, fund shares
legally available in your state.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The funds generally declare dividends daily and pay them monthly.
Short- and long-term capital gains, if any, are distributed annually, typically
after the end of a fund's fiscal year. Your dividends begin accruing the day
after payment is received by the fund and continue through the day your shares
are actually sold.
YOUR ACCOUNT 19
<PAGE>
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
Taxability of dividends As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
Each fund intends to meet certain federal tax requirements so that distributions
of the tax-exempt interest it earns may be treated as "exempt-interest
dividends." However, any portion of exempt-interest dividends attributable to
interest on private activity bonds may increase certain shareholders'
alternative minimum tax.
Dividends from a fund's short- and long-term capital gains are taxable. Taxable
dividends paid in January may be taxable as if they had been paid the previous
December.
The state tax-free income funds intend to comply with certain state tax
requirements so that their income dividends generally will be exempt from state
and local personal income taxes in the applicable state. Dividends of the other
tax-free income funds are generally not exempt from state and local income
taxes.
The tax information that is mailed to you every January details your dividends
and their federal tax category, although you should verify your tax liability
with your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small accounts (non-retirement only) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Signature Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your account application.
o If you are using MAAP to open an account, make out a check ($25 minimum)
for your first investment amount payable to "John Hancock Signature
Services, Inc." Deliver your check and application to your financial
representative or Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payment or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account
(buying shares during a period when you are also selling shares of the
same fund is not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and
there is no limit to the number of payees you may have, as long as they
are all on the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Signature Services.
Retirement plans John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SIMPLE plans, SEPs, 401(k) plans, 403(b) plans (including
TSAs) and other pension and profit-sharing plans. Using these plans, you can
invest in any John Hancock fund (except tax-free income funds) with a low
minimum investment of $250 or, for some group plans, no minimum investment at
all. To find out more, call Signature Services at 1-800-225-5291.
20 YOUR ACCOUNT
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
How the funds are organized Each John Hancock tax-free income fund is an
open-end management investment company or a series of such a company.
Each fund is supervised by a board of trustees, an independent body that has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others (see diagram). The board has the right, and
the obligation, to terminate the fund's relationship with any of these companies
and to retain a different company if the board believes it is in the
shareholders' best interests.
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock tax-free income funds may
include individuals who are affiliated with the investment adviser. However, the
majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
[The following information was represented as a flow chart in the printed
material.]
-----------------
Shareholders
-----------------
Distribution and
shareholder services
-------------------------------------------------
Financial services firms and
their representatives
Advise current and prospective share-
holders on their fund investments, often
in the context of an overall financial plan.
-------------------------------------------------
-------------------------------------------------
Principal distributor
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Markets the funds and distributes shares
through selling brokers, financial planners
and other financial representatives.
-------------------------------------------------
------------------------------------------------------
Transfer agent
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Handles shareholder services, including record-
keeping and statements, distribution of dividends
and processing of buy and sell requests.
------------------------------------------------------
Asset management
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodian
Investors Bank & Trust co.
200 Clarendon Street
Boston, MA 02116
Holds the funds' assets, settles all
portfolio trades and collects most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
------------------------------------
Trustees
Supervise the funds' activities.
------------------------------------
YOUR ACCOUNT 21
<PAGE>
Accounting compensation The funds compensate the adviser for performing tax and
financial management services. Annual compensation is not expected to exceed
0.02% of each fund's average net assets.
Portfolio trades In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock Mutual
Life Insurance Company, but only when the adviser believes no other firm offers
a better combination of quality execution (i.e., timeliness and completeness)
and favorable price.
Investment goals and policies Except for Massachusetts and New York Tax-Free
Income Funds, each fund's investment goal is fundamental and may only be changed
with shareholder approval. Each fund's policy of investing at least 80% in
municipal securities is fundamental and may not be changed without shareholder
approval. The High Yield Tax-Free Fund's 80% credit policy is also fundamental.
Diversification Except for the Massachusetts and New York Tax-Free Income Funds,
all of the tax-free income funds are diversified.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock Funds,
pay compensation to financial services firms that sell the funds' shares. These
firms typically pass along a portion of this compensation to your financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets ("12b-1" refers to the federal
securities regulation authorizing annual fees of this type). The 12b-1 fee rates
vary by fund and by share class, according to Rule 12b-1 plans adopted by the
funds. The sales charges and 12b-1 fees paid by investors are detailed in the
fund-by-fund information. The portions of these expenses that are reallowed to
financial services firms are shown on the next page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
- --------------------------------------------------------------------------------
Class B unreimbursed distribution expenses(1)
- --------------------------------------------------------------------------------
Unreimbursed As a % of
Fund expenses net assets
California Tax-Free Income $ 4,675,967 5.45%
High Yield Tax-Free $ 7,504,868 5.22%
Massachusetts Tax-Free Income $ 22,252 2.40%
New York Tax-Free Income $ 9,306 0.39%
Tax-Free Bond $10,547,839 5.86%
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
Initial compensation Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
Annual compensation Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
22 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Class A investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total compensation(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 3.00% 2.26% 0.25% 2.50%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments of
$1 million or more
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50%
Next $1 and more above that -- 0.00% 0.25% 0.25%
Waiver investments(2) -- 0.00% 0.25% 0.25%
- --------------------------------------------------------------------------------
Class B investments
- --------------------------------------------------------------------------------
<CAPTION>
Maximum
reallowance First year Maximum
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
All amounts 3.75% 0.25% 4.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
FUND DETAILS 23
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following page are brief descriptions of these
securities and practices, along with the risks associated with them. The funds
follow certain policies that may reduce these risks.
As with any bond fund, there is no guarantee that a John Hancock tax-free income
fund will earn income or show a positive return over any period of time -- days,
months or years.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks.
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. Common to all debt securities.
Information risk The risk that key information about a security or market is
inaccurate or unavailable. Common to all municipal securities.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that
the fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industry, sector of
the economy or the market as a whole. Common to all stocks and bonds and the
mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, such as
earthquakes and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
Political risk The risk of losses attributable to government or political
actions of any sort.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
24 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Higher-risk securities and practices
- --------------------------------------------------------------------------------
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semiannual reports.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
* No policy limitation on usage; fund may be using currently
o Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
California Massachusetts New York
Tax-Free High Yield Tax-Free Tax-Free Tax-Free
Income Tax-Free Income Income Bond
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment practices
Borrowing; reverse repurchase agreements
The borrowing of money from banks or
through reverse repurchase agreements.
Leverage, credit risks 15 33.3(1) 33.3 33.3 15
Repurchase agreements The purchase of
a security that must later be sold back
to the issuer at the same price plus
interest. Credit risk * * * * *
Securities lending The lending of securities
to financial institutions, which provide cash or
government securities as collateral. Credit risk 33.3 -- 33.3 33.3 33.3
Short-term trading Selling a security soon after
purchase. A portfolio engag ing in short-term
trading will have higher turnover and transaction
expenses. Market risk * * * * *
When-issued securities and forward commitments
The purchase or sale of securities for
delivery at a future date; market value may
change before delivery. Market, opportunity,
leverage risks * * * * *
- -------------------------------------------------------------------------------------------------------------------------
Conventional securities
Non-investment-grade debt securities
Debt securities rated below BBB/Baa are
considered junk bonds. Credit, market, interest
rate, liquidity, valuation, information risks 20 85 33.3 33.3 35
Private activity bonds Municipal debt obligations
that are backed primarily by revenues
from non-governmental entities. Credit, information,
interest rate, political, natural event risks * * * * *
Restricted and illiquid securities Securities not
traded on the open market. May include illiquid
Rule 144A securities. Liquidity, valuation, market
risks 10 10 15 15 10
- -------------------------------------------------------------------------------------------------------------------------
Unleveraged derivative securities
Participation interests Securities representing
an interest in another security, often a municipal
lease obligation (MLO). MLOs are not backed by the
full faith and credit of the issuing municipality
Credit, information, interest rate, liquidity,
valuation risks * * * * *
- -------------------------------------------------------------------------------------------------------------------------
Leveraged derivative securities
Financial futures and options; securities and
index options Contracts involving the right or
obligation to deliver or receive assets or money
depending on the performance of one or more
assets or an economic index
o Futures and related options. Interest
rate, market, hedged or speculative
leverage, correlation, liquidity,
opportunity risks * * * * *
o Options on securities and indices. Interest
rate, market, hedged or speculative leverage,
correlation, liquidity, credit, opportunity
risks o o o o o
Structured securities Leveraged and/or indexed debt
securities, including principal-only and interest-only
securities, leveraged floating rate securities and
others. These securities tend to be highly sensitive
to interest rate movements and their performance may
not correlate to such movements in a conventional
fashion. Credit, interest rate, market, speculative
leverage, liquidity, valuation risks * * * * *
Swaps, caps, floors, collars OTC contracts involving
the right or obligation to receive or make payments
based on two different income streams. Correlation,
credit, interest rate, hedged or speculative leverage,
liquidity, valuation risks o o o o o
</TABLE>
(1) Applies to reverse repurchase agreements. Other borrowings are limited to
15% of total assets.
FUND DETAILS 25
<PAGE>
- --------------------------------------------------------------------------------
Analysis of funds with 5% or more in junk bonds(1)
- --------------------------------------------------------------------------------
Quality rating
(S&P/Moody's)(2) High Yield Tax-Free Fund Tax-Free Bond Fund
Investment-Grade Bonds
----------------------------------------------------------------------------
AAA/Aaa 11.4% 31.2%
----------------------------------------------------------------------------
AA/Aa 1.6% 8.5%
----------------------------------------------------------------------------
A/A 4.0% 16.3%
----------------------------------------------------------------------------
BBB/Baa 27.7% 31.8%
- --------------------------------------------------------------------------------
Junk Bonds
----------------------------------------------------------------------------
BB/Ba 48.2% 11.0%
----------------------------------------------------------------------------
B/B 7.1% 1.2%
----------------------------------------------------------------------------
CCC/Caa 0.0% 0.0%
----------------------------------------------------------------------------
CC/Ca 0.0% 0.0%
----------------------------------------------------------------------------
C/C 0.0% 0.0%
----------------------------------------------------------------------------
% of portfolio in bonds 100.0 100.0
n Rated by Standard & Poor's or Moody's n Rated by the adviser
(1) Data as of fund's last fiscal year end.
(2) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
26 FUND DETAILS
<PAGE>
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
tax-free income funds:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual/ semiannual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference (is legally a part of this prospectus).
To request a free copy of the current annual/semiannual report or SAI, please
write or call:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts 02199-7603
John Hancock(R)
Financial Services
(C) 1996 John Hancock Funds, Inc.
TEXPN 1/98
<PAGE>
JOHN HANCOCK TAX-EXEMPT SERIES FUND
John Hancock Massachusetts Tax-Free Income Fund
John Hancock New York Tax-Free Income Fund
Class A and Class B Shares
Statement of Additional Information
January 1, 1998
This Statement of Additional Information provides information about John Hancock
Tax-Exempt Series Fund (the "Trust") and its two series, the John Hancock
Massachusetts Tax-Free Income Fund and the John Hancock 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 dated
January 1, 1998 (the "Prospectus"). Each Fund is a 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.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Funds .....................................................2
Investment Objective and Policies .............................................2
Special Risks .................................................................6
Ratings.......................................................................12
Investment Restrictions ......................................................22
Those Responsible For Management .............................................24
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 Sares .......................................40
Special Redemptions ..........................................................43
Additional Services And Programs .............................................44
Description Of The Funds' Shares .............................................45
Tax Status ...................................................................47
State Income Tax Information .................................................51
Calculation Of Performance ...................................................53
Brokerage Allocation .........................................................55
Transfer Agent Services ......................................................57
Custody Of Portfolios ........................................................57
Independent Accountants ......................................................57
Appendix A ..................................................................A-1
Financial Statements ........................................................F-1
1
<PAGE>
ORGANIZATION OF THE FUNDS
The Funds are a series of the Trust, an open-end investment management company
organized as a Massachusetts business trust under the laws of The Commonwealth
of Massachusetts.
John Hancock Advisers, Inc. (the "Adviser") is the Funds' investment adviser.
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.
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.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Funds' investment
objective and policies discussed in the Prospectus. There is no assurance that
either Fund will achieve its investment objective.
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.
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:
2
<PAGE>
(1) Tax-Exempt Bonds which at the time of purchase are rated A or
better by Standard & Poor's Ratings Group ("S&P"), 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.
(2) Tax-Exempt Bonds which are rated BBB or BB by S&P 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 S&P, 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 S&P, 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.
3
<PAGE>
Notes. Tax-Exempt Notes generally are used to provide for short-term capital
needs and generally have maturities of one year or less. Tax-Exempt Notes
include:
1. Project Notes. Project notes are backed by an agreement
between a local issuing agency and the Federal Department of
Housing and Urban Development ("HUD") and carry a United
States Government guarantee. These notes provide financing for
a wide range of financial assistance programs for housing,
redevelopment, and related needs (such as low-income housing
programs and urban renewal programs). Although they are the
primary obligations of the local public housing agencies or
local urban renewal agencies, the HUD agreement provides for
the additional security of the full faith and credit of the
United States Government. Payment by the United States
pursuant to its full faith and credit obligation does not
impair the tax-exempt character of the income from Project
Notes.
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 S&P 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.
4
<PAGE>
"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 S&P
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
may well be introduced in the future. If it appeared that the availability of
5
<PAGE>
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.
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.
Participation Interests. Participation interests, which may take the form of
interests in, or of a lending syndicate. Each Fund's investments in
participation interests may be 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. Participation interests in municipal lease obligations will not be
considered illiquid for purposes of the Fund's 15% limitation on illiquid
securities provided the Adviser determines that there is a readily available
market for such securities. In reaching liquidity decisions, the Adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer.) With respect to municipal lease obligations, the Adviser also
considers: (1) the willingness of the municipality to continue, annually or
biannually, to appropriate funds for payment of the lease; (2) the general
credit quality of the municipality and the essentiality to the municipality of
the property covered by the lease; (3) an analysis of factors similar to that
performed by nationally recognized statistical rating organizations in
evaluating the credit quality of a municipal lease obligation, including (i)
whether the lease can be canceled; (ii) if applicable, what assurance there is
that the assets represented by the lease can be sold; (iii) the strength of the
lessee's general credit (e.g., its debt, administrative, economic and financial
characteristics); (iv) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an event of nonappropriation); and (v) the legal recourse in the event of
failure to appropriate; and (4) any other factors unique to municipal lease
obligations as determined by the Adviser.
The investment objectives and policies described above under the caption
"Investment Objectives 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
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
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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") continues
to remain strong with unemployment falling to 4.3% for 1996, while the national
unemployment rate was 5.3%. In September 1997, the unemployment rate in the
Commonwealth was 4.0% versus the national rate of 4.9%.
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 from a steadily growing state economy. Since Fiscal 1994, the
Commonwealth's tax revenues have increased from $10.6 billion to an estimated
$12.9 billion in Fiscal 1998, an average annual gain of 5.3%. For Fiscal 1998,
tax revenues are expected to remain level with 1997 estimates, while including a
proposed reduction in the tax rate on certain personal income of $196 million,
and a change in the sales tax payment schedule, accounting for $140 million.
Initial projections suggest that Fiscal 1998 could mark the commonwealth's
seventh consecutive operating surplus.
In response to continued strong economic growth, sound financial position, and
the significant progress made in reducing the state's unfunded pension
liability, Standard and Poor's raised the Commonwealth's credit rating from A+
to AA- in October of 1997.
Prior Fiscal Years
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
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
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million was deposited in the Stabilization Fund; and approximately $11.1 million
was deposited to the Cost Relief Fund.
Fiscal 1996. The Fiscal 1996 budget totaled 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. 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 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 to establish a tax reduction reserve equal to
$234 million. Monies in the tax reduction reserve were applied as one-time tax
credit for Fiscal Year 1997.
Fiscal 1997. The 1997 budget provided for expenditures of $17.7 billion, an
increase of 4.8% over Fiscal 1996. This budget incorporated an expected decline
in income tax revenues and anticipated using reserves to maintain budget
balance. Tax revenues, however, increased by 6.7% from 1996. On August 29th a
supplemental appropriation bill was enacted, which provided for $195 million in
additional fiscal 1997 appropriations, of which $63.7 million were carried
forward into fiscal 1998.
The Legislature established a Capital Investment Trust Fund to provide for the
transfer of $229.8 million to finance specified expenditures for equipment
purchases, deferred maintenance and repairs, technology upgrades, and capital
purchases and improvements. The spending authorization expires in 1999 when any
unexpended balances in the fund will be transferred to the Stabilization Fund.
In addition to the mandated transfer, the legislature transferred $100 million
to the Stabilization Fund, and $128 million to a Caseload Increase Mitigation
Fund which had been established in fiscal budget 1998.
Current Fiscal Year
Fiscal 1998. Paul Cellucci became Acting Governor of Massachusetts on July 29,
1997 when Governor Bill Weld resigned the post to pursue the US Ambassadorship
to Mexico. The budget for fiscal 1998, approved on July 10, 1997, was based on a
tax revenue forecast of $12.85 billion. Fiscal 1998 emphasizes economic
development, children and families, education and training, supporting cities
and towns, public safety and environmental management. Specific programs include
reductions in corporate taxes, proposals to reduce individual tax rates,
increases in child care, job training and education assistance, additional
school building support, increased aid to cities and towns, and rate relief for
communities involved with the Massachusetts Water Resource Authority. The fiscal
1998 tax forecast later increased to $13.06 billion on July 30th and then to
$13.20 billion on October 15th. Through September, 1997 tax collections total
$3.089 billion, 7.3% higher than collections for this time period in fiscal
1997, and $9.5 million above projected tax revenues. On July 30th, Acting
Governor Cellucci filed legislation to reduce the certain income tax rates,
estimated to cost $196 million in fiscal 1998. The fiscal 1998 budget provides
for $18.4 billion in appropriations, which was reduced by $3.3 million by
Governor Weld. This is a 3.8% increase over estimated fiscal 1997 expenditures.
On July 10th, Governor Weld filed a supplemental appropriation bill which would
reduce appropriations to public higher education by $24 million to create a $24
million reserve to offset reductions in student fees during fiscal 1998. The
bill also eliminates student fee increases after July 1st, 1997 without approval
of the Board of Higher Education. On October 6th, a bill was filed to spend
$51.6 million on construction and repair of local roads and bridges. On October
17th, an additional supplemental appropriations bill was filed recommending
$37.5 million to provide for certain unanticipated obligations of the
Commonwealth, and to propose the transfer off-budget of the $128 million
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Caseload Increase Mitigation Fund to a trust fund and of a $206 million
Department of Medical Assistance reserve to indemnify certain medical facilities
against losses that might result from providing uncompensated care. These
supplemental appropriation bills are being considered by the House Committee on
Ways and Means.
Credit Factors
The uncertainty surrounding the expected final cost of the Central Artery/Ted
Williams Tunnel project could impact the continuing fiscal health of the
Commonwealth. Currently, the Commonwealth estimates that project costs should
total $11.6 billion. This projection anticipates that the annual Federal highway
funding of at least $550 million will be provided up until completion in 2005.
Recent revisions proposed for the allocation of federal highway funds suggest
that the Commonwealth may receive less than the expected $550 million for
completion of the Central Artery. Any shortfalls in Federal funding or
unanticipated escalations in project costs will place additional burdens upon
the transportation agencies and the general credit of the Commonwealth to fund
these ongoing amounts from surplus revenues or additional debt issuance.
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; "AA-" from Standard and Poor's, and "A+" from
Fitch.
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New York Tax-Exempt Bonds
The following section provides only a brief summary of the complex factors
affecting the financial situation in New York and is based on information
obtained from New York State (the "State" or "New York State") certain of its
authorities and New York City (the "City" or "New York City") as publicly
available on the date of this Statement of Additional Information. The
information contained in such publicly available documents has not been
independently verified. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
the State, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default in the absence of a
specific guarantee of pledge provided by the State. It should also be noted that
the fiscal stability of New York State is related to the fiscal stability of New
York City and of the State's Authorities. New York State's experience has been
that if New York City or any other major political subdivision or any of the
State's Authorities suffers serious financial difficulty, the ability of New
York State, New York State's political subdivisions (including New York City)
and the State's Authorities to obtain financing in the public credit markets is
adversely affected. This results in part from the expectation that to the extent
that any Authority or local government experiences financial difficulty, it will
seek and receive New York State financial assistance. Moreover, New York City
accounts for approximately 40 percent of New York State's population and tax
receipts, so New York City's financial integrity in particular affects New York
State directly. Accordingly, if there should be a default by New York City or
any other major political subdivision or any of the State's Authorities, the
market value and marketability of all New York Tax-Exempt Bonds issued by New
York State, its political subdivisions and Authorities ("New York Tax-Exempt
Bonds") could be adversely affected. This would have an adverse effect on the
asset value and liquidity of the New York Fund, even though securities of the
defaulting entity may not be held by the Fund.
Regional Economy
Based upon forecasts for the national economy, the State's Budget Division
projects continuation of moderate employment growth throughout the remainder of
1997. Wage and personal income growth should be slower when compared to 1996,
since the forecast does not anticipate another sharp rise in Financial Industry
bonus payments occurring in December. Total and private-sector employment should
continue to grow at about the same rate as 1996, when employment increased by
0.8%, representing a 0.2% improvement; a net expansion of 60,000 jobs over the
1995. In 1996, the unemployment rates for New York State and New York City were
6.2% and 8.8% respectively, as compared to 5.3% for the United States. For
September of 1997, unemployment in New York State and New York City have risen
to 6.4% and 8.9% respectively, as compared to the rate for the United States
which has gone down to 4.9%.
1997-1998 Fiscal Year. On August 4, 1997, the State's budget for fiscal
1997-1998 was adopted by the Legislature, more than four months after the start
of the fiscal year on April 1, 1997. The State Financial Plan for 1997-1998 was
formulated on August 11, 1997, and is expected to be updated in October and
January. State Funds disbursements are projected to increase by 7.0% from
1996-1997. General Fund disbursements are planned to increase by $1.7 billion,
or 5.2% over 1996-1997 levels. The Plan calls for the provision of $927 million
in reserves including: a reserve for future needs of $530 million, and a
projected balance of $332 million in the Tax Stabilization Reserve Fund, and a
projected $65 million balance in the Contingency Reserve Fund. Revenues are
expected to increase due to increased resources produced in 1996-1997 fiscal
year that will be used during 1997-1998, reestimates of social services, fringe
benefit and other spending, and certain non-recurring resources.
The budget adopted includes multi-year tax reductions, including a State funded
property and local income tax reduction program, estate tax relief, utility
gross receipts tax reductions, permanent reductions in the State sales tax on
clothing, and elimination of assessments on medical providers. This tax
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reductions will not begin to materially affect the outyear projections until the
State's 1999-2000 fiscal year.
The state expects to finance its capital program through bond issuance by the
State and its Authorities. The state anticipates issuing $605 million in general
obligation bonds and, $140 million in general obligation commercial paper. The
Legislature has authorized the issuance of $311 million in COPs for equipment
purchases. Borrowing by Authorities through lease-purchase and
contractual-obligation financings are expected to total $1.9 billion.
1996-1997 Fiscal Year. The state ended the 1996-1997 fiscal year with a combined
Governmental Funds operating surplus of $2.1 billion, which included an
operating surplus in the General Funds of $1.9 billion, in Capital Projects
Funds of $98 million and in the Special Revenue Funds of $65 million, offset in
part by an operating deficit of $37 million in the Debt Service Funds.
General Fund receipts totaled $33 billion during the Fiscal Year. Revenues
increased $1.91 billion (nearly 6.0%) over the prior fiscal year. Personal
income taxes grew $620 million (3.6%), despite the implementation of scheduled
tax cuts. This increase is attributable to moderate employment and wage growth
and the strong financial markets during 1996.
The General Fund reported an operating surplus of $1.93 billion for the fiscal
year, as compared to $380 million for the previous fiscal year. Debt Service
Funds ended the 1996-1997 fiscal year with an operating deficit of $37 million,
as a result, the accumulated fund balance declined to $1.90 billion. An
operating surplus was reported for the Special Revenue Funds and the Capital
Projects Funds of $65 million and $98 million respectively, bringing the
accumulated fund balance of the Special Revenue Fund to $532 million, and the
accumulated fund balance of the Capital Projects Fund to $614 million.
Expenditures increased $830 million or 2.6% from the prior fiscal year. The
largest increases occurred in pension contributions, which were up $514 million
(198.2%), and State aid for education spending, which was up $351 million (
3.4%). The pension increase was due to the State paying off its 1984-85 and
1985-86 pension amortization liability. Modest increases in other State aid
spending was offset by a decline in social services expenditure of $157 million
(1.7%).
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.
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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.
RATINGS
On August 28, 1997 Standard and Poor's upgraded their rating for the State of
New York from to A- to A, this upgrade was the first rating increase in 10 years
for the State of New York. The current General Obligation ratings for the State
of New York are A2 by Moody's, A by S&P and A+ by Fitch Investors Services.
Credit Considerations
Current Budget. The Fiscal Year 1997-1998 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.
Welfare Reform. 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. Governor Pataki signed into law a comprehensive welfare law
reform bill on August 20, 1997, which took effect November 1, 1997. The new
policy aims to reduce welfare rolls by: rewarding work by enabling recipients to
keep more of what they earn, making day care more available, and continuing
Medicaid benefits after leaving welfare.
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 that apply
to New York State. Authorities 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
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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.
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 In 1975, New York City encountered severe financial difficulties
which impaired the borrowing ability of New York City, New York State, and the
Authorities. New York City lost access to public credit markets and was not able
to sell debt to the public until 1979.
As a result of the City's financial difficulties, certain organizations were
established to provide financial assistance and oversee and review the City's
financing. These organizations continue to exercise various monitoring functions
relating to the City's financial position.
New York City has maintained a balanced budget 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 actual 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 of short term obligations to finance
the City's current estimate of its seasonal financing needs during its 1997
fiscal year. The City's capital financing program projects long-term financing
requirements of approximately $16.2 billion for the City's fiscal years 1998
through 2001 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. In 1997, to help the
City avoid exceeding its State Constitutional general debt limit, the State
created the New York City Transitional Finance Authority to finance a portion of
the City's capital program.
New York cities and towns have experienced financial stress due to the slow rate
of recovery from the recession of 1992; offset in part by increasing local
assistance support from the state. The 1997-1998 State Financial Plan projects
total receipts of the State's General Fund to be $35.1 billion, an increase of
$205 million from the prior fiscal year. State General Fund disbursements and
transfers will be $170.3 million above the level of disbursements in 1996-1997.
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Grants to local governments, including education aid and Social Services, are
anticipated to increase by $75 million from the prior fiscal year.
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 1997-98 fiscal year and thereafter. Continuing 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 (bonds and notes) of all localities in the State, other
than New York City, was approximately $19 billion as of the localities' fiscal
year ending during 1995. 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) changes in Medicaid reimbursement methodology for
nursing home care; (v) the State's practice of reimbursing certain mental
hygiene patient-care expenses with the client's Social Security benefits; (vi)
adequacy of shelter allowance provided to recipients of public assistance; (vii)
contract and tort claims; (viii) alleged violation of the Commerce Clause of the
United States Constitution; (ix) enforcement of sales and excise tax collections
of tobacco and motor fuel sold to non-Indian customers on Indian reservations;
(x) legality of the Clean Water/Clean Air Bond Act of 1996; and (xi) alleged
responsibility of New York State officials to assist in remedying racial
segregation in the City of Yonkers.
Repurchase Agreements. The Fund may enter into repurchase agreements for the
purpose of realizing additional (taxable) income. 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.
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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.
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. A Fund will not invest more than 15% of its net assets
in illiquid investments. If the Trustees determine, based upon a continuing
review of the trading markets for specific Section 4(2) paper or Rule 144A
securities, that they are liquid, they will not be subject to the 15% limit on
illiquid investments. The Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor 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.
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 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
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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 other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
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Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on 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 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.
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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. 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.
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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.
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.
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Structured or Hybrid Notes. Each Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Indexed Securities. Each Fund may invest in indexed securities, including
floating rate securities that are subject to a maximum interest rate ("capped
floaters") and leveraged inverse floating rate securities ("inverse floaters")
(up to 10% of the Fund's total assets). The interest rate or, in some cases, the
principal payable at the maturity of an indexed security may change positively
or inversely in a relation to one or more interest rates, financial indices, or
other financial indicators ("reference prices"). An indexed security may be
leveraged to the extent that the magnitude of any change in the interest rate or
principal payable on an indexed security is a multiple of the change in the
reference price. Thus, indexed securities may decline in value due to adverse
market charges in interest rates or other reference prices.
Risk Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. The risk of early prepayments
is the primary risk associated with interest only debt securities ("IOs"), super
floaters and other leveraged floating rate instruments. In some instances, early
prepayments may result in a complete loss of investment in certain of these
securities. The primary risks associated with certain other derivative debt
securities are the potential extension of average life and/or depreciation due
to rising interest rates.
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
leveraged inverse floating rate securities ("inverse floaters"), principal only
debt securities ("POs") and certain residual or support branches of index
amortizing notes. Index amortizing notes are subject to extension risk resulting
from the issuer's failure to exercise its option to call or redeem the notes
before their stated maturity date. Leveraged inverse IOs present an especially
intense combination of prepayment, extension and interest rate risks.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X- reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
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
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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.
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps, and
other types of swap agreements such as caps, collars and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. Caps and floors have an effect similar to buying or
writing options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of a Fund's investments and its share price and
yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
Lending of Securities. For purposes of realizing additional (taxable) income,
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 and money market funds. When a Fund lends
portfolio securities, there is a risk that the borrower may fail to return the
securities involved in the transaction. As a result, the Fund may incur a loss
or, in the event of the borrower's bankruptcy, the Fund may be delayed in or
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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.
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 correspondingly higher brokerage expenses. Each Fund's
portfolio turnover rate is set forth in the table under the caption "Financial
Highlights" in the Prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The fundamental investment restrictions
will not be changed for the Funds without the approval of a majority of that
Fund's outstanding voting securities which, as used in the Prospectus and this
Statement of Additional Information, means the approval by the lesser of (1) the
holders of 67% or more of that Fund's shares represented at a meeting if more
than 50% of that Fund's outstanding shares are present in person or by proxy at
that meeting or (2) more than 50% of that Fund's outstanding shares.
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 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 TaxExempt 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.
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(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.
Non-fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval:
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.
(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 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
23
<PAGE>
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.
(4) invest more than 15% of its net assets in illiquid securities.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of each Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of each Fund is managed by the Trustees of the Trust who elect
officers who are responsible for the day-to-day operations of the Funds and who
execute policies formulated by the Trustees. Several of the officers and/or
Trustees of the Trust are also officers and/or directors of the Adviser or
officers and Trustees of the Funds' principal distributor, John Hancock Funds,
Inc. ("John Hancock Funds").
24
<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, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Trustee and Chief
October 1944 Executive Officer, The Berkeley
Financial Group ("The Berkeley
Group"); Chairman and Director, NM
Capital Management, Inc. ("NM
Capital"), John Hancock Advisers
International Limited ("Advisers
International") and Sovereign Asset
Management Corporation ("SAMCorp");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds");
Chairman, First Signature Bank and
Trust Company; Director, John
Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Advisers International
(Ireland) Limited ("International
Ireland"), 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;
Director, John Hancock Freedom
Securities Corporation (until
September 1996); Director, John
Hancock Signature Services, Inc.
("Signature Services") (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(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
- ---------------- ---------------- --------------------------
Dennis S. Aronowitz Trustee (3) Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Ft. Lauderdale, FL 33327 1997); Trustee, Brookline Savings
June 1931 Bank.
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.
26
<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) Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Director, Santa Fe Ingredients
December 1928 Company of California, Inc. and
Santa Fe Ingredients Company, Inc.
(private food processing companies),
Uranium Resources Corporation;
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.
27
<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,
3054 So. Abingdon Street The Conference Board (non-profit
Arlington, VA 22206 economic and business research);
December 1947 Director, Unisys Corp.; and H.B.
Fuller Company.
William F. Glavin Trustee (3) President Emeritus, Babson College
120 Paget Court - John's Island (as of 1997); Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June 1989);
March 1932 Director, Caldor Inc., Reebok, Inc.
(since 1994) and Inco Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Trustee,
Boston, MA 02199 The Berkeley Group; Director, John
April 1953 Hancock Funds, Advisers
International, Insurance Agency,
Inc. and International Ireland;
President and Director, SAMCorp. and
NM Capital; Executive Vice
President, the Adviser (until
December 1994); Director, Signature
Services (until January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(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
- ---------------- ---------------- --------------------------
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.
29
<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, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Trustee, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Fort 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, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Senior Vice President,
The Berkeley Group; President, the
Adviser (until December 1994);
Director, Signature Services (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
30
<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.
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; Secretary, NM Capital and
SAMCorp.; Clerk, Insurance Agency,
Inc.; Counsel, John Hancock Mutual
Life Insurance Company (until
February 1996), and Vice President
of John Hancock Distributors, Inc.
(until April 1994).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
- -------------------
* 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.
</TABLE>
31
<PAGE>
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers or
Trustees of one or more of the other funds for which the Adviser serves as
investment adviser.
As of December 1, 1997, 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:
Name and Address of Shareholder Percentage of total
Outstanding shares of the
Massachusetts Class of Shares class of the Fund
- ------------- --------------- -----------------
MLPF&S For The Sole Benefit
Of Its Customers
Attn: Fund Administration
4800 Deer Lake Drive East
Jacksonville FL 32246-6484 B 10.39%
New York
MLPF`&S For The Sole Benefit
Of Its Customers
Attn: Fund Aministration
4800 Deer Lake Drive East
Jacksonville FL 32246-6484 B 24.77%
Edward H & Patricia F Warne TTEE
Warne Family Trust
U/A DTD 12/03/83
8549 Lamp Post Circle
Manlius NY 13104-9389 B 10.78%
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. Messrs. Boudreau and Scipione and Ms.
Hodsdon, each a non-Independent Trustee and each of the officers of the Funds
are interested persons of the Adviser, are compensated by the Adviser and
receive no compensation from the Funds for their services.
32
<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation From the Funds (1)
Total Compensation
From the Funds and John
Hancock Fund Complex
Independent Trustees Massacusetts Fund New York Fund to Trustees (2)
- -------------------- ----------------- ------------- ---------------
<S> <C> <C> <C>
Dennis J. Aronowitz $ 320 $ 325 $ 72,000
Richard P. Chapman(t) 330 336 75,000
William J. Cosgrove(t) 320 325 72,000
Douglas Costle 330 336 75,000
Leland O. Erdahl 320 325 72,000
Richard A. Farrell 330 336 75,000
Gail D. Fosler 320 325 72,000
William F. Glavin(t) 320 325 72,000
Bayard Henry* 0 0 0
Dr. John A. Moore(t) 320 325 72,000
Patti McGill Peterson 320 325 72,000
John Pratt 320 325 72,000
Edward J. Spellman 330 336 75,000
------ ------ --------
Total $3,880 $3,944 $876,000
</TABLE>
1 Compensation is for the fiscal year ended August 31, 1997.
2 Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 1997. As of this date, there were sixty-seven
funds in the John Hancock Fund Complex of which each of these Independent
Trustees served thirty-two.
* Mr. Henry retired from his position as a Trustee effective April 26, 1996.
(t) As of September 30, 1997, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $74,492, Mr. Cosgrove was $166,255, Mr. Glavin was $196,225 and for
Dr. Moore was $78,822 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 has more than $22 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 over 1,400,000 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 more than $100
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries a high rating from Standard and Poor's and A.M.
Best's. Founded in 1862, the Life Company has been serving clients for over 130
years.
33
<PAGE>
The Funds have entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Funds' shareholders.
Pursuant to the Advisory Agreements, the Adviser will: (a) furnish continuously
an investment program for the Funds and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Funds' operations except those which are delegated to a custodian, transfer
agent or other agent.
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.
As compensation for its services under the Advisory Agreements, each Fund pays
the Adviser monthly a fee based on a stated percentage of the average daily net
assets of each Fund 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%
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 reimpose a fee and recover any other
payments to the extent that, at the end of any fiscal year, the Fund's annual
expenses fall below this limit.
Securities held by a Fund may also be held by other funds or investment advisory
clients for which the Adviser or its affiliates provide investment advice.
Because of different investment objectives or other factors, a particular
security may be bought for one or more funds or clients when one or more are
selling the same security. If opportunities for purchase or sale of securities
by the Adviser for the Funds 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.
Pursuant to the Advisory Agreements, the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Funds in connection
with the matters to which their respective Advisory Agreement relate, except a
34
<PAGE>
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties or from reckless disregard
of the obligations and duties under the applicable Advisory Agreement.
Under the Advisory Agreements, the Funds may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If a Fund's
Advisory Agreement is no longer in effect, the Fund (to the extent that it
lawfully can) will cease to use such name or any other name indicating that it
is advised by or otherwise connected with the Adviser. In addition, the Adviser
or the Life Company may grant the non-exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
Each Advisory Agreement was approved by all of the Trustees. The Advisory
Agreement and the Distribution Agreement discussed below will continue in effect
from year to year, provided that its continuance is approved annually both (i)
by the holder of a majority of the outstanding voting securities of the Trust or
by the Trustees, and (ii) by a majority of the Trustees who are not parties to
the Agreement, or "interested persons" of any such parties. Both agreements may
be terminated on 60 days written notice by any party or by a vote of a majority
of the outstanding voting securities of the Funds and will terminate
automatically if assigned.
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.
For the year ended August 31, 1997, the management fee paid by the Massachusetts
and New York Funds to the Adviser amounted to $64,441 and $63,549, respectively.
Accounting and Legal Services Agreement The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Funds with certain tax, accounting
and legal services. For the fiscal year ended August 31, 1996, the Massachusetts
Tax-Free Income Fund and New York Tax-Free Income Fund paid the Adviser $6,958
and $7,059, for services respectively. For the fiscal year ended August 31,
1997, the Massachusetts Tax-Free Income and New York Tax-Free Income Fund paid
the Adviser $10,451 and $10,630, for services respectively.
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.
DISTRIBUTION CONTRACTS
Each 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 on behalf of the Funds. Shares of the Funds 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 Funds 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 from 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. John Hancock may pay extra compensation to financial services
35
<PAGE>
firms selling large amounts of fund shares. This compensation would be
calculated as a percentage of fund shares sold by the firm.
For the fiscal years ended August 31, 1996 and 1997, the following amounts
reflect (a) the total underwriting commissions for sales of the Funds' Class A
shares and (b) the portion of such amount retained by John Hancock Funds. The
remainder of the underwriting commissions were reallowed to dealers.
Massachusetts New York
Tax-Free Income Tax-Free Income
9/1/95-8/31/96 (a) $219,862 (b) $25,097 (a) $222,608 (b) $25,703
9/1/96-8/31/97 (a) $153,486 (b) $15,682 (a) $155,262 (b) $20,879
Each 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, each 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 average daily net assets attributable to shares of that class. However,
the service fee will not exceed 0.25% of the each 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 each Fund's shares; (ii) marketing,
promotional and overhead expenses incurred in connection with the distribution
of each Fund's 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 and others for providing personal and account
maintenance services to shareholders. In the event the John Hancock Funds is not
fully reimbursed for payments they make 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 Funds do not
treat unreimbursed expenses under the Class B Plan as a liability of the Funds,
because the Trustees may terminate Class B Plan at any time. For the fiscal year
ended August 31, 1997, an aggregate of $22,252 of distribution expenses or 2.40%
of the average net assets of Massachusetts Fund's Class B shares was not
reimbursed or recovered by John Hancock Funds through the receipt of deferred
sales charges or Rule 12b-1 fees in prior periods. For the same period, an
aggregate of $9,306 of distribution expenses or 0.81% of the average net assets
of New York Fund's Class B shares was not reimbursed or recovered by John
Hancock Funds through the receipt of deferred sales charges or Rule 12b-1 fees
in prior periods.
The Plans were approved by a majority of the voting securities of each Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of each 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 each 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.
Each of the Plans provides that it 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. Each of the Plans may be terminated without penalty, (a)
by vote of a majority of the Independent Trustees, (b) by a vote of a majority
36
<PAGE>
of the applicable 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. Each of the Plans further provides that it may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
applicable Fund which has voting rights with respect to that Plan. Each of the
Plans provide, that no material amendment to the Plan will be effective unless
it is approved by a vote of a majority of the Trustees and the Independent
Trustees of the applicable 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 affected Fund.
Amounts paid to John Hancock Funds by any class of shares of each Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of that Fund; provided, however, that expenses attributable to each 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 Trustees.
From time to time, the Funds 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, 1997, the Funds paid John Hancock Funds
the following amounts of expenses with respect to the Class A and Class B shares
of each of the Funds:
<TABLE>
<CAPTION>
Expense Items
Printing and
Mailing of Interest,
Prospectuses Compensation Expenses of Carrying or
to New to John Hancock Other Finance
Funds Advertising Shareholders Selling Brokers Funds Charges
----- ----------- ------------ --------------- ----- -------
<S> <C> <C> <C> <C> <C>
New York
Class A $ 36,739 $ 8,847 $ 58,120 $ 64,919 $ 0
Class B $ 3,021 $ 301 $ 695 $ 6,396 $ 22
Massachusetts
Class A $ 39,300 $ 8,250 $ 57,582 $ 61,220 $ 0
Class B $ 2,850 $ 638 $ 130 $ 4,783 $ 32
</TABLE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the shares of the
Funds, 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
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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.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Funds are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then only
will be issued for full shares. The Trustees of each Fund reserve the right to
change or waive each Fund's minimum investment requirements and to reject any
order to purchase shares (including purchase by exchange) when in the judgment
of the Adviser such rejection is in the respective Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Funds are
described in the Prospectus. Methods of obtaining a reduced sales charges
referred to generally in the Prospectus are described in detail below. In
calculating the sales charge applicable to current purchases of Class A shares,
the investor is entitled to accumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Funds, owned by
the investor, or if John Hancock Signature Services, Inc. ("Signature Services")
is notified by the investor's dealer or the investor at the time of the
purchase, the cost of the Class A shares owned.
Without Sales 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.
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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 Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has more than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. See your
Merrill Lynch financial consultant for further information.
o Existing full service clients of the Life Company who were
group annuity contract holders as of September 1, 1994, and
participant directed defined contribution plans with at least
100 eligible employees at the inception of the Fund account,
may purchase Class A shares with no initial sales charge.
However, for each Fund, if the shares are redeemed within 12
months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC Rate
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
*For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account, and (c) groups which quality for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a representative of a Selling Broker.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or current account value of the Class A shares of all
John Hancock funds which carry a sales charge already held by such person. Class
A shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
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Letter of Intention. Reduced sales charges are also applicable to investments
made pursuant to a Letter of Intention (the "LOI"), which should be read
carefully prior to its execution by an investor. Each Fund offers two options
regarding the specified period for making investments under the LOI. All
investors have the option of making their investments over a specified period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
qualified retirement plan, however, may opt to make the necessary investments
called for by the LOI over a forty-eight (48) month period. These qualified
retirement plans include IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs) and
Section 457 plans. Such an investment (including accumulations and combinations)
must aggregate $100,000 or more invested during the specified period from the
date of the LOI or from a date within ninety (90) days prior thereto, upon
written request to Signature Services. The sales charge applicable to all
amounts invested under the LOI is computed as if the aggregate amount intended
to be invested had been invested immediately. If such aggregate amount is not
actually invested, the difference in the sales charge actually paid and the
sales charge payable had the LOI not been in effect is due from the investor.
However, for the purchases actually made within the specified period (either 13
or 48 months), the sales charge applicable will not be higher than that which
would have applied (including accumulations and combinations) had the LOI been
for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing the
LOI, the investor authorizes Signature Services to act as his attorney-in-fact
to redeem any escrowed Class A shares and adjust the sales charge, if necessary.
A LOI does not constitute a binding commitment by an investor to purchase, or by
the subject Fund to sell, any additional Class A shares and may be terminated at
any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of an initial sales charge so that the 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 contingent deferred sales charge ("
CDSC") at the rates set forth in the Prospectus as a percentage of the dollar
amount subject to the CDSC. The charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
Class B shares being redeemed. No CDSC will be imposed on increases in account
value above the initial purchase prices, including all shares derived from
reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution plans
administered by Signature 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 the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
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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
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 facilitates the ability of the Funds to sell the Class B shares
without a sales charge being deducted at the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B 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 each 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
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value, including reinvested dividends, at the time you established your
periodic withdrawal plan and 12% of the value of subsequent investments
(less redemptions) in that account at the time you notify Signature
Services. (Please note, this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
For Retirement Accounts (such as IRA, SIMPLE plans, 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 or life expectancy 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 Plan and
Profit-Sharing Plan).
* 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.
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CDSC Waiver Matrix for Class B Funds.
- -------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-Retirement
Distribution (401(k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distribution value
or 12% of annually
account in
value periodic
annually payments
in
periodic
payments.
- --------------------------------------------------------------------------------
Between 59 Waived Waived Waived Waived for 12% of
1/2 and Life account
70 1/2 Expectancy value
or 12% of annually
account in
value periodic
annually payments
in
periodic
payments.
- --------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of
annuity annuity annuity account
payments payments payments value
(72t) or (72t) or (72t) or annually
12% of 12% of 12% of in
account account account periodic
value value value payments
annually annually annually
in in in
periodic periodic periodic
payments. payments. payments.
- --------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- --------------------------------------------------------------------------------
Termination Not Waived Not Waived Not Waived Not Waived N/A
of Plan
- --------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- --------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- --------------------------------------------------------------------------------
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although the Funds would not normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purpose of making such
payment at the same value as used in determining each Fund's net asset value.
Each Fund has, however, elected to be governed by Rule 18f-1 under the
Investment Company Act. Under that rule, each Fund must redeem its shares for
cash except to the extent that the redemption payments to any shareholder during
any 90-day period would exceed the lesser of $250,000 or 1% of the Fund's net
asset value at the beginning of such period.
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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.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transactions charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
Each Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
Each Fund may refuse any exchange order. Each Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. Each of the Funds permits the establishment of a
Systematic Withdrawal Plan. Payments under this plan represent proceeds arising
from the redemption of shares of the applicable Fund shares, which may result in
realization of gain or loss for purposes of Federal, state and local income
taxes. The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional Class A or Class B shares of the Funds could be
disadvantageous to a shareholder because of the initial sales charge payable on
such purchases of Class A shares and the CDSC imposed on redemptions of Class B
shares and because redemptions are taxable events. Therefore, a shareholder
should not purchase Class A or Class B 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 Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investment will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
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The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the due date of any investment.
Reinstatement and Reinvestment Privilege. If Signature Services is notified
prior to reinvestment, a shareholder who has redeemed shares of a Fund's shares
may, within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
that Fund or in another John Hancock fund, subject to the minimum investment
limit of that fund. The proceeds from the redemption of Class A shares may be
reinvested in Class A shares of another John Hancock fund. If a CDSC was paid
upon a redemption, a shareholder may reinvest the proceeds from this redemption
at net asset value in additional shares of the class from which the redemption
was made. The shareholder's account will be credited with the amount of the CDSC
previously charged upon the prior redemption and the new shares will continue to
be subject to the CDSC. The holding period of the shares acquired through
reinvestment will, for purposes of computing the CDSC payable upon a subsequent
redemption, include the holding period of the redeemed shares.
To protect the interests of other investors in each Fund, each Fund may cancel
the reinvestment privilege of any parties that, in the opinion of the Funds, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Funds may refuse any reinvestment
request.
Each Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS."
Retirement Plans participating in Merrill Lynch's servicing programs.
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
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 each Fund,
without par value. Under the Declaration of Trust, the Trustees have the
authority to create and classify shares of beneficial interest in separate
series, and in one or more classes, 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 Funds represent an equal proportionate interest
in the aggregate net assets attributable to that class or series of the Funds.
Holders of Class A and Class B shares have certain exclusive voting rights on
matters relating to their respective distribution plans. The different classes
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<PAGE>
of the Funds 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 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. No interest will
be paid on uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the applicable Fund available for distribution to
these shareholders. Shares entitle their holders to one vote per share, are
freely transferable and have no preemptive, subscription or conversion rights.
When issued, shares are fully paid and non-assessable, except as set forth
below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, each Fund has no intention of holding annual meetings of shareholders.
Each Fund's shareholders may remove a Trustee by the affirmative vote of at
least two-thirds of the Trust's outstanding shares and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
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
Prospectus shall be liable for the liabilities of any other John Hancock fund.
Liability is therefore limited to circumstances in which each Fund itself would
be unable to meet its obligations, and the possibility of this occurrence is
remote.
The Funds reserve the right to reject any application which conflicts with the
Funds' internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept credit card checks. Use of information provided on
the account application may be used by the Funds to verify the accuracy of the
information or for background or financial history purposes. A joint account
will be administered as a joint tenancy with right of survivorship, unless the
joint owners notify Signature Services of a different intent. A shareholder's
account is governed by the laws of The Commonwealth of Massachusetts.
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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 Internal Revenue Code
of 1986, as amended (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 its taxable and tax-exempt income (including net realized capital gains)
which is distributed to shareholders in accordance with the timing requirements
of the Code.
Each Fund will be subject to a four percent non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. 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 obligation 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
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
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interest from which (including the Fund's distributions attributable to such
interest) may be a preference item for purposes of the federal alternative
minimum tax (both individual and corporate). All exempt-interest dividends from
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
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.) As a result of federal tax legislation enacted on August 5, 1997 (the
"Act"), gain recognized after May 6, 1997 from the sale of a capital asset is
taxable to individual (noncorporate) investors at different maximum federal
income tax rates, depending generally upon the tax holding period for the asset,
the federal income tax bracket of the taxpayer, and the dates the asset was
acquired and/or sold. The Treasury Department has issued guidance under the Act
that will enable the Funds to pass through to their shareholders the benefits of
the capital gains rates enacted in the Act. Shareholders should consult their
own tax advisers on the correct application of these new rules in their
particular circumstances. Some distributions may be paid in January but may be
taxable to shareholders as if they had been received on December 31 of the
previous year. The tax treatment described above will apply without regard to
whether distributions are received in cash or reinvested in additional shares of
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 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.
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The amount of a Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
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 portfolio. Consequently, subsequent
distributions on these shares from such appreciation may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of a Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. A sales charge paid in purchasing
shares of 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 Fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the 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. Shareholders should consult their own tax advisers regarding their
particular circumstances to determine whether a disposition of the shares of a
Fund is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion. Also, future Treasury Department guidance issued to
implement the Act may contain additional rules for determining the tax treatment
of sales of the shares of a Fund held for various periods, including the
treatment of losses on the sale of shares held for six months or less that are
recharacterized as long-term capital losses, as described above. 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 long-term 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 years' capital losses, it would be subject to federal
income tax in the hands of the applicable Fund. Upon proper designation of this
amount by the Fund, each shareholder would be treated for federal income tax
purposes as if the Fund had distributed to him on the last day of its taxable
year his pro rata share of such excess, and he had paid his pro rata share of
the taxes paid by the Fund and reinvested the remainder in the Fund.
Accordingly, each shareholder would (a) include his pro rata share of such
excess as capital gain in his return for his taxable year in which the last day
of the Fund's taxable year falls, (b) be entitled either to a tax credit on his
return for, or to a refund of, his pro rata share of the taxes paid by the Fund
and (c) be entitled to increase the adjusted tax basis for his shares in the
Fund by the difference between his pro rata share of such 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 federal income
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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
$524,746, of this amount $387,469 expires August 31, 2003 and $137,277 expires
August 31, 2004. The New York Fund has a realized capital loss carryforward of
$292,545 of this amount $75,132 expires August 31, 2003 and $217,413 expires
August 31, 2004.
Each Fund is required to accrue original issue discount ("OID") on certain debt
securities (including zero coupon or deferred payment obligations) that have OID
prior to the receipt of the corresponding cash payments. The mark to market or
constructive sale rules applicable to certain options and futures contracts or
other transactions may also require a Fund to recognize income or 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 portfolio securities under disadvantageous circumstances to
generate cash, or borrow the cash, to satisfy these distribution requirements.
The Federal income tax rules applicable to certain structured or indexed
securities, interest rate swaps, caps, floors and collars, and possibly other
investments or transactions, are unclear in certain respects, and each Fund will
account for these investments or transactions in a manner intended to preserve
its qualification as a regulated investment company and avoid material tax
liability.
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. Investments in debt obligations that are at risk of 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.
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Dividends and capital gain distributions paid by the Fund will not qualify for
the dividends-received deduction for corporate shareholders.
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.
Additionally, a Fund may be required to recognize gain (subject to tax
distribution requirements) if an option, future, notional principal contract, or
a combination thereof is treated as a constructive sale of an appreciated
financial position in the Fund's portfolio. Also, certain of a Fund's losses on
its transactions involving options 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 taxable income or gain. 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 a 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 transactions in order to seek to
minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
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 insurance companies
and financial institutions. Shareholders should consult their own tax advisers
as to the Federal, state or local tax consequences of ownership of shares of,
and receipt of distributions from, 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
applicable provisions of federal law incorporated in Massachusetts law, 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
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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
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.
For personal income tax purposes, 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
Massachusetts tax purposes. The applicable provision 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. The Massachusetts Department of Revenue (the "DOR") has proposed
regulations under which this distribution would be taxed at the maximum 5% rate
unless a mutual fund reports to the DOR and the shareholder within a prescribed
time period the portions of the distribution attributable to gains in each
separate holding period category, in which case each such portion would be taxed
at the rate applicable to the appropriate holding period category. The
Massachusetts Fund anticipates that, to the extent practicable, it will provide
the appropriate information under the applicable DOR regulations or other
administrative positions. Legislation proposed in 1997 would, if enacted, change
the Massachusetts tax treatment of capital gains. Shareholders should consult
their own tax advisers to determine the status of this or other developments
that may alter the provisions described above.
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 U.S. Government
obligations and 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
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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.
The New York Fund's dividends (including exempt-interest dividends) and
distributions will not be tax-exempt for State and City purposes for corporate
investors, so that corporate should consult their own tax advisers before
investing in the New York Fund. All investors should consult their own tax
advisers regarding the tax provisions described above and any additional taxes
to which they may be subject, including but not limited to minimum taxes, tax
surcharges, and taxes based on or affected by the ownership of intangible
property such as mutual fund shares.
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, 1997, the annualized yield for the Funds'
Class A and Class B shares were 4.55% and 4.05% for Massachusetts and 4.47% and
3.97 % 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, 1997 were 4.90%, 5.84% and 7.93% for Massachusetts and 4.55%, 5.82%
and 8.05% for New York, respectively. The total returns since inception on
October 3, 1996, for Class B shares were 7.81% for Massachusetts and 7.52% for
New York.
The Funds may 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:
a - b
_____ 6
Yield = 2 ( [ ( cd ) + 1 ] - 1)
Where:
a= dividends and interest earned during the period.
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b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the
period (NAV where applicable).
Each Fund may advertise a tax-equivalent yield, which is computed by dividing
that portion of the yield of each Fund which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield of
each Fund that is not tax-exempt. The tax equivalent yields for each Fund's
Class A and Class B shares at the combined maximum federal and Massachusetts and
New York tax rates, which assumes the full deductibility of state income taxes
on the federal income tax return, for the 30-day period ended August 31, 1997
were 8.56%, 7.62% and 7.94% , 7.06%, respectively.
Each Fund's total return is computed by finding the average annual compounded
rate of return over the 1 year, 5 year and life-of-fund period that would equate
the initial amount invested to the ending redeemable value according to the
following formula:
n ________
T = \/ ERP / 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 and life-of-fund periods.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of Class A 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 each
Fund during the period stated by the maximum offering price or net asset value
at the end of the period. Excluding each Fund's sales charge from the
distribution rate produces a higher rate.
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 each Fund's sales charge on Class A shares
or the CDSC on Class B shares into account. Excluding each Fund's sales charge
on Class A shares and the CDSC on Class B shares from a total return calculation
produces a higher total return figure.
In the case of a tax-exempt obligation issued without original issue discount
and having a current market discount, the coupon rate of interest is used in
lieu of the yield to maturity. Where, in the case of a tax-exempt obligation
with original issue discount, the discount based on the current market value
exceeds the then-remaining portion or original issue discount (market discount),
the yield to maturity is the imputed rate based on the original issue discount
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calculation. Where, in the case of a tax-exempt obligation with original issue
discount, the discount based on the current market value is less than the
then-remaining portion of original issue discount (market premium), the yield to
maturity is based on the market value.
From time to time, in reports and promotional literature, each 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. Each Fund's promotional and sales literature may make
reference to the Funds' "beta". Beta reflects the market-related risk of the
Funds by showing how responsive each 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 Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates, and Trustees who are
interested persons of the Funds. Orders for purchases and sales of securities
are placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market 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 these transactions.
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 the Funds 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
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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 Funds. 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 each Fund's brokerage business, the policies in this regard
must be consistent with the foregoing and will at all times be subject to review
by the Trustees. For the year ended August 31, 1995, 1996 and 1997, the
Massachusetts Fund paid negotiated brokerage commissions in the amount of
$2,470, $5,721 and $5,172, respectively and the New York Fund paid negotiated
brokerage commissions in the amount of $3,267, $4,655 and $13,877, 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 the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. During the fiscal year ended August 31, 1997,
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., a broker-dealer ("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 and 1997, neither Fund executed any portfolio
transactions with Affiliated Brokers.
Distributors may act as broker for the Funds on exchange transactions, subject,
however, to the general policy of the Funds set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Funds
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated customers, except for accounts for which the Affiliated Broker
acts as clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Funds as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Funds, the Adviser or the Affiliated Broker. Because the Adviser,
which is affiliated with the Affiliated Brokers, has, as an investment adviser
to the Funds, the obligation to provide investment management services, which
includes elements of research and related investment skills, such research and
related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Funds. 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 Funds. In some
56
<PAGE>
instances, this investment procedure may adversely affect the price paid or
received by each 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 each Fund with those to be sold or
purchased for other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Funds. Each Fund pays Signature
Services an annual fee of $20.00 for each Class A shareholder and $22.50 for
each Class B shareholder. Each Fund also pays certain out-of-pocket expenses and
these expenses are aggregated and charged to each Fund on the basis of their
relative net asset values.
CUSTODY OF PORTFOLIOS
Portfolio securities of the Funds are held pursuant to a custodian agreement
between the Funds and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, MA 02116. 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.
57
<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, 1997:
<TABLE>
<CAPTION>
- --------------------------- ----------------- --------------- ------------- ----------- ---------------- ------------
Rating Rating
% of Portfolio Assigned by % of Assigned by % of
Security Ratings Average Value Adviser Portfolio Service Portfolio
- --------------------------- ----------------- --------------- ------------- ----------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
AAA $19,098,989 34.5% 0.0% $19,098,989 34.5%
0
AA 3,856,874 7.0% 157,465 0.3% 3,699,409 6.7%
A 20.830,966 37.6% 0.0% 20.830.966 37.6%
0
BBB 11,530,875 20.8% 1,205,034 2.2% 10,325,841 18.6%
BB 80,987 0.1% 80,987 0.1% 0 0.0%
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 55,398,691 100.0% 1,443,486 2.6% $53,955,205 97.4%
Options Securities 9,304 0.0%
Short-Term Securities 0 0.0%
-----------------
Total Portfolio 55,407,995 100.0%
-----------------
Other Assets -- Net 851,984
- --------------------------- --------------- ------------- ----------- ---------------- ------------
Net Assets $56,259,979
- --------------------------- ----------------- --------------- ------------- ----------- ---------------- ------------
</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, 1997:
<TABLE>
<CAPTION>
- --------------------------- --------------- ------------- -------------- ------------ ---------------- --------------
Rating Rating
Average Value % of Assigned by % of Assigned by % of
Security Ratings Portfolio Adviser Portfolio Service Portfolio
- --------------------------- --------------- ------------- -------------- ------------ ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
AAA $16,646,819 29.5% 0.0% $16,646,819 29.5%
0
AA 10,402,373 18.5% 0.0% 10,402,373 18.5%
0
A 14,311,274 25.4% 0.0% 14,311,274 25.4%
0
BBB 11,348,594 20.1% 2,584,713 4.6% 8,763,881 15.5%
BB 3,650,587 6.5% 3,494,882 6.2% 155,705 0.3%
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 $56,359,647 100.0% 6,079,595 10.8% $50,280,052 89.2%
Options Securities 6,220 0.0%
Short-Term Securities 0 0.0%
---------------
Total Portfolio 56,365,867 100.0%
Other Assets -- Net 753,402
---------------
Net Assets $57,119,269
===============
- --------------------------- --------------- ------------- -------------- ------------ ---------------- --------------
</TABLE>
The ratings are described in the Statement of Additional Information.
A-5
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included in each Fund's 1997 Annual
Report to Shareholders for the year ended August 31, 1997; (filed electronically
on November 4, 1997, accession number 0001010521-97-000412) and are included in
and incorporated by reference into Part B of the Registration Statement for John
Hancock Tax-Exempt Series Trust (file nos. 811-5079 and 33-12947).
John Hancock Tax-Exempt Series Trust
John Hancock Massachusetts Tax-Free Income Fund
John Hancock New York Tax-Free Income Fund
Statement of Assets and Liabilities as of August 31, 1997.
Statement of Operations for the year ended August 31, 1997.
Statement of Change in Net Assets for the period ended August 31, 1997.
Financial Highlights for the period ended August 31, 1997.
Notes to Financial Statements.
Schedule of Investments as of August 31, 1997.
Report of Independent Auditors.
F-1
<PAGE>
PART C.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements listed below are included in and incorporated
by reference into Part B of the Registration Statement from the 1997 Annual
Report to Shareholders for John Hancock Tax-Exempt Series Fund for the year
ended August 31, 1997 (filed electronically on November 4, 1997 file nos.
811-5079 and 33-12947; accession number 0001010521-97-000412.
John Hancock Massachusetts Tax-Free Income Fund
John Hancock New York Tax-Free Income Fund
Statement of Assets and Liabilities as of August 31, 1997.
Statement of Operations from the year ended August 31, 1997.
Statement of Changes in Net Assets for each of the periods
indicated therein.
Financial Highlights for each of the periods indicated therein.
Notes to Financial Statements.
Schedule of Investments as of August 31, 1997.
Report to Independant Auditors
(b) Exhibits:
The exhibits to this Registration Statement are listed in the Exhibits
Index hereto and are incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant
No person is directly or indirectly controlled by or under common control
with Registrant.
C-1
<PAGE>
Item 26. Number of Holders of Securities
As of December 1, 1997 the number of record holders of shares of Registrant
was as follows:
Title of Class Number of Record Holders
-------------- ------------------------
(Shares of Beneficial Interest,
without par value)
John Hancock Tax-Exempt Series Fund-
Massachusetts Tax-Free
Class A Shares 2,449
Class B Shares 109
New York Tax-Free
Class A Shares 2,568
Class B Shares 81
Item 27. Indemnification
(a) Under Registrant's Declaration of Trust. Sections 4.1, 4.2 and 4.3 of
Article VI of the Registrant's Amended and Restated Declaration of Trust provide
for indemnification of the Registrant's Trustees and Officers under certain
circumstances. A copy of the Registrant's Amended and Restated Declaration of
Trust is attached as Exhibit 1 to this Post-Effective Amendment No. 10 to the
Registration Statement of the Registrant.
(b) Under the Distribution Agreement. Under Section 12 of the Distribution
Agreement, John Hancock Funds, Inc. ("John Hancock Funds" ) has agreed to
indemnify the Registrant and its Trustees, officers and controlling persons
against claims arising out of certain acts and statements of John Hancock Funds.
Section 9(a) of the By-Laws of the Insurance Company provides, in effect,
that the Insurance Company will, subject to limitations of law, indemnify each
present and former director, officer and employee of the of the Insurance
Company who serves as a Trustee or officer of the Registrant at the direction or
request of the Insurance Company against litigation expenses and liabilities
incurred while acting as such, except that such indemnification does not cover
any expense or liability incurred or imposed in connection with any matter as to
which such person shall be finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best interests of the
Insurance Company. In addition, no such person will be indemnified by the
Insurance Company in respect of any liability or expense incurred in connection
with any matter settled without final adjudication unless such settlement shall
have been approved as in the best interests of the Insurance Company either by
vote of the Board of Directors at a meeting composed of directors who have no
interest in the outcome of such vote, or by vote of the policyholders. The
Insurance Company may pay expenses incurred in defending an action or claim in
advance of its final disposition, but only upon receipt of an undertaking by the
person indemnified to repay such payment if he should be determined to be
entitled to indemnification.
C-2
<PAGE>
Article IX of the respective By-Laws of John Hancock Funds and the Adviser
provide as follows:
"Section 9.01. Indemnity: Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall be indemnified by the Corporation
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and the liability was not
incurred by reason of gross negligence or reckless disregard of the duties
involved in the conduct of his office, and expenses in connection therewith may
be advanced by the Corporation, all to the full extent authorized by the law."
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such as person."
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of
Registrant pursuant to the Registrant's Amended and Restated Articles of
Incorporation, Article 10.1 of the Registrant's By-Laws, The underwriting
Agreement, the By-Laws of Distributors, the Adviser, or the Insurance Company or
otherwise, Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Investment
Adviser, reference is made to Forms ADV (801-8124) filed under the Investment
Advisers Act of 1940, herein incorporated by reference.
Item 29. Principal Underwriters
John Hancock Funds acts as principal underwriter for the Registrant and
also serves as principal underwriter or distributor of shares for John Hancock
Institutional Series Trust, John Hancock Sovereign Bond Fund, John Hancock
Special Equities Fund, John Hancock Capital Series, John Hancock Strategic
C-3
<PAGE>
Series, John Hancock Tax-Exempt Series Fund, , John Hancock World Fund, John
Hancock Investment Trust II, John Hancock Investment Trust III, John Hancock
Bond Trust, John Hancock California Tax-Free Income Fund, John Hancock Cash
Reserve, Inc., John Hancock Current Interest, John Hancock Investment Trust,
John Hancock Series Trust and John Hancock Tax-Free Bond Trust.
(b) The following table lists, for each director and officer of JH Funds,
Inc., the information indicated.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. Director, Chairman, President and Trustee, Chairman and Chief
101 Huntington Avenue Chief Executive Officer Executive Officer
Boston, Massachusetts
Anne C. Hodson Director and Executive Vice President
101 Huntington Ave President
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Chief Compliance
P.O. Box 111 Officer
Boston, Massachusetts
Robert G. Freedman Director Chairman and Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
Richard O. Hansen Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Osbert M. Hood Senior Vice President None
101 Huntington Avenue and
Boston, Massachusetts Chief Financial Officer
David A. King Director None
101 Huntington Avenue
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
C-4
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
John A. Morin Vice President and Secretary Vice President
101 Huntington Avenue
Boston, Massachusetts
Susan S. Newton Vice President Vice President
101 Huntington Avenue and Secretary
Boston, Massachusetts
Christopher M. Meyer Vice President and None
101 Huntington Avenue Treasurer
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-5
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Foster L. Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David F. D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington avenue
Boston, Massachusetts
Anthony P. Petrucci Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Suite 950
Albuquerque, New Mexico
Keith Hartstein Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
Karen Walsh Vice President None
101 Huntington Avenue
Boston, Massachusetts
</TABLE>
(c) None.
C-6
<PAGE>
Item 30. Location of Accounts and Records
Registrant maintains the records required to be maintained by it under Rules
31a-1 (a), 31a-a(b), and 31a-2(a) under the Investment Company Act of 1940 as
its principal executive offices at 101 Huntington Avenue, Boston Massachusetts
02199-7603. Certain records, including records relating to Registrant's
shareholders and the physical possession of its securities, may be maintained
pursuant to Rule 31a-3 at the main office of Registrant's Transfer Agent and
Custodian.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable
(c) The Registrant on behalf of each of its each of its series undertakes
to furnish each person to whom a prospectus is delivered with a copy of such
series' annual report to shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boston, and the Commonwealth of Massachusetts on the
22th day of December, 1997.
JOHN HANCOCK TAX EXEMPT SERIES FUND
By: /s/ Edward J. Boudreau, Jr.
---------------------------
Edward J. Boudreau, Jr.*
Chairman
Pursuant to the requirements of the Securities Act of 1933, the
Registration has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
- ------------------------ Chairman
Edward J. Boudreau, Jr.* (Principal Executive Officer)
/s/James B. Little
- ------------------------ Senior Vice President and Chief
James B. Little Financial Officer (Principal December 23, 1997
Financial and Accounting Officer)
- ------------------------ Trustee
Dennis S. Aronowitz*
- ------------------------ Trustee
Richard P. Chapman, Jr.*
- ------------------------ Trustee
William J. Cosgrove*
- ------------------------ Trustee
Douglas M. Costle*
- ------------------------ Trustee
Leland O. Erdahl*
- ------------------------ Trustee
Richard A. Farrell*
- ------------------------ Trustee
Gail D. Fosler*
- ------------------------ Trustee
William F. Glavin*
- ------------------------ Trustee
Anne C. Hodsdon*
C-8
<PAGE>
- ------------------------ Trustee
John A. Moore
- ------------------------ Trustee
Patti McGill Peterson*
- ------------------------ Trustee
John W. Pratt*
- ------------------------ Trustee
Richard S. Scipione*
- ------------------------ Trustee
Edward J. Spellman*
*By: /s/Susan S. Newton December 23, 1996
------------------
Susan S. Newton
Attorney-in-Fact under
Powers of Attorney dated
May 21, 1996.
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.B1 Amended and Restated Declaration of Trust dated July 1, 1996.**
99.B1.2 Establishment and Designation of Class A Shares and Class B
Shares of Beneficial Interest dated July 1, 1996.**
99.B2 Amended and Restated By-Laws dated December 3, 1996.**
99.B3 None.
99.B4 Specimen share certificate for John Hancock Tax-Exempt Series
Fund, New York Portfolio.*
.
99.B4.1 Specimen share certificate for John Hancock Tax-Exempt Series
Fund, Massachusetts Portfolio.*
99.B5 Investment Management Contract between the New York Tax-Free
Income Fund and John Hancock Advisers, Inc. dated July 1,
1996.**
99.B5.1 Investment Management Contract between the Massachusetts
Tax-Free Income Fund and John Hancock Advisers, Inc. dated
July 1, 1996.**
99.B6 Distribution Agreement with John Hancock Broker Distribution
Services, Inc. dated August 1, 1991.*
99.B6.1 Form of Soliciting Dealer Agreement between John Hancock Broker
Distribution Services, Inc. and Selected Dealers.*
99.B7 None.
99.B8 Master Custodian Agreement with Registrant and Investors Bank
and Trust Company.*
99.B9 Transfer Agency and Service Agreement between Registrant and
John Hancock Fund Services, Inc. dated January 1, 1991.*
99.B10 None
99.B11 Auditors Consent+
99.B12 None
99.B13 Subscription Agreement between Registrant and John Hancock
Advisers, Inc.*
C-10
<PAGE>
Exhibit No. Description
- ----------- -----------
99.B14 None
99.B15 Amended and Restated Distribution Plan for Class A shares
between John Hancock Tax-Exempt Series Fund and John Hancock
Funds, Inc. dated July 1, 1996.+
99.B15.1 Amended and Restated Distribution Plan for Class B shares
between John Hancock Tax-Exempt Series Fund and John Hancock
Funds, Inc. dated July 1, 1996.**
99.B16 Working papers showing yield calculation for yield and total
return.*
99.27.1A Massachusetts Tax-Free Income Fund
99.27.1B Massachusetts Tax-Free Income Fund
99.27.2A New York Tax-Free Income Fund
99.27.2B New York Tax-Free Income Fund
* Previously filed electronically with post-effective amendment number 10
(file nos. 811-5079 and 33-12947) on December 25, 1995, accession number
0000950156-95-000881.
** Previously filed electronically with post-effective amendment number 12
(file nos. 811-5079 and 33-12947) on December 20, 1996, accession number
0001010521-96-000226.
+ Filed herewith.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post Effective
Amendment No. 13 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated October 14, 1997, relating to the financial
statements and the financial highlights appearing in the August 31, 1997 Annual
Reports to Shareholders of the of the John Hancock Massachusetts Tax-Free Income
Fund and the John Hancock New York Tax-Free Income Fund, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights" in the Prospectus
and under the heading "Independent Accountants" in the Statement of Additional
Information.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
December 23, 1997
JOHN HANCOCK TAX-EXEMPT SERIES FUND --
JOHN HANCOCK MASSACHUSETTS TAX-FREE INCOME FUND
JOHN HANCOCK NEW YORK TAX-FREE INCOME FUND
Amended and Restated Distribution Plan
As of July 1, 1996
Class A Shares
Article I. This Plan
This amended and restated Distribution Plan (the "Plan") sets forth the
terms and conditions on which John Hancock Tax-Exempt Series Fund (the "Trust"),
on behalf of the John Hancock Massachusetts Tax-Free Income Fund and John
Hancock New York Tax-Free Income Fund (the "Portfolios"), two series portfolios
of the Trust, on behalf of the Portfolios' Class A shares, will, after the
effective date hereof, pay certain amounts to John Hancock Funds, Inc. ("JH
Funds") in connection with the provision by JH Funds of certain services to the
Fund and its Class A shareholders, as set forth herein. Certain of such payments
by each Portfolio may, under Rule 12b-1 of the Securities and Exchange
Commission, as from time to time amended (the "Rule"), under the Investment
Company Act of 1940, as amended (the "Act"), be deemed to constitute the
financing of distribution by a Portfolio of its shares. This Plan describes all
material aspects of such financing as contemplated by the Rule and shall be
administered and interpreted, and implemented and continued, in a manner
consistent with the Rule. The Trust and JH Funds heretofore entered into a
Distribution Agreement, dated August 1, 1991 (the "Agreement"), the terms of
which, as heretofore and from time to time continued, are incorporated herein by
reference.
Article II. Distribution and Service Expenses
Each Portfolio shall pay to JH Funds a fee in the amount specified in
Article III hereof. Such fee may be spent by JH Funds on any activities or
expenses primarily intended to result in the sale of Class A shares of a
Portfolio, including, but not limited to the payment of Distribution Expenses
(as defined below) and Service Expenses (as defined below). Distribution
Expenses include but are not limited to, (a) initial and ongoing sales
compensation out of such fee as it is received by JH Funds of a Portfolio or
other broker-dealers ("Selling Brokers") that have entered into an agreement
with Broker Services for the sale of Class A shares of a Portfolio, (b) direct
out-of-pocket expenses incurred in connection with the distribution of Class A
shares of a Portfolio, including expenses related to printing of prospectuses
and reports to other than existing Class A shareholders of a Portfolio, and
preparation, printing and distribution of sales literature and advertising
materials, and (c) an allocation of overhead and other branch office expenses of
JH Funds related to the distribution of Class A shares of a Portfolio.
Service Expenses include payments made to, or on account of, account
executives of selected broker-dealers (including affiliates of JH Funds) and
others who furnish personal and shareholder account maintenance services to
Class A shareholders of a Portfolio.
Article III. Maximum Expenditures
The expenditures to be made by each Portfolio pursuant to this Plan,
and the basis upon which such expenditures will be made, shall be determined by
each Portfolio, and in no event shall such expenditures exceed 0.30% of the
average daily net asset value of the Class A shares of a Portfolio (determined
in accordance with each Portfolio's prospectus as from time to time in effect)
on an annual basis to cover Distribution Expenses and Service Expenses, provided
that the portion of such fee used to cover service expenses shall not exceed an
annual rate of up to 0.25% of the average daily net asset value of the Class A
shares of the Portfolio. Such expenditures shall be calculated and accrued daily
<PAGE>
and paid monthly or at such other intervals as the Trustees shall determine. In
the event JH Funds is not fully reimbursed for payments made or other expenses
incurred by it under this Plan, such expenses will not be carried beyond one
year from the date such expenses were incurred. Any fees paid to JH Funds under
this Plan during any fiscal year of a Portfolio and not expended or allocated by
JH Funds for actual or budgeted Distribution Expenses and Service Expenses
during such fiscal year will be promptly returned to the Portfolio.
Article IV. Expenses Borne by the Portfolio
Notwithstanding any other provision of this Plan, the Trust, each
Portfolio and its investment adviser, John Hancock Advisers, Inc. (the
"Adviser"), shall bear the respective expenses to be borne by them under the
Investment Management Contract, as amended, dated May 5, 1987, as from time to
time continued and amended (the "Management Contract"), and under the
Portfolios' current prospectus as it is from time to time in effect. Except as
otherwise contemplated by this Plan, the Trust, and as Portfolio shall not,
directly or indirectly, engage in financing any activity which is primarily
intended to or should reasonably result in the sale of shares of the Portfolio.
Article V. Approval by Trustees, etc.
This Plan shall not take effect until it has been approved, together
with any related agreements, by votes, cast in person at a meeting called for
the purpose of voting on this Plan or such agreements, of a majority (or
whatever greater percentage may, from time to time, be required by Section 12(b)
of the Act or the rules and regulations thereunder) of (a) all of the Trustees
of the Portfolios and (b) those Trustees of the Portfolios who are not
"interested persons" of the Portfolios, as such term may be from time to time
defined under the Act, and have no direct or indirect financial interest in the
operation of this Plan or any agreements related to it (the "Independent
Trustees").
Article VI. Continuance
This Plan and any related agreements shall continue in effect for so
long as such continuance is specifically approved at least annually in advance
in the manner provided for the approval of this Plan in Article V.
Article VII. Information
JH Funds shall furnish the Portfolio and its Trustees quarterly, or at
such other intervals as the Portfolio shall specify, a written report of amounts
expended or incurred for Distribution Expenses and Service Expenses pursuant to
this Plan and the purposes for which such expenditures were made and such other
information as the Trustees may request.
Article VIII. Termination
This Plan may be terminated (a) at any time by vote of a majority of
the Trustees, a majority of the Independent Trustees, or a majority of the
Portfolio's outstanding voting Class A shares, or (b) by JH Funds on 60 days'
notice in writing to the Portfolio.
Article IX. Agreements
Each agreement with any person relating to implementation of this Plan
shall be in writing, and each agreement related to this Plan shall provide:
2
<PAGE>
(a) That, with respect to the Portfolio, such agreement may be terminated
at any time, without payment of any penalty, by vote of a majority of the
Independent Trustees or by vote of a majority of the Portfolio's then
outstanding voting Class A shares.
(b) That such agreement shall terminate automatically in the event of its
assignment.
Article X. Amendments
This Plan may not be amended to increase the maximum amount of the fees
payable by the Portfolio hereunder without the approval of a majority of the
outstanding voting Class A shares of the Portfolio. No material amendment to the
Plan shall, in any event, be effective unless it is approved in the same manner
as is provided for approval of this Plan in Article V.
Article XI. Limitation of Liability
The names "John Hancock Tax-Exempt Series Fund -- John Hancock
Massachusetts Tax-Free Income Fund; John Hancock New York Tax-Free Income Fund"
are the designations of the Trustees under the Declaration of Trust, as Amended
and Restated July 1, 1996, as amended from time to time. The Declaration of
Trust has been filed with the Secretary of State of the Commonwealth of
Massachusetts. The obligations of the Trust and each Portfolio are not
personally binding upon, nor shall resort be had to the private property of, any
of the Trustees, shareholders, officers, employees or agents of the Portfolio,
but only each Portfolio's property shall be bound. No Portfolio of the Trust
shall be responsible for the obligations of any other Portfolio of the Trust.
IN WITNESS WHEREOF, the Trust has executed this amended and restated
Distribution Plan effective as of the 1st day of July, 1996 in Boston,
Massachusetts.
JOHN HANCOCK TAX-EXEMPT SERIES FUND
- John Hancock Massachusetts Tax-Free Income Fund
- John Hancock New York Tax-Free Income Fund
By /s/ Anne C. Hodsdon
-----------------------------------
President
JOHN HANCOCK FUNDS, INC.
By /s/ Edward J. Boudreau, Jr.
-----------------------------------
Chairman, President and CEO
3
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<NAME> JOHN HANCOCK MASSACHUSETTS TAX-FREE INCOME FUND - CLASS A
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<NAME> JOHN HANCOCK MASSACHUSETTS TAX-FREE INCOME FUND - CLASS B
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