FILE NO. 33-12947
FILE NO. 811-5079
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
---------
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 17 (X)
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 18 (X)
---------
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
---------
SUSAN S. NEWTON
Vice President and Secretary
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and Address of Agent for Service)
---------
It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b) of Rule 485
(X) on January 1, 2000 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
If appropriate, check the following box:
( ) This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
- --------------------------------------------------------------------------------
JOHN HANCOCK
Tax-Free
Income Funds
[LOGO] Prospectus
January 1, 2000
- --------------------------------------------------------------------------------
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these funds or determined whether the information in
this prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
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
- --------------------------------------------------------------------------------
A fund-by-fund summary of California Tax-Free Income Fund 4
goals, strategies, risks,
performance and expenses. 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 Your account
for opening, maintaining
and closing an account in Choosing a share class 14
any tax-free income fund. How sales charges are calculated 14
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
Further information on the Fund details
tax-free income funds.
Business structure 21
Financial highlights 22
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
JOHN HANCOCK TAX-FREE INCOME FUNDS
These 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
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.
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
RISKS OF MUTUAL FUNDS
Mutual funds are not bank deposits and are not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Because
you could lose money by investing in these funds, be sure to read all risk
disclosure carefully before investing.
THE MANAGEMENT FIRM
All John Hancock 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 $30 billion in
assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[Clip Art] Your expenses The overall costs borne by an investor in the fund,
including sales charges and annual expenses.
3
<PAGE>
California Tax-Free Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income, consistent with
preservation of capital, that is exempt from federal and California personal
income taxes. In pursuing this goal, the fund normally invests at least 80% of
assets in California municipal debt obligations of any maturity. Most of these
securities are investment-grade when purchased, but the fund may invest up to
20% of assets in junk bonds rated BB/Ba and their unrated equivalents.
In managing the portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the team uses a strategy designed to find
undervalued bonds, based on research into specific municipal issuers, their
creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The team also favors
bonds with limitations on whether they can be called, or redeemed, by the issuer
before maturity. This enables the team to minimize the effect of declining
interest rates on the fund's income.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these and other
cases, the fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began career in 1986
Dianne Sales, CFA
- --------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began career in 1984
Frank A. Lucibella, CFA
- --------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1982
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. The average annual figures reflect sales charges; the
year-by-year and index figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998
6.69% 11.70% 9.06% 13.60% -9.29% 21.91% 4.48% 10.13% 6.65%
1999 total return as of September 30: -1.55%
Best quarter: Q1 '95, 9.23% Worst quarter: Q1 '94, -6.58%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of Life of
1 year 5 year Class A Class B
Class A - began 12/29/89 1.85% 5.32% 7.48% --
Class B - began 12/31/91 0.85% 5.18% -- 6.91%
Class C - began 4/1/99 -- -- -- --
Index 6.48% 6.22% 7.93% 7.44%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of U.S.
municipal bonds.
4
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk. There
is no limit on the fund's average maturity.
Because the fund invests primarily in California issuers, its performance is
affected by local, state and regional factors. These may include economic or
policy changes, erosion of the tax base, state legislative changes (especially
those regarding taxes) and the possibility of credit problems, such as the 1994
bankruptcy of Orange County.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments do not perform as the fund expects, it could
under-perform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from
their underlying facilities decline, causing the fund to lose money.
o Junk bonds could make the fund more sensitive to market or economic
shifts.
o Certain derivatives could produce disproportionate losses.
o In a down market, certain securities and derivatives could become harder
to value or to sell at a fair price.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price, whichever
is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.55% 0.55% 0.55%
Distribution and service (12b-1) fees 0.15% 1.00% 1.00%
Other expenses 0.12% 0.12% 0.12%
Total fund operating expenses 0.82% 1.67% 1.67%
Distribution and service (12b-1) fee
reduction (until 12/31/00) -- 0.10% --
Expense reimbursement (at least until
12/31/00) 0.07% 0.07% 0.07%
Actual operating expenses 0.75% 1.50% 1.60%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $523 $693 $ 878 $1,412
Class B - with redemption $653 $810 $1,091 $1,735
- without redemption $153 $510 $ 891 $1,735
Class C - with redemption $262 $520 $ 901 $1,970
- without redemption $162 $520 $ 901 $1,970
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ---------------------------
Ticker TACAX
CUSIP 41014R108
Newspaper CATxFA
SEC number 811-5979
Class B
- ---------------------------
Ticker TACAX
CUSIP 41014R207
Newspaper CATxFB
SEC number 811-5979
Class C
- ---------------------------
Ticker --
CUSIP 41014R306
Newspaper --
SEC number 811-5979
5
<PAGE>
High Yield Tax-Free Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income that is largely exempt
from federal income tax consistent with preservation of capital. In pursuing
this goal, the fund normally invests at least 80% of assets in tax-exempt
municipal debt obligations of any maturity with credit ratings from A to BB/Ba
and their unrated equivalents. The fund may also invest up to 5% of assets in
bonds rated as low as CC/Ca and their unrated equivalents. Bonds that are in or
below the BB/Ba category are considered junk bonds.
In managing the portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the team uses a strategy designed to find
undervalued bonds, based on research into specific municipal issuers, their
creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The team also favors
bonds with limitations on whether they can be called, or redeemed, by the issuer
before maturity. This enables the team to minimize the effect of declining
interest rates on the fund's income.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these and other
cases, the fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began career in 1986
Frank A. Lucibella, CFA
- --------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1982
Dianne Sales, CFA
- --------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began career in 1984
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. The average annual figures reflect sales charges; the
year-by-year and index figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
7.50% 3.80% 12.30% 8.35% 11.58% -5.70% 18.89% 0.60% 8.81% 4.69%
1999 total return as of September 30: -2.71%
Best quarter: Q1 '95, 7.62% Worst quarter: Q1 '94, -4.18%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class A
Class A - began 12/31/93 0.73% 4.95% -- 4.95%
Class B -0.30% 4.82% 6.88% --
Class C - began 4/1/99 -- -- -- --
Index 6.48% 6.22% 8.22% 6.22%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of municipal
bonds.
6
<PAGE>
MAIN RISKS
[Clip Art] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk. There is no limit on the fund's average maturity.
Because their issuers are often in relatively weak financial health, junk bonds
could make the fund more sensitive to market or economic shifts, and to the risk
of default of a particular bond. In general, investors should expect
fluctuations in share price, yield and total return that are above average for
bond funds.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments do not perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund invests in securities with additional risks, those
risks could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from
their underlying facilities decline, causing the fund to lose money.
o If the fund invests heavily in securities from a given state or region,
its performance could be disproportionately affected by political or
demographic factors in that state or region.
o Certain derivatives could produce disproportionate losses.
o In a down market, certain securities and derivatives could become harder
to value or to sell at a fair price.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price, whichever
is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.58% 0.58% 0.58%
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
Other expenses 0.17% 0.17% 0.17%
Total fund operating expenses 1.00% 1.75% 1.75%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $547 $754 $ 978 $1,620
Class B - with redemption $678 $851 $1,149 $1,864
- without redemption $178 $551 $ 949 $1,864
Class C - with redemption $278 $551 $ 949 $2,062
- without redemption $178 $551 $ 949 $2,062
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ---------------------------
Ticker JHTFX
CUSIP 41013Y302
Newspaper HiTxFA
SEC number 811-5968
Class B
- ---------------------------
Ticker TSHTX
CUSIP 41013Y401
Newspaper HiTxFB
SEC number 811-5968
Class C
- ---------------------------
Ticker --
CUSIP 41013Y500
Newspaper --
SEC number 811-5968
7
<PAGE>
Massachusetts Tax-Free Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income, consistent with
preservation of capital, that is exempt from federal and Massachusetts personal
income taxes.
In pursuing its goal, the fund normally invests at least 80% of assets in
securities of any maturity exempt from Massachusetts personal income taxes. Most
of these securities have credit ratings of A or higher when purchased, but the
fund may invest up to 33.3% of assets in securities rated as low as BB/Ba and
their unrated equivalents. Bonds that are in or below the BB/Ba category are
considered junk bonds.
In managing the portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the team uses a strategy designed to find
undervalued bonds, based on research into specific municipal issuers, their
creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The team also favors
bonds with limitations on whether they can be called, or redeemed, by the issuer
before maturity. This enables the team to minimize the effect of declining
interest rates on the fund's income. The fund is non-diversified and may invest
more than 5% of assets in securities of a single issuer.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these and other
cases, the fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began career in 1986
Dianne Sales, CFA
- --------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began career in 1984
Frank A. Lucibella, CFA
- --------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1982
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. The average annual figures reflect sales charges; the
year-by-year and index figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
8.64% 4.39% 13.56% 9.50% 12.71% -5.51% 16.36% 4.27% 9.34% 7.06%
1999 total return as of September 30: -2.78%
Best quarter: Q1 '95, 6.68% Worst quarter: Q1 '94, -6.07%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A 2.27% 5.09% 7.37% --
Class B - began 10/3/96 1.31% -- -- 6.51%
Class C - began 4/1/99 -- -- -- --
Index 6.48% 6.22% 8.22% 8.13%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of municipal
bonds.
8
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk. There
is no limit on the fund's average maturity.
Because the fund invests primarily in Massachusetts issuers, its performance is
affected by local, state and regional factors. These may include economic or
policy changes, erosion of the tax base, state legislative changes (especially
those affecting taxes) and the possibility of credit problems.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments do not perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund invests in securities with additional risks, those
risks could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from
their underlying facilities decline, causing the fund to lose money.
o If the fund invests heavily in a single issuer, its performance could
suffer significantly from adverse events affecting that issuer.
o Junk bonds could make the fund more sensitive to market or economic
shifts.
o Certain derivatives could produce disproportionate losses.
o In a down market, certain securities and derivatives could become harder
to value or to sell at a fair price.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price, whichever
is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.25% 0.25% 0.25%
Total fund operating expenses 1.05% 1.75% 1.75%
Expense reimbursement (at least until
12/31/00) 0.25% 0.25% 0.25%
Actual operating expenses 0.80% 1.50% 1.50%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $528 $745 $ 980 $1,653
Class B - with redemption $653 $827 $1,126 $1,857
- without redemption $153 $527 $ 926 $1,857
Class C - with redemption $253 $527 $ 926 $2,042
- without redemption $153 $527 $ 926 $2,042
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ---------------------------
Ticker JHMAX
CUSIP 410229207
Newspaper MATxFA
SEC number 811-5079
Class B
- ---------------------------
Ticker JHMBX
CUSIP 410229405
Newspaper --
SEC number 811-5079
Class C
- ---------------------------
Ticker --
CUSIP 410229603
Newspaper --
SEC number 811-5079
9
<PAGE>
New York Tax-Free Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income consistent with
preservation of capital, that is exempt from federal, New York State and New
York City personal income taxes.
In pursuing its goal, the fund normally invests at least 80% of assets in
securities of any maturity exempt from New York personal income taxes. Most of
these securities have credit ratings of A or higher when purchased, but the fund
may invest up to 33.3% of assets in bonds rated as low as BB/Ba and their
unrated equivalents. Bonds that are in or below the BB/Ba category are
considered junk bonds.
In managing the portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the team uses a strategy designed to find
undervalued bonds, based on research into specific municipal issuers, their
creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The team also favors
bonds with limitations on whether they can be called, or redeemed, by the issuer
before maturity. This enables the team to minimize the effect of declining
interest rates on the fund's income. The fund is non-diversified and may invest
more than 5% of assets in securities of a single issuer.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these and other
cases, the fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began career in 1986
Frank A. Lucibella, CFA
- --------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1982
Dianne Sales, CFA
- --------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began career in 1984
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. The average annual figures reflect sales charges; the
year-to-year and index figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
9.06% 4.77% 13.63% 9.45% 13.78% -6.48% 17.09% 3.65% 9.50% 6.28%
1999 total return as of September 30: -3.01%
Best quarter: Q1 '95, 6.64% Worst quarter: Q1 '94, -5.54%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A 1.49% 4.76% 7.39% --
Class B - began 10/3/96 0.54% -- -- 5.94%
Class C - began 4/1/99 -- -- -- --
Index 6.48% 6.22% 8.22% 8.13%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of municipal
bonds.
10
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk. There
is no limit on the fund's average maturity.
Because the fund invests primarily in New York issuers, its performance is
affected by local, state and regional factors. These may include economic or
policy changes, erosion of the tax base, state legislative changes (especially
those affecting taxes) and the legacy of past credit problems of New York City
and other issuers.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments do not perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund invests in securities with additional risks, those
risks could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from
their underlying facilities decline, causing the fund to lose money.
o Junk bonds could make the fund more sensitive to market or economic
shifts.
o If the fund invests heavily in a single issuer, its performance could
suffer significantly from adverse events affecting that issuer.
o Certain derivatives could produce disproportionate losses.
o In a down market, certain securities and derivatives could become harder
to value or to sell at a fair price.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price, whichever
is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.28% 0.28% 0.28%
Total fund operating expenses 1.08% 1.78% 1.78%
Expense reimbursement (at least until
12/31/00) 0.28% 0.28% 0.28%
Actual operating expenses 0.80% 1.50% 1.50%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $528 $751 $ 993 $1,684
Class B - with redemption $653 $833 $1,138 $1,887
- without redemption $153 $533 $ 938 $1,887
Class C - with redemption $253 $533 $ 938 $2,072
- without redemption $153 $533 $ 938 $2,072
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ---------------------------
Ticker JHNYX
CUSIP 410229306
Newspaper NYTxFA
SEC number 811-5079
Class B
- ---------------------------
Ticker JNTRX
CUSIP 410229504
Newspaper --
SEC number 811-5079
Class C
- ---------------------------
Ticker --
CUSIP 410229702
Newspaper --
SEC number 811-5079
11
<PAGE>
Tax-Free Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks as high a level of interest income exempt from federal
income tax as is consistent with preservation of capital. In pursuing this goal,
the fund normally invests at least 80% of assets in tax-exempt municipal debt
obligations of any maturity. Most of these bonds are investment-grade when
purchased, but the fund may also invest up to 35% of assets in junk bonds rated
BB/Ba or B and their unrated equivalents.
In managing the portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the management team uses a strategy
designed to find undervalued bonds, based on research into specific municipal
issuers, their creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The fund may invest up
to 25% of assets in private activity bonds.
The management team also favors bonds with limitations on whether they can be
called, or redeemed, by the issuer before maturity. This enables the team to
minimize the effect of declining interest rates on the fund's income.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these and other
cases, the fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began career in 1986
Dianne Sales, CFA
- --------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began career in 1984
Frank A. Lucibella, CFA
- --------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1982
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. The average annual figures reflect sales charges; the
year-to-year and index figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998
14.97% 10.95% 15.15% -9.26% 20.22% 4.15% 9.81% 5.50%
1999 total return as of September 30: -2.08%
Best quarter: Q1 '95, 8.82% Worst quarter: Q1 '94, -7.06%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of Life of
1 year 5 year Class A Class B
Class A - began 1/5/90 0.80% 4.67% 7.74% --
Class B - began 12/31/91 -0.28% 4.53% -- 6.90%
Class C - began 4/1/99 -- -- -- --
Index 6.48% 6.22% 7.93% 6.22%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of municipal
bonds.
12
<PAGE>
MAIN RISKS
[Clip Art] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk. There is no limit on the fund's average maturity.
Junk bonds may make the fund more sensitive to market or economic shifts. The
fund could lose money if any bonds it owns are downgraded in credit rating or go
into default. If certain sectors or investments do not perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund invests in other securities with additional risks,
those risks could increase volatility or reduce performance:
o If the fund invests heavily in securities from a given state or region,
its performance could be disproportionately affected by political or
demographic factors in that state or region.
o Revenue bonds could be downgraded or go into default if revenues from
their underlying facilities decline, causing the fund to lose money.
o Certain derivatives could produce disproportionate losses.
o In a down market, certain securities and derivatives could become harder
to value or to sell at a fair price.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price, whichever
is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.53% 0.53% 0.53%
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
Other expenses 0.18% 0.18% 0.18%
Total fund operating expenses 0.96% 1.71% 1.71%
Distribution and service (12b-1) fee
reduction (until 12/31/00) 0.10% 0.10% --
Expense reimbursement (at least until
12/31/00) 0.01% 0.01% 0.01%
Actual operating expenses 0.85% 1.60% 1.70%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $533 $732 $ 947 $1,565
Class B - with redemption $663 $828 $1,118 $1,811
- without redemption $163 $528 $ 918 $1,811
Class C - with redemption $273 $538 $ 927 $2,019
- without redemption $173 $538 $ 927 $2,019
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ---------------------------
Ticker TAMBX
CUSIP 41013Y104
Newspaper TFBdA
SEC number 811-5968
Class B
- ---------------------------
Ticker TSMBX
CUSIP 41013Y203
Newspaper TFBdB
SEC number 811-5968
Class C
- ---------------------------
Ticker --
CUSIP 41013Y609
Newspaper --
SEC number 811-5968
13
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each share class has its own cost structure, including a Rule 12b-1 plan that
allows it to pay fees for the sale, distribution and service of its shares. Your
financial representative can help you decide which share class is best for you.
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------
o Front-end sales charges, as described below.
o Distribution and service (12b-1) fees of 0.15% for California Tax-Free
Income and Tax-Free Bond, 0.25% for High Yield Tax-Free and 0.30% for
Massachusetts Tax-Free Income and New York Tax-Free Income.
- --------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right away.
o Distribution and service (12b-1) fees of 1.00% (0.90% for California
Tax-Free Income and Tax-Free Bond).
o A deferred sales charge, as described at right.
o Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses.
- --------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right away.
o Distribution and service (12b-1) fees of 1.00%.
o A 1.00% contingent deferred sales charge on shares sold within one year of
purchase.
o No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
For actual past expenses of each share class, see the fund-by-fund information
earlier in this prospectus.
Because 12b-1 fees are paid on an ongoing basis, they may cost shareholders more
than other types of sales charges.
Investors purchasing $1 million or more of Class B or Class C shares may want to
consider the lower operating expenses of Class A shares.
Your broker or agent may charge you a fee to effect transactions in fund shares.
- --------------------------------------------------------------------------------
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 next column
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
- --------------------------------------------------------------------------------
CDSC on shares
Your investment being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the first day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
Class B and Class C Shares are offered at their net asset value per share,
without any initial sales charge. However, you may be charged a CDSC on shares
you sell within a certain time after you bought them, as described in the tables
below. There is no CDSC on shares acquired through reinvestment of dividends.
The CDSC is based on the original purchase cost or the current market value of
the shares being sold, whichever is less. The CDSCs are as follows:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after CDSC on shares
purchase being sold
1st year 5.00%
2nd year 4.00%
3rd year 3.00%
4th year 3.00%
5th year 2.00%
6th year 1.00%
After 6th year none
- --------------------------------------------------------------------------------
Class C deferred charges
- --------------------------------------------------------------------------------
Years after purchase CDSC
1st year 1.00%
After 1st year none
For purposes of these CDSCs, all purchases made during a calendar month are
counted as having been made on the first day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to
14 YOUR ACCOUNT
<PAGE>
sell shares we will first sell any shares in your account that carry no CDSC. If
there are not enough of these to meet your request, we will sell those shares
that have the lowest CDSC.
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
o Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge. Retirement plans investing $1 million in
Class B shares may add that value to Class A purchases to calculate
charges.
o Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had
been purchased at once.
o Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Signature Services, or consult the SAI (see the
back cover of this prospectus).
Group Investment Program A group may be treated as a single purchaser under the
accumulation and combination privileges. Each investor has an individual
account, but the group's investments are lumped together for sales charge
purposes, making the investors potentially eligible for reduced sales charges.
There is no charge or obligation to invest (although initial investments must
total at least $250), and individual investors may close their accounts at any
time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify, or consult the SAI (see the back cover of this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for each share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI (see the back
cover of this prospectus).
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge, as long as Signature Services is
notified before you reinvest. If you paid a CDSC when you sold your shares, you
will be credited with the amount of the CDSC. All accounts involved must have
the same registration.
To utilize: contact your financial representative or Signature Services.
Waivers for certain investors Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
o selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under signed agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds
o individuals transferring assets from an employee benefit plan into a John
Hancock fund
o certain John Hancock insurance contract holders (one-year CDSC usually
applies)
o participants in certain retirement plans with at least 100 eligible
employees (one-year CDSC applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
Signature Services or consult the SAI (see the back cover of this prospectus).
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must
invest at least $25 a month
o fee-based clients of selling brokers who have placed at least $2
billion in John Hancock funds: $250
3 Complete the appropriate parts of the account application, carefully
following the instructions. You must submit additional documentation when
opening trust, corporate or power of attorney accounts. You must notify
your financial representative or Signature Services if this information
changes. For more details, please contact your financial representative or
call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges application. By
applying for privileges now, you can avoid the delay and inconvenience of
having to file an additional application if you want to add privileges
later.
5 Make your initial investment using the table on the next page. You and
your financial representative can initiate any purchase, exchange or sale
of shares.
YOUR ACCOUNT 15
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clip Art] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable to
"John Hancock Signature "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to your investment slip from an
financial representative, or account statement. If no slip
mail them to Signature is available, include a note
Services (address below). specifying the fund name, your
share class, your account
number and the name(s) in
which the account is
registered.
o Deliver the check and your
investment slip or note to
your financial representative,
or mail them to Signature
Services (address below).
By exchange
[Clip Art] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
By wire
[Clip Art] o Deliver your completed o Instruct your bank to wire the
application to your financial amount of your investment to:
representative, or mail it to First Signature Bank & Trust
Signature Services. Account # 900000260
Routing # 211475000
o Obtain your account number by
calling your financial Specify the fund name, your share
representative or Signature class, your account number and
Services. the name(s) in which the account
is registered. Your bank may
o Instruct your bank to wire the charge a fee to wire funds.
amount of your investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the new
account number and the name(s) in
which the account is registered.
Your bank may charge a fee to
wire funds.
By phone
[Clip Art] 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.
- ----------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- ----------------------------------------
To open or add to an account using the Monthly Automatic
Accumulation Program, see "Additional investor services."
16 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of
your shares
By letter
[Clip Art] o Accounts of any type. o Write a letter of
instruction or complete a
o Sales of any amount. 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
[Clip Art] o Most accounts. o For automated service 24
hours a day using your
o Sales of up to $100,000. touch-tone phone, call the
EASI-Line at
1-800-338-8080.
o To place your order, call
your financial representative
or Signature Services between
8 A.M. and 4 P.M. Eastern
Time on most business days.
By wire or electronic funds transfer (EFT)
[Clip Art] o Requests by letter to sell o To verify that the
any amount (accounts of any telephone redemption
type). privilege is in place on an
account, or to request the
o Requests by phone to sell form to add it to an
up to $100,000 (accounts existing account, call
with telephone redemption Signature Services.
privileges).
o Amounts of $1,000 or more
will be wired on the next
business day. A $4 fee will
be deducted from your
account.
o Amounts of less than $1,000
may be sent by EFT or by
check. Funds from EFT
transactions are generally
available by the second
business day. Your bank may
charge a fee for this
service.
By exchange
[Clip Art] o Accounts of any type. o Obtain a current prospectus
for the fund into which you
o Sales of any amount. are exchanging by calling
your financial
representative or Signature
Services.
o Call your financial
representative or Signature
Services to request an
exchange.
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, unless they were previously provided to Signature Services and are
still accurate. These items are shown in the table below. You may also need to
include a signature guarantee, which protects you against fraudulent orders. You
will need a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You will need to obtain your signature guarantee from a member of the Signature
Guarantee Medallion Program. Most brokers and securities dealers are members of
this program. A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
- --------------------------------------------------------------------------------
[Clip Art]
Owners of individual, joint, or o Letter of instruction.
UGMA/UTMA accounts (custodial accounts
for minors). o On the letter, the signatures of all
persons authorized to sign for the
account, exactly as the account is
registered.
o Signature guarantee if applicable
(see above).
Owners of corporate, sole o Letter of instruction.
proprietorship, general partner or
association accounts. o Corporate business/organization
resolution, certified within the
past 12 months, or a John Hancock
Funds business/organization
certification form.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Signature guarantee if applicable
(see above).
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of
the trustee(s).
o Copy of the trust document certified
within the past 12 months or a John
Hancock Funds trust certification
form.
o Signature guarantee if applicable
(see above).
Joint tenancy shareholders with rights o Letter of instruction signed by
of survivorship whose co-tenants are surviving tenant.
deceased.
o Copy of death certificate.
o Signature guarantee if applicable
(see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor,
certified within the past 12 months.
o Signature guarantee if applicable
(see above).
Administrators, conservators, guardians o Call 1-800-225-5291 for
and other sellers or account types not instructions.
listed above.
- ----------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- ----------------------------------------
18 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
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). The funds use market prices in
valuing portfolio securities, but may use fair-value estimates if reliable
market prices are unavailable.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after Signature Services receives your
request in good order.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. Also for your protection, telephone
redemption transactions are not permitted on accounts whose names or addresses
have changed within the past 30 days. Proceeds from telephone transactions can
only be mailed to the address of record.
Exchanges You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B and Class
C shares will continue to age from the original date and will retain the same
CDSC rate. However, if the new fund's CDSC rate is higher, then the rate will
increase. A CDSC rate that has increased will drop again with a future exchange
into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties 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.
Capital gains, if any, are distributed annually, typically after the end of a
fund's fiscal year. Most of these funds' dividends are income dividends. Your
dividends begin accruing the day after payment is received by the fund and
continue through the day your shares are actually sold.
Devidend reinvestments Most investors have their didvidends 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 you
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
YOUR ACCOUNT 19
<PAGE>
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-term capital gains are taxable as ordinary income.
Dividends from a fund's long-term capital gains are taxable at a lower rate.
Whether gains are short-term or long-term depends on the fund's holding period.
Taxable dividends paid in January may be taxable as if they had been paid the
previous December.
The state tax-free income funds intend to comply with certain state tax
requirements so that their income dividends will generally 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.
Year 2000 compliance The adviser and the funds' service providers are taking
steps to address any year 2000-related computer problems. However, there is some
risk that these problems could disrupt the issuers in which the funds invest,
the funds' operations or financial markets generally.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your account application.
o If you are using MAAP to open an account, make out a check ($25 minimum)
for your first investment amount payable to "John Hancock Signature
Services, Inc." Deliver your check and application to your financial
representative or Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payments or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account
(buying shares during a period when you are also selling shares of the
same fund is not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and
there is no limit to the number of payees you may have, as long as they
are all on the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Signature Services.
Retirement plans John Hancock Funds offers a range of retirement plans,
including traditional, Roth and Education IRAs, SIMPLE plans, SEPs, 401(k) plans
and other pension and profit-sharing plans. Using these plans, you can invest in
any John Hancock fund with a low minimum investment of $250 or, for some group
plans, no minimum investment at all. Because of certain tax implications,
tax-free income funds are not appropriate investments for qualified retirement
plans.
20 YOUR ACCOUNT
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The diagram below shows the basic business structure used by the John Hancock
tax-free income funds. Each fund's board of trustees oversees the fund's
business activities and retains the services of the various firms that carry out
the fund's operations.
The trustees of the Massachusetts Tax-Free Income and New York Tax-Free Income
funds have the power to change these funds' respective investment goals without
shareholder approval.
Management fees The management fees paid to the investment adviser by the John
Hancock tax-free income funds last fiscal year are as follows:
- --------------------------------------------------------------------------------
Fund % of net assets
- --------------------------------------------------------------------------------
California Tax-Free Income Fund 0.49%
High Yield Tax-Free Fund 0.58%
Massachusetts Tax-Free Income Fund 0.19%
New York Tax-Free Income Fund 0.16%
Tax-Free Bond Fund 0.53%
[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.
Markets the funds and distributes shares
through selling brokers, financial planners
and other financial representatives.
-------------------------------------------------
------------------------------------------------------
Transfer agent
John Hancock Signature Services, Inc.
Handles shareholder services, including record-
keeping and statements, distribution of dividends,
and processing of buy and sell requests.
------------------------------------------------------
Asset
management
------------------------------------
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.
Holds the funds' assets, settles all
portfolio trades and collects most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
------------------------------------
Trustees
Oversee the funds' activities.
------------------------------------
FUND DETAILS 21
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
These tables detail the performance of each fund's share classes, including
total return information showing how much an investment in the fund has
increased or decreased each year.
California Tax-Free Income Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/94(1) 12/95 8/96(2) 8/97
- ------------------------------------------------------------------------------------------------------------------------------------
<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 (loss) 0.58 0.57(3) 0.39(3) 0.57(3)
Net realized and unrealized gain (loss) on investments and
financial futures contracts (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)
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>
- -------------------------------------------------------------------------------------------------------
Class A - period ended: 8/98 8/99
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.77 $11.19
Net investment income (loss) 0.56(3) 0.56(3)
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.42 (0.54)
Total from investment operations 0.98 0.02
Less distributions:
Dividends from net investment income (0.56) (0.56)
Net asset value, end of period $11.19 $10.65
Total investment return at net asset value(4) (%) 9.32 0.11
Total adjusted investment return at net asset value(4,6) (%) 9.26 0.04
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 300,483 306,786
Ratio of expenses to average net assets (%) 0.77(8) 0.76(8)
Ratio of adjusted expenses to average net assets(9) (%) 0.83 0.82
Ratio of net investment income (loss) to average net assets (%) 5.05 5.06
Ratio of adjusted net investment income (loss) to average net assets(9) (%) 4.99 4.99
Portfolio turnover rate (%) 10 3
Fee reduction per share ($) 0.01(3) 0.01(3)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(1) 12/95 8/96(2) 8/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.85 $9.28 $10.68 $10.36
Net investment income (loss) 0.51 0.50(3) 0.33(3) 0.49(3)
Net realized and unrealized gain (loss) on
investments and financial futures contracts (1.57) 1.40 (0.31) 0.41
Total from investment operations (1.06) 1.90 0.02 0.90
Less distributions:
Dividends from net investment income (0.51) (0.50) (0.34) (0.49)
Net asset value, end of period $9.28 $10.68 $10.36 $10.77
Total investment return at net asset value(4) (%) (9.99) 20.87 0.20(5) 8.88
Total adjusted investment return at net asset value(4,6) (%) (10.13) 20.72 0.14(5) 8.81
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 77,365 84,673 83,253 89,493
Ratio of expenses to average net assets (%) 1.50 1.50 1.52(7,8) 1.50
Ratio of adjusted expenses to average net assets(9) (%) 1.64 1.65 1.59(7) 1.57
Ratio of net investment income (loss) to average net assets (%) 5.10 4.97 4.81(7) 4.66
Ratio of adjusted net investment income (loss) to average net assets(9) (%) 4.96 4.82 4.72(7) 4.59
Portfolio turnover rate (%) 62 37(10) 30 15
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01(3)
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Class B - period ended: 8/98 8/99
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.77 $11.19
Net investment income (loss) 0.47(3) 0.48(3)
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.42 (0.54)
Total from investment operations 0.89 (0.06)
Less distributions:
Dividends from net investment income (0.47) (0.48)
Net asset value, end of period $11.19 $10.65
Total investment return at net asset value(4) (%) 8.50 (0.63)
Total adjusted investment return at net asset value(4,6) (%) 8.44 (0.80)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 98,572 98,530
Ratio of expenses to average net assets (%) 1.52(8) 1.51(8)
Ratio of adjusted expenses to average net assets(9) (%) 1.58 1.67
Ratio of net investment income (loss) to average net assets (%) 4.29 4.31
Ratio of adjusted net investment income (loss) to average net assets(9) (%) 4.23 4.14
Portfolio turnover rate (%) 10 3
Fee reduction per share ($) 0.01(3) 0.01(3)
</TABLE>
22 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Class C - period ended: 8/99(11)
- -------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $11.14
Net investment income (loss) (3) 0.18
Net realized and unrealized (loss) on investments and financial futures contracts (0.49)
Total from investment operations (0.31)
Less distributions:
Dividends from net investment income (0.18)
Net asset value, end of period $10.65
Total investment return at net asset value(4) (%) (2.77)(5)
Total adjusted investment return at net asset value(4,6) (%) (2.80)(5)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 860
Ratio of expenses to average net assets (%) 1.61(7,8)
Ratio of adjusted expenses to average net assets(9) (%) 1.67(7)
Ratio of net investment income (loss) to average net assets(7) (%) 4.20(7)
Ratio of adjusted net investment income (loss) to average net assets(9) (%) 4.13(7)
Portfolio turnover rate (%) 3
Fee reduction per share(3) ($) 0.01
</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 end 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 and the years ended August 31, 1998
and 1999, 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 have been 0.75% for
Class A, 1.50% for Class B and 1.60% for Class C, respectively.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover rate excludes merger activity.
(11) Class C shares began operations on April 1, 1999.
FUND DETAILS 23
<PAGE>
High Yield Tax-Free Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95(2) 8/96(3) 8/97 8/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.85 $8.82 $9.47 $9.16 $9.34
Net investment income (loss) 0.48(4) 0.57 0.49(4) 0.56(4) 0.54(4)
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.94) 0.70 (0.30) 0.18 0.31
Total from investment operations (0.46) 1.27 0.19 0.74 0.85
Less distributions:
Dividends from net investment income (0.48) (0.58) (0.50) (0.56) (0.54)
Distributions in excess of net investment income (0.09) (0.04) -- -- --
Total distributions (0.57) (0.62) (0.50) (0.56) (0.54)
Net asset value, end of period $8.82 $9.47 $9.16 $9.34 $9.65
Total investment return at net asset value(5) (%) 4.96(6) 14.85 1.96(6) 8.29 9.34
Total adjusted investment return at net asset value(5,10) (%) -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 15,401 14,225 23,663 32,199 40,725
Ratio of expenses to average net assets (%) 1.15(7) 1.06 1.10(7) 1.06 1.00(8)
Ratio of net investment income (loss) to average net assets (%) 6.08(7) 6.36 6.39(7) 6.00 5.66
Portfolio turnover rate (%) 62 64 38 51 35
<CAPTION>
- -------------------------------------------------------------------------------
Class A - period ended: 8/99
- -------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $9.65
Net investment income (loss) 0.53(4)
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.62)
Total from investment operations (0.09)
Less distributions:
Dividends from net investment income (0.53)
Distributions in excess of net investment income --
Total distributions (0.53)
Net asset value, end of period $9.03
Total investment return at net asset value(5) (%) (0.98)
Total adjusted investment return at net asset value(5,10) (%) (1.00)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 48,869
Ratio of expenses to average net assets (%) 1.00(8)
Ratio of net investment income (loss) to average net assets (%) 5.65(9)
Portfolio turnover rate (%) 39
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/94 10/95(2) 8/96(3) 8/97 8/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.98 $8.82 $9.47 $9.16 $9.34
Net investment income (loss) 0.48 0.51 0.44(4) 0.49(4) 0.47(4)
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.90) 0.69 (0.31) 0.18 0.31
Total from investment operations (0.42) 1.20 0.13 0.67 0.78
Less distributions:
Dividends from net investment income (0.48) (0.51) (0.44) (0.49) (0.47)
Distributions in excess of net investment income (0.07) (0.04) -- -- --
Distributions from net realized gain on investments sold (0.19) -- -- -- --
Total distributions (0.74) (0.55) (0.44) (0.49) (0.47)
Net asset value, end of period $8.82 $9.47 $9.16 $9.34 $9.65
Total investment return at net asset value(5) (%) (4.44) 13.99 1.36(6) 7.51 8.53
Total adjusted investment return at net asset value(5,10) (%) -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 151,069 155,234 147,669 139,385 131,497
Ratio of expenses to average net assets (%) 1.85 1.79 1.81(7) 1.81 1.75(8)
Ratio of net investment income to average net assets (%) 5.36 5.61 5.65(7) 5.28 4.92
Portfolio turnover rate (%) 62 64 38 51 35
<CAPTION>
- --------------------------------------------------------------------------------
Class B - period ended: 8/99
- --------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $9.65
Net investment income (loss) 0.47(4)
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.62)
Total from investment operations (0.15)
Less distributions:
Dividends from net investment income (0.47)
Distributions in excess of net investment income --
Distributions from net realized gain on investments sold --
Total distributions (0.47)
Net asset value, end of period $9.03
Total investment return at net asset value(5) (%) (1.69)
Total adjusted investment return at net asset value(5,10) (%) (1.71)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 112,873
Ratio of expenses to average net assets (%) 1.73(8)
Ratio of net investment income to average net assets (%) 4.93(9)
Portfolio turnover rate (%) 39
</TABLE>
24 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Class C - period ended: 8/99(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $9.47
Net investment income (loss) (4) 0.18
Net realized and unrealized gain (loss) on investments sold and financial futures contracts (0.44)
Total from investment operations (0.26)
Less distributions:
Dividends from net investment income (0.18)
Net asset value, end of period $9.03
Total investment return at net asset value(5) (%) (2.70)(6)
Total adjusted investment return at net asset value(5,10) (%) (2.71)(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 229
Ratio of expenses to average net assets (%) 1.76(7,8)
Ratio of net investment income to average net assets (%) 4.84(7,9)
Portfolio turnover rate (%) 39
</TABLE>
(1) Class A and Class C shares began operations on December 31, 1993 and April
1, 1999, respectively.
(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) The ratio of expenses to average net assets for the years ended August 31,
1998 and 1999 excludes the effect of balance credits. If these expense
reductions had been included, the effect to the ratio of expenses to
average net assets would have been less than 0.01% for Class A and Class B
shares for the year ended August 31, 1998 and the ratio of expenses to
average net assets would have been 0.98%, 1.71% and 1.74% for Class A,
Class B and Class C shares, respectively, for the year ended August 31,
1999.
(9) The ratio of net investment includes the effect of balance credits. If the
expense reductions were excluded, the effect to the ratio of net
investment income to average net assets would have been less than 0.01%
for Class A and Class B shares for the year ended August 31, 1998 and the
ratio of net investment income to average net assets would have been
5.63%, 4.91% and 4.82% for Class A, Class B and Class C shares,
respectively, for the year ended August 31, 1999.
(10) An estimated return that does not take into consideration fee reductions
by the Adviser during the periods shown.
FUND DETAILS 25
<PAGE>
Massachusetts Tax-Free Income Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/95 8/96 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.56 $11.76 $11.66 $12.12 $12.60
Net investment income (loss) 0.65 0.65 0.66 0.66(1) 0.64(1)
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.20 (0.10) 0.46 0.48 (0.75)
Total from investment operations 0.85 0.55 1.12 1.14 (0.11)
Less distributions:
Dividends from net investment income (0.65) (0.65) (0.66) (0.66) (0.64)
Net asset value, end of period $11.76 $11.66 $12.12 $12.60 $11.85
Total investment return at net asset value(2) (%) 7.66 4.78 9.85 9.66 (0.96)
Total adjusted investment return at net asset value(2,3) (%) 7.21 4.30 9.45 9.27 (1.31)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 54,416 55,169 54,253 58,137 58,177
Ratio of expenses to average net assets (%) 0.70 0.75(4) 0.71(4) 0.71(4) 0.74(4)
Ratio of adjusted expenses to average net assets(5) (%) 1.15 1.18 1.11 1.10 1.05
Ratio of net investment income (loss) to average net assets (%) 5.67 5.53 5.59 5.28 5.16
Ratio of adjusted net investment income (loss) to average net assets(5) (%) 5.22 5.05 5.19 4.89 4.81
Portfolio turnover rate (%) 24 36 12 6 6
Expense and fee reduction per share ($) 0.05 0.06 0.05 0.05(1) 0.04(1)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Class B - period ended: 8/97(6) 8/98 8/99
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.84 $12.12 $12.60
Net investment income (loss) 0.54 0.57(1) 0.55(1)
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.28 0.48 (0.75)
Total from investment operations 0.82 1.05 (0.20)
Less distributions:
Dividends from net investment income (0.54) (0.57) (0.55)
Net asset value, end of period $12.12 $12.60 $11.85
Total investment return at net asset value(2) (%) 7.08(7) 8.89 (1.66)
Total adjusted investment return at net asset value(2,3) (%) 6.72(7) 8.50 (2.01)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,418 6,197 12,967
Ratio of expenses to average net assets (%) 1.41(4,8) 1.41(4) 1.44(4)
Ratio of adjusted expenses to average net assets(5) (%) 1.81(8) 1.80 1.75
Ratio of net investment income (loss) to average net assets (%) 4.82(8) 4.58 4.46
Ratio of adjusted net investment income (loss) to average net assets(5) (%) 4.42(8) 4.19 4.11
Portfolio turnover rate (%) 12 6 6
Expense and fee reduction per share ($) 0.04 0.05(1) 0.04(1)
</TABLE>
26 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Class C - period ended: 8/99(6)
- ----------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $12.46
Net investment income (loss)(1) 0.21
Net realized and unrealized gain (loss) on investments and financial futures contracts (0.61)
Total from investment operations (0.40)
Less distributions:
Dividends from net investment income (0.21)
Net asset value, end of period $11.85
Total investment return at net asset value(2) (%) (3.23)(7)
Total adjusted investment return at net asset value(2,3) (%) (3.38)(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 178
Ratio of expenses to average net assets (%) 1.44(4,8)
Ratio of adjusted expenses to average net assets(5) (%) 1.75(8)
Ratio of net investment income (loss) to average net assets (%) 4.30(8)
Ratio of adjusted net investment income (loss) to average net assets(5) (%) 3.95(8)
Portfolio turnover rate (%) 6
Expense and fee reduction per share(1) ($) 0.02
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(4) The ratio of expenses to average net assets for the periods ending on or
after August 31, 1996 excludes the effect of balance credits. If these
expense reductions were included, the ratio of expenses to average net
assets would have been 0.70% for Class A and 1.40% for Class B and Class
C.
(5) Unreimbursed, without fee reduction.
(6) Class B and Class C shares began operations on October 3, 1996 and April
1, 1999, respectively.
(7) Not annualized.
(8) Annualized.
FUND DETAILS 27
<PAGE>
New York Tax-Free Income Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/95 8/96 8/97 8/98 8/99
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.73 $11.88 $11.83 $12.25 $12.62
Net investment income (loss) 0.65 0.66 0.67 0.66(1) 0.63(1)
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.15 (0.05) 0.42 0.37 (0.75)
Total from investment operations 0.80 0.61 1.09 1.03 (0.12)
Less distributions:
Dividends from net investment income (0.65) (0.66) (0.67) (0.66) (0.63)
Distributions from net realized gain on investments sold -- -- -- -- (0.11)
Distributions in excess of net realized gain on investments sold -- -- -- -- (0.00)(2)
Total distributions (0.65) (0.66) (0.67) (0.66) (0.74)
Net asset value, end of period $11.88 $11.83 $12.25 $12.62 $11.76
Total investment return at net asset value(3) (%) 7.19 5.21 9.48 8.64 (1.08)
Total adjusted investment return at net asset value(3,4) (%) 6.74 4.77 9.08 8.24 (1.46)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 55,753 56,229 54,086 52,373 48,198
Ratio of expenses to average net assets (%) 0.70 0.73(5) 0.71(5) 0.70 0.74(5)
Ratio of adjusted expenses to average net assets(6) (%) 1.15 1.14 1.11 1.10 1.08
Ratio of net investment income (loss) to average net assets (%) 5.67 5.51 5.61 5.26 5.06
Ratio of adjusted net investment income (loss) to average net assets(6) (%) 5.22 5.07 5.21 4.86 4.68
Portfolio turnover rate (%) 70 76 46 46 58
Expense and fee reduction per share ($) 0.05 0.05 0.05 0.05(1) 0.04(1)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Class B - period ended: 8/97(6) 8/98 8/99
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.99 $12.25 $12.62
Net investment income (loss) 0.54 0.57(1) 0.54(1)
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.26 0.37 (0.75)
Total from investment operations 0.80 0.94 (0.21)
Less distributions:
Dividends from net investment income (0.54) (0.57) (0.54)
Distributions from net realized gain on investments sold -- -- (0.11)
Distributions in excess of net realized gain on investments sold -- -- (0.00)(2)
Total distributions (0.54) (0.57) (0.65)
Net asset value, end of period $12.25 $12.62 $11.76
Total investment return at net asset value(3) (%) 6.82(8) 7.88 (1.77)
Total adjusted investment return at net asset value(3,4) (%) 6.46(8) 7.48 (2.15)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,414 5,824 8,458
Ratio of expenses to average net assets (%) 1.41(5,9) 1.40 1.44(5)
Ratio of adjusted expenses to average net assets(6) (%) 1.81(9) 1.80 1.78
Ratio of net investment income (loss) to average net assets (%) 4.79(9) 4.56 4.36
Ratio of adjusted net investment income (loss) to average net assets(6) (%) 4.39(9) 4.16 3.98
Portfolio turnover rate (%) 46 46 58
Expense and fee reduction per share ($) 0.04 0.05(1) 0.04(1)
</TABLE>
28 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Class C - period ended: 8/99(7)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $12.39
Net investment income (loss) 0.22(1)
Net realized and unrealized gain (loss) on investments and financial futures contracts (0.63)
Total from investment operations (0.41)
Less distributions:
Dividends from net investment income (0.22)
Net asset value, end of period $11.76
Total investment return at net asset value(3) (%) (3.24)(8)
Total adjusted investment return at net asset value(3,4) (%) (3.40)(8)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 94
Ratio of expenses to average net assets (%) 1.44(5,9)
Ratio of adjusted expenses to average net assets(6) (%) 1.78(9)
Ratio of net investment income (loss) to average net assets (%) 4.23(9)
Ratio of adjusted net investment income (loss) to average net assets(6) (%) 3.85(9)
Portfolio turnover rate (%) 58
Expense and fee reduction per share(1) ($) 0.04
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Less than $0.01 per share.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(5) The ratio of expenses to average net assets for the periods ending on or
after August 31, 1996 excludes the effect of balance credits. If these
expense reductions were included, the ratio of expenses to average net
assets would have been 0.70% for Class A and 1.40% for Class B and Class
C.
(6) Unreimbursed, without fee reduction.
(7) Class B and Class C shares began operations on October 3, 1996 and April
1, 1999, respectively.
(8) Not annualized.
(9) Annualized.
FUND DETAILS 29
<PAGE>
Tax-Free Bond Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/94(1) 12/95 8/96(2) 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 (loss) 0.58 0.57(3) 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)
Net asset value, end of period $9.39 $10.67 $10.27 $10.63
Total investment return at net asset value(4) (%) (9.28) 20.20 (0.01)(5) 9.44
Total adjusted investment return at net asset value(4,6) (%) (9.39) 20.08 (0.09)(5) 9.38
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 114,539 118,797 560,863 590,185
Ratio of expenses to average net assets (%) 0.85 0.85 0.85(7) 0.85
Ratio of adjusted expenses to average net assets(8) (%) 0.96 0.97 0.98(7) 0.91
Ratio of net investment income (loss) to average net assets (%) 5.72 5.67 5.75(7) 5.61
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 5.61 5.55 5.62(7) 5.55
Portfolio turnover rate (%) 107 113 116(9) 46(9)
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Class A - period ended: 8/98 8/99
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.63 $11.01
Net investment income (loss) 0.56(3) 0.56(3)
Net realized and unrealized gain (loss) on investments 0.38 (0.65)
Total from investment operations 0.94 (0.09)
Less distributions:
Dividends from net investment income (0.56) (0.56)
Net asset value, end of period $11.01 $10.36
Total investment return at net asset value(4) (%) 9.08 (0.93)
Total adjusted investment return at net asset value(4,6) (%) 9.06 (1.04)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 600,905 564,877
Ratio of expenses to average net assets (%) 0.85 0.86(10)
Ratio of adjusted expenses to average net assets(8) (%) 0.87 0.96
Ratio of net investment income (loss) to average net assets (%) 5.16 5.14
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 5.14 5.03
Portfolio turnover rate (%) 24 13
Fee reduction per share ($) 0.01(3) 0.00(11)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(1) 12/95 8/96(2) 8/97
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.96 $9.38 $10.67 $10.27
Net investment income 0.50 0.50(3) 0.34 0.51
Net realized and unrealized gain (loss) on investments (1.58) 1.28 (0.40) 0.36
Total from investment operations (1.08) 1.78 (0.06) 0.87
Less distributions:
Dividends from net investment income (0.50) (0.49) (0.34) (0.51)
Net asset value, end of period $9.38 $10.67 $10.27 $10.63
Total investment return at net asset value(4) (%) (10.05) 19.41 (0.51)(5) 8.63
Total adjusted investment return at net asset value(4,6) (%) (10.16) 19.29 (0.59)(5) 8.57
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 70,243 76,824 81,177 204,621
Ratio of expenses to average net assets (%) 1.60 1.60 1.60(7) 1.60
Ratio of adjusted expenses to average net assets(8) (%) 1.71 1.72 1.73(7) 1.66
Ratio of net investment income (loss) to average net assets (%) 4.97 4.90 4.91(7) 4.85
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 4.86 4.78 4.78(7) 4.79
Portfolio turnover rate (%) 107 113 116(9) 46(9)
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Class B - period ended: 8/98 8/99
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.63 $11.01
Net investment income 0.48(3) 0.48(3)
Net realized and unrealized gain (loss) on investments 0.38 (0.65)
Total from investment operations 0.86 (0.17)
Less distributions:
Dividends from net investment income (0.48) (0.48)
Net asset value, end of period $11.01 $10.36
Total investment return at net asset value(4) (%) 8.27 (1.67)
Total adjusted investment return at net asset value(4,6) (%) 8.25 (1.78)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 184,085 143,830
Ratio of expenses to average net assets (%) 1.60 1.61(10)
Ratio of adjusted expenses to average net assets(8) (%) 1.62 1.71
Ratio of net investment income (loss) to average net assets (%) 4.41 4.39
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 4.39 4.28
Portfolio turnover rate (%) 24 13
Fee reduction per share ($) 0.01(3) 0.00(11)
</TABLE>
30 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Class C - period ended: 8/99(12)
- ------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $10.86
Net investment income (3) 0.19
Net realized and unrealized gain (loss) on investments (0.50)
Total from investment operations (0.31)
Less distributions:
Dividends from net investment income (0.19)
Net asset value, end of period $10.36
Total investment return at net asset value(4) (%) (2.86)(5)
Total adjusted investment return at net asset value(4,6) (%) (2.86)(5)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 354
Ratio of expenses to average net assets (%) 1.71(7,10)
Ratio of adjusted expenses to average net assets(8) (%) 1.71(7)
Ratio of net investment income (loss) to average net assets (%) 4.29(7)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 4.28(7)
Portfolio turnover rate (%) 13
Fee reduction per share ($) 0.00(11)
</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 end 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) Unreimbursed, without fee reduction.
(9) Portfolio turnover rate excludes merger activity.
(10) For the period ended August 31, 1999, the ratio of expenses to average net
assets for the Fund excludes the effect of expense reductions. If expense
reductions were included, the ratio of expenses to average net assets
would have been 0.85%, 1.60% and 1.70% for Class A, Class B and Class C,
respectively.
(11) Less than $0.01 per share.
(12) Class C shares began operations on April 1, 1999.
FUND DETAILS 31
<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, a discussion of the market conditions and
investment strategies that significantly affected performance, as well as the
auditors' report (in annual report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into (is legally a part of) this prospectus.
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail:
John Hancock Signature
Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
By phone: 1-800-225-5291
By EASI-Line: 1-800-338-8080
By TDD: 1-800-544-6713
On the Internet:
www.jhfunds.com
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public Reference Room in Washington, DC. For access to
the Reference Room call 1-800-SEC-0330
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-6009
(duplicating fee required)
On the Internet: www.sec.gov
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts
02199-7603
(C) 2000 John Hancock Funds, Inc.
TEXPN 1/00
John Hancock(R)
<PAGE>
JOHN HANCOCK TAX-EXEMPT SERIES FUND
John Hancock New York Tax-Free Income Fund
Class A, Class B and Class C Shares
Statement of Additional Information
January 1, 2000
This Statement of Additional Information provides information about the John
Hancock New York Tax-Free Income Fund (the "Fund"), in addition to the
information that is contained in the combined Tax-Free Income Funds' Prospectus
dated January 1, 2000 (the "Prospectus"). The Fund is a non-diversified series
of the John Hancock Tax-Exempt Series Fund (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 Fund............................................... 2
Investment Objective and Policies...................................... 2
Special Risks.......................................................... 14
Investment Restrictions................................................ 19
Those Responsible for Management....................................... 21
Investment Advisory and Other Services................................. 30
Distribution Contracts................................................. 32
Sales Compensation..................................................... 34
Net Asset Value........................................................ 36
Initial Sales Charge on Class A Shares................................. 36
Deferred Sales Charge on Class B and Class C........................... 38
Special Redemptions.................................................... 42
Additional Services and Programs....................................... 42
Purchases and Redemptions Through Third Parties........................ 44
Description of the Fund's Shares....................................... 44
Tax Status............................................................. 45
State Income Tax Information........................................... 50
Calculation of Performance............................................. 51
Brokerage Allocation................................................... 53
Transfer Agent Services................................................ 55
Custody of Portfolio................................................... 55
Independent Accountants................................................ 55
Appendix A-Description of Investment Risk.............................. A-1
Appendix B-Description of Bond Ratings................................. B-1
Financial Statements................................................... F-1
1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a series of the Trust, an open-end investment management company
organized as a Massachusetts business trust under the laws of The Commonwealth
of Massachusetts. Prior to July 1, 1996, the New York Tax-Free Income Fund was
known as the New York Portfolio.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's 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.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. Appendix A contains further
information describing investment risks. The investment objective of the Fund is
not fundamental and may be changed by the Trustees without shareholder approval.
There is no assurance that the Fund will achieve its investment objective.
The Fund's objective is 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 Fund seeks to provide the maximum
level of tax-exempt income that is consistent with preservation of capital.
Non-Diversification. The Fund has registered as a "non-diversified" investment
company, permitting the Adviser to invest more than 5% of the assets of the Fund
in the obligations of any one issuer. Since a relatively high percentage of the
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.
Additional Risks. Securities in which the 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 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 securities 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
securities. Federal tax legislation enacted primarily during the 1980's limits
the types and amounts of tax-exempt bonds issuable for certain purposes,
especially industrial development bonds and other types of "private activity"
bonds. Such limits may affect the future supply and yields of these types of
tax-exempt securities. Further proposals limiting the issuance of tax-exempt
securities may well be introduced in the future. If it appeared that the
availability of tax-exempt securities for investment by the Fund and the value
of the Fund's investments could be materially affected by such changes in law,
the Trustees would reevaluate the Fund's investment objective and policies and
consider changes in the structure of the Fund or its dissolution.
All of the investments of the Fund will be made in:
2
<PAGE>
(1) tax-exempt securities which at the time of purchase are rated
BB or better by Standard & Poor's Ratings Group ("S&P"), or
Fitch Investors Services, Inc. ("Fitch") or Ba by Moody's
Investors Service, Inc. ("Moody's"). Alternatively, the bonds
may be unrated but considered by the Adviser to be of
comparable quality. Not more than one-third of the Fund's
total assets will be invested in tax-exempt bonds rated lower
than A or determined to be of comparable quality.
(2) Notes of issuers having an issue of outstanding tax-exempt
securities rated at least 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.
(3) 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.
(4) 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. Appendix B contains
further information about ratings.
Tax-Exempt Securities. These are 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.
Tax-exempt securities 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 securities 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, sewage or solid waste disposal or
student loans, or to obtain 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
securities if the interest paid thereon is excluded from gross income for
Federal income tax purposes.
The interest income on certain private activity bonds (including the 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 Fund
will not include tax-exempt securities 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 securities, but current
Federal tax law places substantial limitations on the size of such issues.
3
<PAGE>
The yields or returns on tax-exempt securities 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 securities
which they undertake to rate. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, tax-exempt securities 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 securities or changes in the investment objectives of investors.
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 the
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. The 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.
Municipal Bonds. 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.
"Moral Obligation" Bonds. The Fund currently does not intend to invest in
so-called "moral obligation" bonds, unless the credit of the issuer itself,
without regard to the "moral obligation," meets the investment criteria
established for investments by the Fund. With "moral obligation" bonds,
repayment is backed by a moral commitment of an entity other than the issuer.
Tax-Exempt 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:
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.
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.
4
<PAGE>
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.
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.
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.
Ratings as Investment Criteria.
Lower Rated High Yield "High Risk" Debt Obligations. The 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 "Appendix B" 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 the Fund's exposure to the risks associated with lower
rated securities. Because the Fund invests in securities in the lower rated
categories, the achievement of the Fund's goals is more dependent on the
Adviser's ability than would be the case if the Fund was investing in securities
in the higher rated categories.
5
<PAGE>
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.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. The Fund will not invest more than 15% of its net
assets in illiquid investments. If the Trustees determine, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid securities. The Trustees have adopted guidelines and delegated to
the Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a the Fund if qualified institutional buyers become for
a time uninterested in purchasing these restricted securities.
Participation Interests. Participation interests may take the form of interests
in or of a lending syndicate. The Fund's investments in participation interests
may be subject to its 15% net assets limitation on investments in illiquid
securities. The 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.
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 Fund will enter into repurchase agreements
only with member banks of the Federal Reserve System and with "primary dealers"
in U.S. Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements.
6
<PAGE>
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income, a decline in
value of the underlying securities or lack of access to income during this
period, and the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. The Fund will
also continue to be subject to the risk of a decline in the market value of the
securities sold under the agreements because it will reacquire those securities
upon effecting their repurchase. The 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 associated with reverse
repurchase agreements, the Fund will establish 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 Fund will enter into reverse repurchase
agreements only with federally insured banks or savings and loan associations
which are approved in advance as being creditworthy by the Trustees. Under
procedures established by the Trustees, the Adviser will monitor the
creditworthiness of the banks involved.
Options on Securities and Securities Indices. The Fund may purchase and write
(sell) call and put options on any securities in which it may invest on any
securities index based on securities in which it may invest. These options may
be listed on national domestic securities exchanges or traded in the
over-the-counter market. The Fund may write covered put and call options and
purchase put and call options to enhance total return, as a substitute for the
purchase or sale of securities, or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by the Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
7
<PAGE>
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account with a value at least equal to the Fund's obligation under
the option, (ii) entering into an offsetting forward commitment and/or (iii)
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position. A written call option on securities is typically covered by
maintaining the securities that are subject to the option in a segregated
account. The Fund may cover call options on a securities index by owning
securities whose price changes are expected to be similar to those of the
underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities 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 the Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of the Fund's portfolio securities. Put options may
also be purchased by the Fund for the purpose of affirmatively benefiting from a
decline in the price of securities which it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities. 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.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If the Fund is unable to
effect a closing purchase transaction with respect to covered options it has
written, the Fund will not be able to sell the underlying securities or dispose
of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
8
<PAGE>
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates and securities prices, the
Fund may purchase and sell various kinds of futures contracts, and purchase and
write call and put options on these futures contracts. The Fund may also enter
into closing purchase and sale transactions with respect to any of these
contracts and options. The futures contracts may be based on various securities,
securities indices, and any other financial instruments and indices. All futures
contracts entered into by the Fund are traded on U.S. exchanges or boards of
trade that are licensed, regulated or approved by the Commodity Futures Trading
Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging and Other Strategies with Future Contracts. Hedging is an attempt to
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that the Fund
proposes to acquire. When securities prices are falling, the Fund can seek to
offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When securities prices are rising, the Fund, through
the purchase of futures contracts, can attempt to secure better rates or prices
than might later be available in the market when it effects anticipated
purchases.
9
<PAGE>
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated decline
in market prices that would adversely affect the value of the Fund's portfolio
securities. Such futures contracts may include contracts for the future delivery
of securities held by the Fund or securities with characteristics similar to
those of the Fund's portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. The Fund may also purchase futures
contracts as a substitute for transactions in securities to alter the investment
characteristics of portfolio securities or to gain or increase its exposure to a
particular securities market.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
10
<PAGE>
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish a
segregated account consisting of cash or liquid securities in an amount equal to
the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates or securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. In the event of an imperfect correlation between
a futures position and a portfolio position which is intended to be protected,
the desired protection may not be obtained and the Fund may be exposed to risk
of loss.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Structured or Hybrid Notes. The 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
11
<PAGE>
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. The 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.
Derivative debt 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 Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. The Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund'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.
12
<PAGE>
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities 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 the 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,
the Fund may lend portfolio securities to brokers, dealers, and financial
institutions if the loan is collateralized by cash or U.S. Government securities
according to applicable regulatory requirements. The Fund may reinvest any cash
collateral in short-term securities and money market funds. When the Fund lends
portfolio securities, there is a risk that the borrower may fail to return the
securities involved in the transaction. As a result, the Fund may incur a loss
or, in the event of the borrower's bankruptcy, the Fund may be delayed in or
prevented from liquidating the collateral. It is a fundamental policy of the
Fund not to lend portfolio securities having a total value exceeding 33 1/3% of
its total assets.
Short-Term Trading and Portfolio Turnover. The 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 the Fund is calculated by
13
<PAGE>
dividing the lower 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. The Fund's portfolio
turnover rate is set forth in the table under the caption "Financial Highlights"
in the Prospectus.
Special Risks
The following information as to certain special risks associated with investing
in New York constitutes only a brief summary and does not purport to be a
complete description of the considerations associated with such investments. The
information is based in part on information from official statements related to
securities offerings of New York issuers and is believed to be accurate.
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 Fund, even though securities of the defaulting
entity may not be held by the Fund.
State Economy
The State economic forecast for 1999 and 2000 has been raised slightly from the
August Financial Plan forecast. Continued growth is projected in 1999 and 2000
for employment, wages, and personal income, although, for 2000, a slowdown in
the growth rate of employment is expected. The growth of personal income is
projected to decrease from 5.2% in 1998 to 4.8% in 1999, and then grow 4.9% in
2000. The growth in average wages is expected to outpace the inflation rate in
both 1999 and 2000. Overall employment growth is expected to be 2.0% in 1999,
almost the same as in 1998, but is expected to drop 1.7% in 2000, reflecting the
slowing growth of the national economy, continued spending restraint in
government, constraints in labor supply, and continued restructuring in the
manufacturing, health care, and banking sectors.
1999-2000 Fiscal Year. The State's current fiscal year began on April 1, 1999
and ends on March 31, 2000. On March 31, 1999, the State adopted the debt
service portion of the State budget for the 1999-2000 fiscal year; four months
later, on August 4, 1999, it enacted the remainder of the budget. The Governor
approved the budget as passed by the Legislature. Prior to passing the budget in
its entirety for the current fiscal year, the State enacted appropriations that
permitted the State to continue its operations.
14
<PAGE>
In 1999-2000, General Fund disbursements, including transfers to support capital
projects, debt service and other funds, are estimated at $37.36 billion, an
increase of $868 million or 2.38% over 1998-1999. Projected spending under the
1999-2000 enacted budget is $215 million above the Governor's Executive Budget
recommendations, including 30-day amendments. This change is the net result of
spending actions that occurred during negotiations on the Budget. The increase
in General Fend spending is comprised of $1.1 billion in legislative additions
to the Executive Budget (primarily in education), offset by various actions,
including reestimates of required spending based on year-to-date results and the
identification of certain other resources that offset spending, such as $250
million from commencing the process of privatizing the Medical Malpractice
Insurance Association (MMIA), $250 million from the retention of the Debt
Reduction Reserve Fund within the General Fund and about $100 million in excess
fund balances. The MMIA was established in 1983 to provide excess liability
insurance to doctors and medical providers. Legislation enacted with the
1999-2000 budget initiates the process of MMIA privatization and transfers
excess fund balances to the State.
1998-1999 Fiscal Year. Adoption of the State's fiscal 1998-1999 budget occurred
almost on schedule with the final legislative program passing on April 18, 1998
and being enacted by the Governor on April 25, 1998. The budget contains several
new provisions to accelerate local property and income tax relief for senior
citizens, expansion of income tax credits, tax and fee reductions and an
accelerated phase-out of assessments on medical providers. In conjunction with
continuing the tax reduction program, the Fiscal 1998-1999 budget contains
increased spending for public schools, special needs programs and the State and
City university systems. Overall, this budget calls for total state expenditures
to rise by 8% and revenues by about 6%.
The Fiscal 1998-1999 General Fund anticipates increasing both revenues and
expenditures by 7%. Principally, the additional revenues are expected to stem
from a significant expansion of personal income taxes being offset by slight
reductions in business taxes, other revenues and transfers. Planned expenditure
increases focus on expanding education programs, grants to local governments and
meeting state operating needs. At the end of Fiscal 1998-1999, the General Fund
projects a closing fund balance of $1.4 billion composed of $760 million in a
reserve for future needs, a $400 million balance in the Tax Stabilization
Reserve Fund, $158 million in the Community Projects Fund and $100 million in
the Contingency Reserve Fund.
Capital Project Fund spending is forecast to exceed $4.1 billion, an increase of
16%, in Fiscal 1998-1999. Major components of this program feature
transportation, environmental projects related to the 1996 Clean Water/Clean Air
Act, and prison capacity enhancement projects.
1997-1998 Fiscal Year. The State's fiscal 1997-1998 budget for was adopted by
the Legislature, more than four months after the start of the fiscal year on
April 1, 1997. It featured 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. Based upon
preliminary results, the improving state economy generated revenues in excess of
moderate expenditure levels. Due to phasing and economic projections, the impact
of these tax reductions should not begin to materially affect the outyear
projections until fiscal year 1999-2000.
The State projects to end fiscal year 1997-1998 with a combined funds operating
surplus of $2 billion and expects that for the first time since 1982 it has
eliminated its accumulated deficit (GAAP basis). At year-end, the State should
show an accumulated surplus of $567 million. This improvement reflects an
expectation an increase of 7.4% in State combined fund revenues and expenditure
growth of 5.7% over 1996-1997.
15
<PAGE>
Final General Fund figures project a surplus of $205 million or 0.6% of expected
revenues. Compared with FY1996-97, disbursements should show an increase of
$1.45 billion, or 4.4% and revenues by $1.5 billion or 4.6%. By category, the
largest gains in disbursements should relate to general operating expenses and
debt service obligations while social service delivery programs realized only
modest increases. On the revenue side, the General Fund appears to have
benefited from increased collections of personal income taxes and user taxes and
fees. The projected figures should result in the provision of $638 million in
General Fund reserves including a projected balance of $400 million in the Tax
Stabilization Reserve Fund, and a projected $68 million balance in the
Contingency Reserve Fund and $170 million in a Community Projects Reserve.
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%).
Ratings
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. On November 9, 1999,
Standard and Poor's upgraded their rating for the State of New York from to A to
A+ with a Stable Outlook.
Credit Considerations
Current Budget. The Fiscal Year 1999-2000 budget, which projects to generate a
significant 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 affects
of the financial problems and general economic slowdowns in the global economy,
and changes in the health care industry or other sectors could result in slower
economic growth and a deterioration in expected State revenues.
16
<PAGE>
Welfare Reform. The new welfare reform program initiated in November 1997 could
impact state expenditures in the event of a slowdown in the state economy. To
date, the new legislation which aims to reduce welfare rolls by rewarding
enabling more recipients to work appears to have produced program efficiencies.
A general slowdown in the state economy especially in New York City could thwart
many of the gains achieved by this program and shift additional financial
burdens to state and local governments.
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, 1997, there was
outstanding a $35.1 billion aggregate principal amount of bonds and notes issued
by Authorities which were either guaranteed by the State or supported by the
State through lease-purchase and contractual-obligation arrangements or moral
obligation provisions.
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
17
<PAGE>
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 $1.1 billion of short-term obligations to finance
the City's current estimate of its seasonal financing needs during its 1998
fiscal year. The City's capital financing program projects long-term financing
requirements of approximately $16.4 billion for the City's fiscal years 1999
through 2002 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 Fiscal Year 1998,
the New York City Transitional Finance Authority successfully issued over $650
million in asset back bonds to finance a portion of the City's capital program
and help avoid exceeding its State Constitutional general debt limit for the
City
New York City buoyed by a rebounding economy expects to post a surplus of more
than $2 billion for Fiscal Year 1998. The strong performance stems from the
City's maintenance of spending discipline and the projected receipt of over $1.6
billion in unexpected personal income, business and sales tax revenues.
Continuation of the City's ability to adhere to fiscal controls, close outyear
projected funding shortfalls and the region's growing economy, both Moody's and
Standard & Poor's raised their ratings on New York City into the A category
during 1998. The current General Obligation ratings for the City of New York are
A3 by Moody's, A- by S&P and A- by Fitch Investors Services.
New York cities and towns have lagged the rest of the nation in recovering from
the recession of 1992. The impact of this gradual yet improving economic trend
upon local government revenues have been offset in part by increasing local
assistance support from the state. The 1998-1999 enacted budget projects total
receipts of $37.6 billion for the State's General Fund, an increase of $3.0
billion from the prior fiscal year. State General Fund disbursements and
transfers will be $2.4 billion above the level of disbursements in 1997-1998.
Grants to local governments, including are anticipated to increase by $37
million from the prior fiscal year to over $800 million. 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 1998-99
fiscal year and thereafter. 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.
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.
18
<PAGE>
Litigation. Certain litigation pending against New York State, its subdivisions
and their officers and employees could have a substantial or long-term adverse
effect on State finances. Among the more significant of these lawsuits are those
that involve: (i) the validity and fairness of certain eighteenth century
agreements and treaties by which Oneida and Cayuga Indian tribes transferred
title to the State of approximately five million acres of land in central New
York; (ii) certain aspects of the State's Medicaid rates and regulations,
including reimbursements to providers of mandatory and optional Medicaid
services; (iii) the care and housing for individuals released from State mental
health facilities; (iv) 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.
The investment objectives and policies described above under the caption
"Investment Objective and Policies" are not fundamental and may be changed by
the Trustees without shareholder approval. The policy of the 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.
Investment Restrictions
Fundamental Investment Restrictions. The fundamental investment restrictions
will not be changed for the Fund without the approval of a majority of the
Fund's outstanding voting securities which, as used in the Prospectus and this
Statement of Additional Information, means the approval by the lesser of (1) the
holders of 67% or more of the Fund's shares represented at a meeting if more
than 50% of the Fund's outstanding shares are present in person or by proxy at
that meeting or (2) more than 50% of the Fund's outstanding shares.
The Fund may not:
(1) Issue senior securities, except as permitted by paragraphs (2)
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
Fund's investment policies, and the pledge, mortgage or
hypothecation of the Fund's assets within the meaning of
paragraph (3) below are not deemed to be senior securities.
(2) Borrow money, except from banks as a temporary measure for
extraordinary emergency purposes in amounts not to exceed 33
1/3% of the 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. The Fund may also participate as part of a group in
bidding for the purchase of Tax-Exempt Bonds directly from an
issuer in order to take advantage of the lower purchase price
available to members of such groups.
19
<PAGE>
(5) Purchase or sell real estate or any interest therein, but this
restriction shall not prevent the Fund from investing in
Tax-Exempt Bonds secured by real estate or interests therein.
(6) Make loans, except that the Fund (1) may lend portfolio
securities in accordance with the Fund's investment policies
in an amount up to 33 1/3% of the Fund's total assets taken at
market value, (2) enter into repurchase agreements, and (3)
purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit,
bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
(7) Purchase or sell commodities or commodity contracts or puts,
calls or combinations of both, except options on securities,
securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency
and other financial instruments and options on such futures
contracts, forward commitments, interest rate swaps, caps and
floors, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's
investment policies.
(8) Purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after
such purchase, the value of its investments in such industry
would exceed 25% of its total assets taken at market value at
the time of each investment. (Tax- Exempt Bonds and securities
issued or guaranteed by the United States Government and its
agencies and instrumentalities are not subject to this
limitation.)
(9) Purchase securities of an issuer (other than the U.S.
Government, its agencies or instrumentalities), if such
purchase would cause more than 10 percent of the outstanding
voting securities of such issuer to be held by the Fund.
Non-fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval:
The Fund may not:
(1) 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.
20
<PAGE>
(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
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 the Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trustees of the Trust who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and/or
Trustees of the Fund are also officers and/or directors of the Adviser or
officers and Trustees of the Fund's principal distributor, John Hancock Funds,
Inc. ("John Hancock Funds").
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Stephen L. Brown* Trustee and Chairman (1, 2) Chairman and Chief Executive Officer,
John Hancock Place John Hancock Mutual Life Insurance
P.O. Box 111 Company; Chairman and Director, John
Boston, MA 02117 Hancock Advisers, Inc. (The Adviser),
July 1937 John Hancock Funds, Inc. (John
Hancock Funds), The Berkeley
Financial Group, Inc. (The Berkeley
Group); Director, John Hancock
Subsidiaries, Inc.; John Hancock
Insurance Agency, Inc.; (Insurance
Agency), (until June 1999); Federal
Reserve Bank of Boston (until March
1999); John Hancock Signature
Services, Inc. (Signature Services)
(until January 1997) ; Trustee,
John Hancock Asset Management
(until March 1997).
Maureen R. Ford * Trustee, Vice Chairman and Chief President, Broker/Dealer Distributor,
Executive Officer John Hancock Mutual Life Insurance
Company; Vice Chairman, Director
and Chief Executive Officer, the
Advisers, The Berkeley Group, John
Hancock Funds; Chairman, Director
and President, Insurance Agency,
Inc.; Chairman, Director and Chief
Executive Officer, Sovereign Asset
Management Corporation (SAMCorp.);
Senior Vice President, MassMutual
Insurance Co. (until 1996); Senior
Vice President, Connecticut Mutual
Insurance Co. (until 1989).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
22
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1996); Director, Brookline Bankcorp.
June 1931
Richard P. Chapman, Jr. Trustee (1) Chairman, President, and Chief
160 Washington Street Executive Officer, Brookline
Brookline, MA 02147 Bankcorp. (lending); Director,
February 1935 Lumber Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee 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.;
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.
23
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Leland O. Erdahl Trustee Director of Uranium Resources
8046 Mackenzie Court Corporation, Hecla Mining Company,
Las Vegas, NV 89129 Canyon Resources Corporation and
December 1928 Apollo Gold, Inc.; Director Original
Sixteen to One Mines, Inc. (until
1999); Management Consultant (from
1984-1987 and 1991-1998); Director,
Freeport-McMoran Copper & Gold, Inc.
(until 1997); Vice President, Chief
Financial Officer and Director of
Amax Gold, Inc. (until 1998).
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
The Venture Capital Fund of New England (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980,
23rd Floor headed the venture capital group at
Boston, MA 02110 Bank of Boston Corporation.
November 1932
Gail D. Fosler Trustee Senior Vice President and Chief
3054 So. Abingdon Street Economist, The Conference Board
Arlington, VA 22206 (non-profit economic and business
December 1947 research); Director, Unisys Corp.;
and H.B. Fuller Company. Director,
National Bureau of Economic
Research (academic).
William F. Glavin Trustee 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.
- -------------------
* 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.
24
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser, The
Boston, MA 02199 Berkeley Group; Director and
April 1953 President, NM Capital and SAMCorp.;
Director, John Hancock Funds,
Advisers International, and John
Hancock Advisers International
(Ireland) Ltd.; Executive Vice
President, the Adviser (until
1994); Director, Insurance Agency,
Inc. (until June 1999); Director,
Signature Services (until January
1997).
Dr. John A. Moore Trustee 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 Executive Director, Council for
Council For International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W. President, Institute of
Washington, D.C. 20008 International Education (since
May 1943 January 1998); Senior Fellow,
Cornell Institute of Public
Affairs, Cornell University (until
December 1997); President Emerita
of Wells College and St. Lawrence
University; Director, Niagara
Mohawk Power Corporation (electric
utility).
- -------------------
* 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.
25
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East Emeritus, Harvard University
Cambridge, MA 02138 Graduate School of Business
September 1931 Administration (as of June 1998).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Mutual
John Hancock Place Life Insurance Company; Director,
P.O. Box 111 the Adviser, John Hancock Funds,
Boston, MA 02117 Signator Investors, Inc., John
August 1937 Hancock Subsidiaries, Inc.,
SAMCorp.., NM Capital, The Berkeley
Group, JH Networking Insurance
Agency, Inc.; Insurance Agency, Inc.
(until June 1999), 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.
26
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Osbert M. Hood Executive Vice President and Chief Executive Vice President and Chief
101 Huntington Avenue Financial Officer Financial Officer, each of the John
Boston, MA 02199 Hancock Funds; Executive Vice
August 1952 President, Treasurer and Chief
Financial Officer of the Adviser,
the Berkeley Group, John Hancock
Funds, and SAMCorp.; Senior Vice
President, Chief Financial Officer
and Treasurer, Signature Services,
NM Capital; Director IndoCam Japan
Limited; Vice President and Chief
Financial Officer, John Hancock
Mutual Life Insurance Company,
Retail Sector (until 1997).
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services, John Hancock
July 1950 Funds, NM Capital, SAMCorp. and
Insurance Agency, Inc.; Counsel,
John Hancock Mutual Life Insurance
Company (until February 1996).
- -------------------
* 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.
27
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Susan S. Newton Vice President, Secretary and Chief Vice President and Chief Legal
101 Huntington Avenue Legal Officer Officer the Adviser; John Hancock
Boston, MA 02199 Funds, Signature Services, The
March 1950 Berkeley Group, NM Capital and
SAMCorp..
James J. Stokowski Vice President, Treasurer and Chief Vice President, the Adviser.
101 Huntington Avenue Accounting Officer
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.
</TABLE>
28
<PAGE>
The following tables provide information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Messrs. Brown and Scipione and Ms. Ford
and Ms. Hodsdon, each a non-Independent Trustee, and each of the officers of the
Fund are interested persons of the Adviser, are compensated by the Adviser and
received no compensation from the Fund for their services.
Total Compensation
Aggregate From the Fund and John
Compensation from Hancock Fund Complex
Independent Trustees the Fund (1) to Trustees (2)
-------------------- ------------ ---------------
Dennis J. Aronowitz $ 271 $ 72,000
Richard P. Chapman* 276 75,100
William J. Cosgrove* 265 72,000
Douglas Costle(3) 241 75,100
Leland O. Erdahl 266 72,000
Richard A. Farrell 276 75,100
Gail D. Fosler 265 72,000
William F. Glavin* 251 72,000
Dr. John A. Moore* 266 72,000
Patti McGill Peterson 276 75,100
John Pratt 265 72,000
------- ---------
Total $2,918 $804,400
(1) Compensation is for the fiscal year ended August 31, 1999.
(2) Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 1998. As of this date, there were sixty-five
funds in the John Hancock Fund Complex with each of these Independent Trustees
serving on thirty-one funds.
(3) Mr. Costle resigned as of December 31, 1999.
*As of December 31, 1998, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $81,203, Mr. Cosgrove was $182,174, Mr. Glavin was $248,920 and for
Dr. Moore was $166,978 under the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees.
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers or
Trustees of one or more of the other funds for which the Adviser serves as
investment adviser.
29
<PAGE>
As of December 1, 1999, the officers and Trustees of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund. As of
that date, the following shareholders beneficially owned 5% or more of the
outstanding shares of the Fund:
Percentage of Total
Outstanding Shares of the
Name and Address of Shareholder Class of Shares Class of the Fund
- ------------------------------- --------------- -----------------
MLPF&S For The Sole Benefit of B 22.91%
Its Customers
Attn: Fund Administration 97M78
4800 Deerlake Drive East 2nd Floor
Jacksonville FL 32246-6484
Robert M. Pollack B 6.89%
708 3rd Ave #19
New York NY 10017-4201
Paine Webber FBO C 94.80%
Thomas S. Coppola
7543 Shore Rd.
Brooklyn NY 11209-2807
Maria M. Rivera C 5.20%
173 Saint Marks Ave.
Brooklyn NY 112328-3442
Investment Advisory And Other Services
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Fund and other funds in the John
Hancock group of funds as well as institutional accounts. The Adviser is an
affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of more
than $100 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries a high rating from Standard and
Poor's and A.M. Best. Founded in 1862, the Life Company has been serving clients
for over 130 years.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including but not
limited to expenses of preparing, printing and mailing all shareholders'
reports, notices, prospectuses, proxy statements and reports to regulatory
agencies; expenses relating to the issuance, registration and qualification of
shares; government fees; interest charges; expenses of furnishing to
shareholders their account statements; taxes; expenses of redeeming shares;
brokerage and other expenses connected with the execution of portfolio
securities transactions; expenses pursuant to the Fund's plan of distribution;
fees and expenses of custodians including those for keeping books and accounts,
30
<PAGE>
maintaining a committed line of credit, and calculating the net asset value of
shares; fees and expenses of transfer agents and dividend disbursing agents;
legal, accounting, financial, management, tax and auditing fees and expenses of
the Fund (including an allocable portion of the cost of the Adviser's employees
rendering such services to the subject Fund); the compensation and expenses of
Trustees who are not otherwise affiliated with the Trust, the Adviser or any of
their affiliates; expenses of Trustees' and shareholders' meetings; trade
association memberships; insurance premiums; and any extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage of the average daily net
assets of the 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 the 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.
For the years ended August 31, 1997, 1998 and 1999, the management fee paid by
the Fund to the Adviser amounted to $63,549, $58,219 and $97,128, for services,
respectively.
Securities held by the 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 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 Agreement, the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which their respective Advisory Agreement relate, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties or from reckless disregard
of the obligations and duties under the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the 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.
31
<PAGE>
The continuation of the Advisory Agreement and Distribution Agreement (discussed
below) was approved by all of the Trustees. The Advisory Agreement and the
Distribution Agreement will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement, or "interested
persons" of any such parties. Both Agreements may be terminated on 60 days
written notice by any party or by a vote of a majority of the outstanding voting
securities of the Fund and will terminate automatically if assigned.
Accounting and Legal Services Agreement The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this Agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal years ended August 31, 1997, 1998 and 1999,
the Fund paid the Adviser $10,630, $9,800 and $9,263, respectively, for services
under this Agreement.
In order to avoid conflicts with portfolio trades for the Fund, 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 Fund and its shareholders come
first.
Distribution ContractS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class on behalf of the Fund. Shares of the Fund are also sold by
selected broker-dealers (the "Selling Brokers") which have entered into selling
agency agreements with John Hancock Funds. These Selling Brokers are authorized
to designate other intermediaries to receive purchase and redemption orders on
behalf of the Fund. John Hancock Funds accepts orders for the purchase of the
shares of the Fund that are continually offered at net asset value next
determined, plus an applicable sales charge, if any. In connection with the sale
of Fund shares, John Hancock Funds and Selling Brokers receive compensation from
a sales charge imposed, in the case of Class A shares, at the time of sale. In
the case of Class B or Class C shares, the broker receives compensation
immediately but John Hancock Funds is compensated on a deferred basis.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended August 31, 1997, 1998 and 1999 were $155,262, $18,852 and
$90,254, respectively, and $20,879, $4,561, and $17,861, respectively, were
retained by John Hancock Funds in 1997, 1998 and 1999. The remainder of the
underwriting commissions were reallowed to Selling Brokers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of
1940. Under the Plans, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% for Class A shares and 1.00% for Class B
and Class C shares, of the Fund's average daily net assets attributable to
shares of that class. However, the service fee will not exceed 0.25% of the
Fund's average daily net assets attributable to each class of shares. The
distribution fees will be used to reimburse John Hancock Funds for its
distribution expenses, including but not limited to: (i) initial and ongoing
sales compensation to Selling Brokers and others (including affiliates of John
Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional
32
<PAGE>
and overhead expenses incurred in connection with the distribution of Fund
shares; and (iii) with respect to Class B and Class C shares only, interest
expenses on unreimbursed distribution expenses. The service fees will be used to
compensate Selling Brokers and others for providing personal and account
maintenance services to shareholders. In the event the John Hancock Funds is not
fully reimbursed for payments or expenses under the Class A Plan, these expenses
will not be carried beyond twelve months from the date they were incurred.
Unreimbursed expenses under the Class B and Class C Plans will be carried
forward together with interest on the balance of these unreimbursed expenses.
The Fund does not treat unreimbursed expenses under the Class B and Class C
Plans as a liability of the Fund, because the Trustees may terminate Class B
and/or Class C Plans at any time with no additional liability for these expenses
to the shareholders and the Fund. For the fiscal year ended August 31, 1999, an
aggregate of $177,742 of distribution expenses or 2.18% of the average net
assets of the Fund's Class B shares was not reimbursed or recovered by John
Hancock Funds through the receipt of deferred sales charges or Rule 12b-1 fees
in prior periods. For the period from April 1, 1999, August 31, 1999, an
aggregate of $0 distribution expenses or 0% of the average net assets of the
Fund's Class C shares was not reimbursed or recovered by John Hancock Funds
through the receipt of deferred sales charges or Rule 12b-1 fees.
The Plans and all amendments were approved by the Trustees, including a majority
of the Trustees who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the Plans (the
"Independent Trustees"), by votes cast in person at meetings called for the
purpose of voting on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provide the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
Independent Trustees. The Plans provide that they may be terminated without
penalty, (a) by vote of a majority of the Independent Trustees, (b) by a vote of
a majority of the Fund's outstanding shares of the applicable class upon 60
days' written notice to John Hancock Funds, and (c) automatically in the event
of assignment. The Plans further provide that they may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to that Plan. Each Plan provides, that
no material amendment to the Plans will be effective unless it is approved by a
majority vote of the Trustees and the Independent Trustees of the Fund. The
holders of Class A, Class B and Class C shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans, the Trustees concluded that, in their judgment, there is a reasonable
likelihood that the Plans will benefit the holders of the applicable class of
shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Fund may participate in joint distribution activities
with other funds and the costs of those activities will be borne by the Fund in
proportion to the relative net asset value of the participating Fund.
During the fiscal year ended August 31, 1999, the Fund paid John Hancock Funds
the following amounts of expenses in connection with their services.
33
<PAGE>
<TABLE>
<CAPTION>
Expense Items
-------------
Printing and Interest,
Mailing of Carrying or
Prospectuses Compensation Expenses of Other
to New to Selling John Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A $26,299 $9,348 $59,029 $54,518 $4,887
Class B $19,659 $5,347 $13,427 $39,526 $3,538
Class C* $ 63 $ 0 $ 0 $ 159 $ 10
*Commenced Operations April 1, 1999
SALES COMPENSATION
As part of their business strategies, the Fund, along with John Hancock Funds,
pays compensation to financial services firms that sell the Fund's shares. These
firms typically pass along a portion of this compensation to your financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the Fund's assets. The sales charges and 12b-1
fees paid by investors are detailed in the prospectus and under "Distribution
Contracts" in this Statement of Additional Information. The portions of these
expenses that are reallowed to financial services firms are shown on the next
page.
Whenever you make an investment in the Fund, 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. 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 by the Fund.
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.
34
<PAGE>
Maximum
Sales charge Reallowance First year
Paid by investors or commission Service fee Maximum
(% of offering (% of offering (% of net total compensation (1)
Class A investments price) price) investment) (% of offering price)
- ------------------- ------ ------ ----------- ---------------------
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 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% (2)
Next $1 and more above that -- 0.00% 0.25% 0.25% (2)
Maximum
Reallowance First year
or commission Service fee Maximum
(% of offering (% of net total compensation
Class B investments price) investment) (% of offering price)
- ------------------- ------ ----------- ---------------------
All amounts 3.75% 0.25% 4.00%
Maximum
Reallowance First year
Or commission service fee Maximum
(% of offering (% of net total compensation
Class C investments price) investment) (% of offering price)
- ------------------- ------ ----------- ---------------------
All amounts 0.75% 0.25% 1.00%
</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) For Group Investment Program sales, the maximum total compensation
for investments of $1 million or more is 1.00% of the offering price
(one year CDSC of 1.00% applies for each sale).
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
35
<PAGE>
Net Asset Value
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
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 Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then only
will be issued for full shares. The Trustees reserve the right to change or
waive the Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining 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 Fund, owned by
the investor, or if John Hancock Signature Services, Inc. ("Signature Services")
is notified by the investor's dealer or the investor at the time of the
purchase, the cost of the Class A shares owned.
Without Sales 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 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, daughter-in-law, son-in-law, niece, nephew,
grandparents and same sex domestic partner) of any of the
foregoing; or any fund, pension, profit sharing or other
benefit plan for the individuals described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into a signed agreement
with John Hancock Funds providing specifically for the use of
Fund shares in fee-based investment products or services made
available to their clients.
36
<PAGE>
o A former participant in an employee benefit plan with John
Hancock Funds, when he or she withdraws from his or her plan
and transfers any or all of his or her plan distributions
directly to the Fund.
o A member of a class action lawsuit against insurance companies
who is investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has more than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. See your
Merrill Lynch financial consultant for further information.
o Retirement plans investing through PruArray Program sponsored
by Prudential Securities.
o Pension plans transferring assets from a John Hancock variable
annuity contract to the Fund pursuant to an exemptive
application approved by the Securities and Exchange
Commission.
o Shareholders of John Hancock Funds PLC who become U.S.
residents or citizens and transfer their existing assets from
John Hancock Funds PLC to the Fund.
o Existing full service clients of the Life Company who were
group annuity contract holders as of September 1, 1994, and
participant directed retirement plans with at least 100
eligible employees at the inception of the Fund account. Each
of these investors may purchase Class A shares with no initial
sales charge. However, if the shares are redeemed within 12
months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class 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.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account, and (c) groups which qualify for the Group Investment Program (see
below). A company's (not an individual's) qualified and non-qualified retirement
plan investments can be combined to take advantage of this privilege. Further
information about combined purchases, including certain restrictions on combined
group purchases, is available from Signature Services or a Selling Broker's
representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount being invested but also
the investor's purchase price or current account value of the Class A shares of
all John Hancock funds which carry a sales charge already held by such person.
Class A shares of John Hancock money market funds will only be eligible for the
37
<PAGE>
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize. A company's (not an individual's)
qualified and non-qualified retirement plan investments can be combined to take
advantage of this privilege.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments
pursuant to a Letter of Intention (the "LOI"), which should be read carefully
prior to its execution by an investor. The Fund offers two options regarding the
specified period for making investments under the LOI. All investors have the
option of making their investments over a period of thirteen (13) months.
Investors who are using the Fund as a funding medium for a retirement plan,
however, may opt to make the necessary investments called for by the LOI over a
forty-eight (48) month period. These retirement plans include traditional, Roth
and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs) SIMPLE IRA,
SIMPLE 401(k), Money Purchase Pension, Profit Sharing and Section 457 plans. An
individual's non-qualified and qualified retirement plan investments cannot be
combined to satisfy an LOI of 48 months. Such an investment (including
accumulations and combinations but not including reinvested dividends) must
aggregate $100,000 or more during the specified period from the date of the LOI
or from a date within ninety (90) days prior thereto, upon written request to
Signature Services. The sales charge applicable to all amounts invested under
the LOI is computed as if the aggregate amount intended to be invested had been
invested immediately. If such aggregate amount is not actually invested, the
difference in the sales charge actually paid and the sales charge payable had
the LOI not been in effect is due from the investor. However, for the purchases
actually made within the specified period (either 13 or 48 months), the sales
charge applicable will not be higher than that which would have applied
(including accumulations and combinations) had the LOI been for the amount
actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Signature Services to act as his
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the subject Fund to sell, any additional Class A
shares and may be terminated at any time.
Deferred Sales Charge on Class B AND CLASS C Shares
Investments in Class B and Class C shares are purchased at net asset value per
share without the imposition of an initial sales charge so that the Fund will
receive the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively, will be subject to a
CDSC at the rates set forth in the Prospectus as a percentage of the dollar
38
<PAGE>
amount subject to the CDSC. The charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
Class B or Class C shares being redeemed. No CDSC will be imposed on increases
in account value above the initial purchase price or on shares derived from
reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service retirement 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 both Class B and Class C
shares, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period for Class B or one year CDSC
redemption period for Class C, or those you acquired through dividend and
capital gain reinvestment, and next from the shares you have held the longest
during the six-year period for Class B shares. For this purpose, the amount of
any increase in a share's value above its initial purchase price is not subject
to a CDSC. Thus, when a share that has appreciated in value is redeemed during
the CDSC period, a CDSC is assessed only on its initial purchase price.
When requesting a redemption for a specific dollar amount, please indicate if
you require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to
CDSC (dividend reinvestment) (120.00)
-------
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the account not just the shares
being redeemed.
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C shares and of Class A shares of the Fund that
are subject to a CDSC, unless indicated otherwise, in the circumstances defined
below:
39
<PAGE>
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to Trust
accounts unless Trust is dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B (but not Class C) shares made under a periodic
withdrawal plan, or redemptions for fees charged by planners or
advisors for advisory services, as long as your annual redemptions do
not exceed 12% of your account value, including reinvested dividends,
at the time you established your periodic withdrawal plan and 12% of
the value of subsequent investments (less redemptions) in that account
at the time you notify Signature Services. (Please note, this waiver
does not apply to periodic withdrawal plan redemptions of Class A or
Class C shares that are subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
* Redemptions of Class A shares by retirement plans that invested
through the PruArray Program sponsored by Prudential Securities.
For Retirement Accounts (such as traditional, Roth and Education IRAs, SIMPLE
IRAs, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under sections
401(a) (such as Money Purchase Pension Plans and Profit-Sharing/401(k)
Plans), 457 and 408 (SEPs and SIMPLE IRAs) of the Internal Revenue
Code.
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
Please see matrix for some examples.
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), MPP, Rollover
PSP 457 & 408
(SEPs & Simple
IRAs)
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Death or Disability Waived Waived Waived Waived Waived
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions in periodic
or 12% of payments
account value
annually in
periodic
payments
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or value annually
12% of account in periodic
value annually payments
in periodic
payments
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of account
(Class B only) annuity annuity annuity annuity value annually
payments (72t) payments (72t) payments (72t) payments (72t) in periodic
or 12% of or 12% of or 12% of or 12% of payments
account value account value account value account value
annually in annually in annually in annually in
periodic periodic periodic periodic
payments payments payments payments
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Loans Waived Waived N/A N/A N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Hardships Waived Waived Waived N/A N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Qualified Domestic Waived Waived Waived N/A N/A
Relations Orders
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Termination of Waived Waived Waived N/A N/A
Employment Before
Normal Retirement Age
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Return of Excess Waived Waived Waived Waived N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
</TABLE>
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.
41
<PAGE>
Special Redemptions
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purpose of making such
payment at the same value as used in determining the Fund's net asset value. The
Fund has, however, elected to be governed by Rule 18f-1 under the Investment
Company Act. Under that rule, the Fund must redeem its shares for cash except to
the extent that the redemption payments to any shareholder during any 90-day
period would exceed the lesser of $250,000 or 1% of the Fund's net asset value
at the beginning of such period.
Additional Services And Programs
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or 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 500 Index Fund and John Hancock
Intermediate Government Fund will retain the exchanged fund's CDSC schedule).
For purposes of computing the CDSC payable upon redemption of shares acquired in
an exchange, the holding period of the original shares is added to the holding
period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994 for
Class B shares of any other John Hancock fund, the acquired shares will continue
to be subject to the CDSC schedule that was in effect when the exchanged shares
were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares, which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional shares of
the Fund could be disadvantageous to a shareholder because of the initial sales
charge payable on such purchases of Class A shares and the CDSC imposed on
redemptions of Class B and Class C shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase shares at the same time as
a Systematic Withdrawal Plan is in effect. The Fund reserves the right to modify
or discontinue the Systematic Withdrawal Plan of any shareholder on 30 days'
prior written notice to such shareholder, or to discontinue the availability of
such plan in the future. The shareholder may terminate the plan at any time by
giving proper notice to Signature Services.
42
<PAGE>
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.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the order date of any investment.
Reinstatement and Reinvestment Privilege. If Signature Services is notified
prior to reinvestment, a shareholder who has redeemed Fund shares may, within
120 days after the date of redemption, reinvest without payment of a sales
charge any part of the redemption proceeds in shares of the same class of that
Fund or another John Hancock fund, subject to the minimum investment limit of
that fund. The proceeds from the redemption of Class A shares may be reinvested
at net asset value without paying a sales charge in Class A shares of any John
Hancock fund. If a CDSC was paid upon a redemption, a shareholder may reinvest
the proceeds from this redemption at net asset value in additional shares of the
class from which the redemption was made. The shareholder's account will be
credited with the amount of the CDSC charged upon the prior redemption and the
new shares will continue to be subject to the CDSC. The holding period of the
shares acquired through reinvestment will, for purposes of computing the CDSC
payable upon a subsequent redemption, include the holding period of the redeemed
shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Funds, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS."
Retirement Plans participating in Merrill Lynch's servicing programs.
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
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).
43
<PAGE>
PURCHASES AND REDEMPTIONS THROUGH THIRD PARTIES
Shares of the Fund may be purchased or redeemed through certain broker-dealers.
Brokers may charge for their services or place limitations on the extent to
which you may use the services of the Fund. The Fund will be deemed to have
received a purchase or redemption order when an authorized broker, or if
applicable, a broker's authorized designee, receives the order. If a broker is
an agent or designee of the Fund, orders are processed at the NAV next
calculated after the broker receives the order. The broker must segregate any
orders it receives after the close of regular trading on the New York Stock
Exchange and transmit those orders to the Fund for execution at NAV next
determined. Some brokers that maintain nominee accounts with the Fund for their
clients charge an annual fee on the average net assets held in such accounts for
accounting, servicing, and distribution services they provide with respect to
the underlying Fund shares. The Adviser, the Fund, and John Hancock Funds, Inc.
(the Fund's principal distributor), share in the expense of these fees.
Description Of The Fund's Shares
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund, without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series and classes
without further action by shareholders. As of the date of this Statement of
Additional Information, the Trustees have authorized the issuance of two series
of shares - John Hancock Massachusetts Tax-Free Income Fund and the John Hancock
New York Tax-Free Income Fund. Additional series may be added in the future. The
Trustees have also authorized the issuance of three classes of shares of each
series, designated as Class A, Class B and Class C.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class or series of the Fund.
Holders of each class of shares have certain exclusive voting rights on matters
relating to their respective distribution plans. The different classes of the
Fund may bear different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to each class of shares will be borne
exclusively by that class (ii) Class B and Class C shares will pay higher
distribution and service fees than Class A shares and (iii) each class of shares
will bear any class expenses properly allocable to that class of shares, subject
to the conditions the Internal Revenue Service imposes with respect to the
multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable by the Fund, except as set
forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders. The
Fund's shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Fund's outstanding shares and the Trustees shall promptly call
a meeting for such purpose when requested to do so in writing by the record
44
<PAGE>
holders of not less than 10% of the outstanding shares of the Fund. Shareholders
may, under certain circumstances, communicate with other shareholders in
connection with requesting a special meeting of shareholders. However, at any
time that less than a majority of the Trustees holding office were elected by
the shareholders, the Trustees will call a special meeting of shareholders for
the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder of any Fund held
personally liable by reason of being or having been a shareholder. The
Declaration of Trust also provides that no series of the Fund shall be liable
for the liabilities of any other series. Furthermore, no fund included in this
Fund's Prospectus shall be liable for the liabilities of any other John Hancock
fund. Liability is therefore limited to circumstances in which the Fund itself
would be unable to meet its obligations, and the possibility of this occurrence
is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter, credit card or third party checks. All
checks returned by the post office as undeliverable will be reinvested at net
asset value in the fund or funds from which a redemption was made or dividend
paid. Information provided on the account application may be used by the 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. For telephone transactions, the transfer agent will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, the transfer agent is not responsible for any
losses that may occur to any account due to an unauthorized telephone call. Also
for your protection telephone transactions are not permitted on accounts whose
names or addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
Selling activities for the Fund may not take place outside the U.S. except with
U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on
Non-U.S. investors' accounts with foreign mailing addresses are required to
certify that all sales activities have occurred, and in the future will occur,
only in the U.S. A foreign corporation may purchase shares of the Fund only if
it has a U.S. mailing address.
TAX STATUS
Federal Income Taxation
The Fund is treated as a separate entity for accounting and tax purposes, has
qualified and elected to be treated as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to so qualify for each taxable year. As such and by complying with the
applicable provisions of the Code regarding the sources of its income, the
timing of its distributions, and the diversification of its assets, the Fund
will not be subject to Federal income tax on its tax-exempt interest and taxable
income (including net realized capital gains) which is distributed to
shareholders in accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
45
<PAGE>
The Fund expects to qualify to pay "exempt-interest dividends," as defined in
the Code. To qualify to pay exempt-interest dividends, the Fund must, at the
close of each quarter of its taxable year, have at least 50% of the value of its
total assets invested in municipal securities whose interest is excluded from
gross income under Section 103(a) of the Code. In purchasing municipal
securities, the Fund intends to rely on opinions of nationally recognized bond
counsel for each issue as to the excludability of interest on such obligations
from gross income for federal income tax purposes and, if available, the
exemption of such interest from New York State and New York City personal income
taxes. The Fund will not undertake independent investigations concerning the
tax-exempt status of such obligations, nor does it guarantee or represent that
bond counsels' opinions are correct. Bond counsels' opinions will generally be
based in part upon covenants by the issuers and related parties regarding
continuing compliance with federal tax requirements. Tax laws enacted
principally during the 1980's not only had the effect of limiting the purposes
for which tax-exempt bonds could be issued and reducing the supply of such
bonds, but also increased the number and complexity of requirements that must be
satisfied on a continuing basis in order for bonds to be and remain tax-exempt.
If the issuer of a bond or a user of a bond-financed facility fails to comply
with such requirements at any time, interest on the bond could become taxable,
retroactive to the date the obligation was issued. In that event, a portion of
the Fund's distributions attributable to interest the Fund received on such bond
for the current year and for prior years could be characterized or
recharacterized as taxable income. The availability of tax-exempt obligations
and the value of the Fund's portfolio may be affected by restrictive federal
income tax legislation enacted in recent years or by similar future legislation.
If the Fund satisfies the applicable requirements, dividends paid by the Fund
which are attributable to tax exempt interest on municipal securities and
designated by the Fund as exempt-interest dividends in a written notice mailed
to its shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. The recipient of tax-exempt income is required
to report such income on his federal income tax return. However, a shareholder
is advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" or a "related person" thereof under Section
147(a) with respect to any of the tax-exempt obligations held by the Fund. The
Code provides that interest on indebtedness incurred or continued to purchase or
carry shares of the Fund is not deductible to the extent it is deemed related to
the Fund's exempt-interest dividends. Pursuant to published guidelines, the
Internal Revenue Service may deem indebtedness to have been incurred for the
purpose of purchasing or carrying shares of the 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 the Fund may be
excluded by the Fund's shareholders from their gross income for federal income
tax purposes, the Fund may purchase specified private activity bonds, the
interest from which (including the Fund's distributions attributable to such
interest) may be a preference item for purposes of the federal alternative
minimum tax (both individual and corporate). All exempt-interest dividends from
the Fund, whether or not attributable to private activity bond interest, may
increase a corporate shareholder's liability, if any, for corporate alternative
minimum tax and will be taken into account in determining the extent to which a
shareholder's Social Security or certain railroad retirement benefits are
taxable.
Distributions other than exempt-interest dividends from the Fund's current or
accumulated earnings and profits ("E&P") will be taxable under the Code for
investors who are subject to tax. Taxable distributions include distributions
from the Fund that are attributable to (i) taxable income, including but not
limited to taxable bond interest, recognized market discount income, original
issue discount income accrued with respect to taxable bonds, income from
46
<PAGE>
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 or constructive sale of securities or other
investments (including from the disposition of rights to when-issued securities
prior to issuance) or from options and futures contracts. If these distributions
are paid from the Fund's "investment company taxable income," they will be
taxable as ordinary income; and if they are paid from the Fund's "net capital
gain," they will be taxable as long-term capital gain. (Net capital gain is the
excess (if any) of net long-term capital gain over net short-term capital loss,
and investment company taxable income is all taxable income and capital gains or
losses, other than those gains and losses included in computing net capital
gain, after reduction by deductible expenses.) Some distributions may be paid in
January but may be taxable to shareholders as if they had been received on
December 31 of the previous year. The tax treatment described above will apply
without regard to whether distributions are received in cash or reinvested in
additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Amounts that are not allowable as a deduction in computing
taxable income, including expenses associated with earning tax-exempt interest
income, do not reduce the Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of the Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders who have chosen automatic reinvestment of their distributions will
have a federal tax basis in each share received pursuant to such a reinvestment
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received in the
reinvestment.
After the close of each calendar year, the Fund will inform shareholders of the
federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative minimum tax. Shareholders who have not held shares of
the Fund for its full taxable year may have designated as tax-exempt or as a tax
preference item a percentage of distributions which is not equal to the actual
amount of a pro rata share of tax-exempt income or tax preference item income
earned by the Fund during the period of their investment in the Fund.
The amount of the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
Fund securities and/or engage in options or futures transactions that will
generate capital gains. At the time of an investor's purchase of the 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 the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. A sales charge paid in purchasing
shares of the Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
47
<PAGE>
purchase to the extent shares of the Fund or another John Hancock Fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to 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 Fund shares is
properly treated as a sale for tax purposes, as is assumed in the foregoing
discussion.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess of net long-term capital gain over net short-term
capital loss in any year. The Fund will not, in any event, distribute net
capital gain realized in any year to the extent that a capital loss is carried
forward from prior years against such gain. To the extent such excess was
retained and not exhausted by the carryforward of prior years' capital losses,
it would be subject to federal income tax in the hands of the Fund. Upon proper
designation of this amount by the Fund, each shareholder would be treated for
federal income tax purposes as if the Fund had distributed to him on the last
day of its taxable year his pro rata share of such excess, and he had paid his
pro rata share of the taxes paid by the Fund and reinvested the remainder in the
Fund. Accordingly, each shareholder would (a) include his pro rata share of such
excess as long-term capital gain in his return for his taxable year in which the
last day of the Fund's taxable year falls, (b) be entitled either to a tax
credit on his return for, or to a refund of, his pro rata share of the taxes
paid by the Fund and (c) be entitled to increase the adjusted tax basis for his
shares in the Fund by the difference between his pro rata share of such excess
and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
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 tax
liability to the Fund and, as noted above, would not be distributed to
shareholders. Presently, there are no realized capital loss carryforwards
available to offset future net realized capital gains.
The 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 the Fund to recognize income or gain without
a concurrent receipt of cash. However, the Fund must distribute to shareholders
for each taxable year substantially all of its net income and net capital gains,
including such income or gain, to qualify as a regulated investment company and
avoid liability for any federal income or excise tax. Therefore, the Fund may
have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash, or 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, dollar rolls and
possibly other investments or transactions, are unclear in certain respects, and
the 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.
48
<PAGE>
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. However, the Fund's
taxable distributions may not be subject to backup withholding if the Fund can
reasonably estimate that at least 95% of its distributions for the year will be
exempt-interest dividends. The Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
The Fund 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 Fund. Tax rules are not entirely clear about
issues such as when the Fund may cease to accrue interest, original issue
discount, or market discount, when and to what extent deductions may be taken
for bad debts or worthless securities, how payments received on obligations in
default should be allocated between principal and income, and whether exchanges
of debt obligations in a workout context are taxable. If the Fund invests in
these debt obligations, it will address these issues in order to seek to ensure
that it distributes sufficient income to preserve its status as a regulated
investment company and seek to avoid Federal income or excise tax.
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 Fund
may restrict the Fund's ability to enter into futures and options transactions.
Certain options and futures transactions undertaken by the Fund may cause the
Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Additionally, the 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 the 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 gains. Some of these
transactions may also cause the Fund to dispose of investments sooner than would
otherwise have occurred. These transactions may therefore affect the amount,
timing and character of the Fund's distributions to shareholders. The Fund will
take into account the special tax rules (including consideration of available
elections) applicable to options and futures transactions in order to seek to
minimize any potential adverse tax consequences.
49
<PAGE>
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, the Fund in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment different from that described above. These investors may be
subject to non-resident alien withholding tax at the rate of 30% (or a lower
rate under an applicable tax treaty) on amounts treated as ordinary dividends
from the Fund and, unless an effective IRS Form W-8, Form W-8BEN or other
authorized withholding certificate is on file, to 31% backup withholding on
certain other payments from the Fund. Non-U.S. investors should consult their
tax advisers regarding such treatment and the application of foreign taxes to an
investment in the Fund.
STATE INCOME TAX INFORMATION
The Fund is not subject to Massachusetts Corporate excise or franchise taxes.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
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 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
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
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.
50
<PAGE>
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 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 investors should consult their own tax advisers before investing
in the 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 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, 1999, the annualized yields for the
Fund's Class A, Class B and Class C shares were 4.63%, 4.13% and 4.12%,
respectively. The average annual total returns of the Fund's Class A shares for
the 1 year, 5 years and 10 years ended August 31, 1999 were -5.50%, 3.95 % and
6.44%, respectively. The total returns for 1 year and since inception on October
3, 1996, for Class B shares were -6.43 % and 3.40%, respectively. For Class C
shares, for the period from April 1, 1999 to August 31, 1999, the average total
returns were -4.19%. Class C shares commenced operations April 1, 1999;
therefore, there are no other periods to report.
The Fund may advertise yield, where appropriate. The Fund's yield is computed by
dividing net investment income per share determined for a 30-day period by the
maximum offering price per share (which includes the full sales charge) on the
last day of the period, according to the following standard formula:
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-----
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the period
(NAV where applicable).
51
<PAGE>
The Fund may advertise a tax-equivalent yield, which is computed by dividing
that portion of the yield of the Fund which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield of
the Fund that is not tax-exempt. The tax equivalent yields for the Fund's Class
A and Class B shares at the combined maximum federal 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, 1999 were 8.23% and 7.34%,
respectively. The tax equivalent yield for the Fund's Class C shares at the
combined maximum federal and New York tax rates, which assume the full
deductibility of state income taxes on the federal income tax equivalent yield
for the period ended August 31, 1999 was 7.34%.
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 = \ / ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the 1-year 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 each class, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC applied at the end of the period. This calculation assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Fund's sales charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B or Class C shares into account. Excluding the Fund's
sales charge on Class A shares and the CDSC on Class B or Class C shares from a
total return calculation produces a higher total return figure.
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
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.
52
<PAGE>
From time to time, in reports and promotional literature, the Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes as well as the Russell and Wilshire Indices. Comparisons may also be
made to bank certificates of deposit, ("CDs") which differ from mutual 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, and excerpts from,
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 also be utilized. The Fund's promotional and sales
literature may make reference to the Fund's "beta". Beta is a reflection the
market-related risk of the Funds by showing how responsive the Fund is to the
market.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
Brokerage Allocation
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates, and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market makers
reflect a "spread." Debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these transactions.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
53
<PAGE>
Company or other advisory clients of the Adviser, and, conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitment to allocate portfolio transactions upon any
prescribed basis. While the Adviser's officers will be primarily responsible for
the allocation of the Fund's brokerage business, the policies in this regard
must be consistent with the foregoing and will at all times be subject to review
by the Trustees. For the years ended August 31, 1997, 1998 and 1999, the Fund
paid negotiated brokerage commissions in the amount of $13,877, $3,140 and
$6,904, 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 Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that 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 years ended August 31, 1999, the
Fund did not pay commissions as compensation to any brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999,
John Hancock Distributors, Inc.) ("Signator" or Affiliated Broker"). Pursuant to
procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through the Affiliated Broker. During the year sending August 31, 1997, 1998 and
1999, the Fund did not execute any portfolio transactions with the Affiliated
Broker.
Signator 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 Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated customers, except for accounts for which the Affiliated Broker
acts as clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser,
which is affiliated with the Affiliated Broker, has, as an investment adviser to
the Fund, the obligation to provide investment management services, which
include elements of research and related investment skills, such research and
related skills will not be used by the Affiliated Broker as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transaction as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. Because of
this, client accounts in a particular style may sometimes not sell or acquire
securities as quickly or at the same prices as they might if each were managed
and traded individually.
For purchases of equity securities, when a complete order is not filled, a
partial allocation will be made to each account pro rata based on the order
size. For high demand issues (for example, initial public offerings), shares
will be allocated pro rata by account size as well as on the basis of account
objective, account size ( a small account's allocation may be increased to
provide it with a meaningful position), and the account's other holdings. In
addition, an account's allocation may be increased if that account's portfolio
54
<PAGE>
manager was responsible for generating the investment idea or the portfolio
manager intends to buy more shares in the secondary market. For fixed income
accounts, generally securities will be allocated when appropriate among accounts
based on account size, except if the accounts have different objectives or if an
account is too small to get a meaningful allocation. For new issues, when a
complete order is not filled, a partial allocation will be made to each account
pro rata based on the order size. However, if a partial allocation is too small
to be meaningful, it may be reallocated based on such factors as account
objectives, duration benchmarks and credit and sector exposure. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate securities to be
sold or purchased for the Fund with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
Transfer Agent Services
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Funds. The Fund pays Signature
Services an annual fee of $20.00 for each Class A shareholder account, $22.50
for each Class B shareholder account and $21.50 for each Class C shareholder
account. The Fund also pays certain out-of-pocket expenses and these expenses
are aggregated and charged to the Fund on the basis of their relative net asset
values.
Custody Of Portfolio
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 Fund are PricewaterhouseCoopers LLP, 160
Federal Street, Boston, Massachusetts 02110. PricewaterhouseCoopers LLP audits
and renders an opinion on the Fund's annual financial statements and reviews the
Fund's annual Federal income tax return.
55
<PAGE>
APPENDIX A
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of the fund's
risk profile in the prospectus.
A fund is permitted to utilize -- within limits established by the trustees --
certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that the Fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them with examples of related securities and
investment practices included in brackets. See the "Investment Objective and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The Fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the Fund will earn income or
show a positive return over any period of time -- days, months or years.
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks. (e.g., futures and related options; securities and index
options, swaps, caps, floors, collars).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. Common to all debt securities.(e.g. borrowing; reverse repurchase
agreements, repurchase agreements, financial futures and options; securities and
index options, securities lending, non-investment grade debt securities, private
activity bonds, participation interests and structured securities, swaps, caps,
floors, collars).
Information risk The risk that key information about a security or market is
inaccurate or unavailable. Common to all municipal securities. (e.g.
non-investment grade debt securities, private activity bonds and participation
interests).
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values. (e.g.
financial futures and options; securities and index options, non-investment
grade debt securities, private activity bonds, participation interests,
structured securities and swaps, caps, floors and collars).
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
borrowing; reverse repurchase agreements, when-issued securities and forward
commitments).
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that the
fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
A-1
<PAGE>
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.
o Liquidity risk The risk that certain securities may be difficult or
impossible to sell at the time and the price that the seller would like.
The seller may have to lower the price, sell other securities instead, or
forego an investment opportunity, any of which could have a negative effect
on fund management or performance. (e.g. financial futures and options;
securities and index options, non-investment-grade debt securities,
restricted and illiquid securities, participation interests, swaps, caps,
floors, collars , structured securities).
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industry, sector of
the economy or the market as a whole. Common to all stocks and bonds and the
mutual funds that invest in them. (e.g. financial futures and options;
securities and index options, short-term trading, when-issued securities and
forward commitments, non-investment-grade debt securities, restricted and
illiquid securities, structured securities).
Natural event risk The risk of losses attributable to natural disasters, such as
earthquakes and similar events. (e.g. private activity bonds).
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments. (e.g. financial futures and options; securities and index options,
when-issued securities and forward commitments).
Political risk The risk of losses attributable to government or political
actions of any sort. (e.g. private activity bonds).
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.(e.g. non-investment-grade debt
securities, Restricted and illiquid securities, participation interests,
structured securities, swaps, caps, floors, collars).
A-2
<PAGE>
APPENDIX B
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.
B-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.
B-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.
B-3
<PAGE>
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1+ Exceptionally strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues rated "F-1+"
B-4
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included in the Fund's 1999 Annual
Report to Shareholders for the year ended August 31, 1999; (filed electronically
on November 1, 1999, accession number 0001010521-99-000367) 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 New York Tax-Free Income Fund
Statement of Assets and Liabilities as of August 31, 1999.
Statement of Operations for the year ended August 31, 1999.
Statement of Change in Net Assets for the period ended August 31, 1999.
Financial Highlights for the period ended August 31, 1999.
Notes to Financial Statements.
Schedule of Investments as of August 31, 1999.
Report of Independent Accountants.
F-1
<PAGE>
JOHN HANCOCK TAX-EXEMPT SERIES FUND
John Hancock Massachusetts Tax-Free Income Fund
Class A, Class B and Class C Shares
Statement of Additional Information
January 1, 2000
This Statement of Additional Information provides information about John Hancock
Massachusetts Tax-Free Income Fund (the "Fund"), in addition to the information
that is contained in the combined Tax-Free Income Funds' Prospectus dated
January 1, 2000 (the "Prospectus"). The Fund is a non-diversified series of the
John Hancock Tax-Exempt Series Fund (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 Fund................................................. 2
Investment Objective and Policies........................................ 2
Special Risks............................................................ 14
Investment Restrictions.................................................. 17
Those Responsible for Management......................................... 19
Investment Advisory and Other Services................................... 28
Distribution Contracts................................................... 30
Sales Compensation....................................................... 32
Net Asset Value.......................................................... 33
Initial Sales Charge on Class A Shares................................... 34
Deferred Sales Charge on Class B and Class C............................. 36
Special Redemptions...................................................... 40
Additional Services and Programs......................................... 40
Purchases and Redemptions Through Third Parties.......................... 42
Description of the Fund's Shares......................................... 42
Tax Status............................................................... 43
State Income Tax Information............................................. 48
Calculation of Performance............................................... 49
Brokerage Allocation..................................................... 51
Transfer Agent Services.................................................. 53
Custody of Portfolio..................................................... 53
Independent Accountants.................................................. 53
Appendix A-Description of Investment Risk................................ A-1
Appendix B-Description of Bond Ratings................................... B-1
Financial Statements..................................................... F-1
1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a series of the Trust, an open-end investment management company
organized as a Massachusetts business trust under the laws of The Commonwealth
of Massachusetts. Prior to July 1, 1996, the Massachusetts Tax-Free Income Fund
was known as the Massachusetts Portfolio.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's 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.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. Appendix A contains further
information describing investment risks. The investment objective of the Fund is
not fundamental and may be changed by the Trustees without shareholder approval.
There is no assurance that the Fund will achieve its investment objective.
The Fund's objective is 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 Fund seeks to provide the maximum level of tax-exempt
income that is consistent with preservation of capital.
Non-Diversification. The Fund is registered as a "non-diversified" investment
company, permitting the Adviser to invest more than 5% of the assets of the Fund
in the obligations of any one issuer. Since a relatively high percentage of the
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.
Additional Risks. Securities in which the 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
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 securities 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
securities. Federal tax legislation enacted primarily during the 1980's limits
the types and amounts of tax-exempt securities issuable for certain purposes,
especially industrial development bonds and other types of "private activity"
bonds. Such limits may affect the future supply and yields of these types of
tax-exempt securities. Further proposals limiting the issuance of tax-exempt
securities may well be introduced in the future. If it appeared that the
availability of tax-exempt securities for investment by the Fund and the value
of the Fund's investments could be materially affected by such changes in law,
the Trustees would reevaluate the Fund's investment objective and policies and
consider changes in the structure of the Fund or its dissolution.
2
<PAGE>
All of the investments of the Fund will be made in:
(1) tax-exempt securities which at the time of purchase are rated
BB or better by Standard & Poor's Ratings Group ("S&P"), or
Fitch Investors Services, Inc. ("Fitch") or Ba by Moody's
Investors Service, Inc. ("Moody's"). Alternatively, the bonds
may be unrated but considered by the Adviser to be of
comparable quality. Not more than one-third of the Fund's
total assets will be invested in Tax-Exempt Bonds rated lower
than A or determined to be of comparable quality.
(2) Notes of issuers having an issue of outstanding tax-exempt
securities rated at least 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.
(3) 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.
(4) 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. Appendix B contains
further information about ratings.
Tax-Exempt Securities. These are 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.
Tax-exempt securities 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 securities 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, sewage or solid waste disposal or
student loans, or to obtain 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
securities if the interest paid thereon is excluded from gross income for
Federal income tax purposes.
The interest income on certain private activity bonds (including the 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 Fund
will not include tax-exempt securities generating this income for purposes of
measuring compliance with the 80% fundamental investment policy described in the
Prospectus.
3
<PAGE>
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 securities, but current
Federal tax law places substantial limitations on the size of such issues.
Yields. The yields or returns 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 securities 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
securities which they undertake to rate. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, tax-exempt
securities 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 securities or changes in the investment
objectives of investors.
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 the
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. The 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.
Municipal Bonds. 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.
"Moral Obligation" Bonds. With "moral obligation" bonds, the Fund does not
currently intend 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.
Tax-Exempt 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:
4
<PAGE>
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.
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.
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.
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.
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.
Ratings As Investment Criteria.
Lower Rated High Yield "High Risk" Debt Obligations. The 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 "Appendix B" 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 the Fund's exposure to the risks associated with lower
rated securities. Because the Fund invests in securities in the lower rated
categories, the achievement of the Fund's goals is more dependent on the
Adviser's ability than would be the case if the Fund was investing in securities
in the higher rated categories.
5
<PAGE>
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.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. The Fund will not invest more than 15% of its net
assets in illiquid investments. If the Trustees determine, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid securities. The Trustees have adopted guidelines and delegated to
the Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
Participation Interests. Participation interests may take the form of interests
in or of a lending syndicate. The Fund's investments in participation interests
may be subject to its 15% net assets limitation on investments in illiquid
securities. The 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.
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 Fund will enter into repurchase agreements
only with member banks of the Federal Reserve System and with "primary dealers"
in U.S. Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements.
6
<PAGE>
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income, a decline in
value of the underlying securities or lack of access to income during this
period and the expense of enforcing its rights. Reverse Repurchase Agreements.
The Fund may also enter into reverse repurchase agreements which involve the
sale of U.S. Government securities held in its portfolio to a bank with an
agreement that the Fund will buy back the securities at a fixed future date at a
fixed price plus an agreed amount of "interest" which may be reflected in the
repurchase price. Reverse repurchase agreements are considered to be borrowings
by the Fund. Reverse repurchase agreements involve the risk that the market
value of securities purchased by the Fund with proceeds of the transaction may
decline below the repurchase price of the securities sold by the Fund which it
is obligated to repurchase. The Fund will also continue to be subject to the
risk of a decline in the market value of the securities sold under the
agreements because it will reacquire those securities upon effecting their
repurchase. The 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 a separate account consisting of highly liquid,
marketable securities in an amount at least equal to the repurchase prices of
these securities (plus accrued interest thereon) under such agreements. In
addition, the Fund will not purchase additional securities while all borrowings
are outstanding. The Funds will enter into reverse repurchase agreements only
with federally insured banks or savings and loan associations which are approved
in advance as being creditworthy by the Trustees. Under procedures established
by the Trustees, the Adviser will monitor the creditworthiness of the banks
involved.
Options on Securities and Securities Indices. The 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. The Fund may write covered put and call options and
purchase put and call options to enhance total return, as a substitute for the
purchase or sale of securities, or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by the Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
7
<PAGE>
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account with a value at least equal to the Fund's obligation under
the option, (ii) entering into an offsetting forward commitment and/or (iii)
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position. A written call option on securities is typically covered by
maintaining the securities that are subject to the option in a segregated
account. The Fund may cover call options on a securities index by owning
securities whose price changes are expected to be similar to those of the
underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities 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 the Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of the Fund's portfolio securities. Put options may
also be purchased by the Fund for the purpose of affirmatively benefiting from a
decline in the price of securities which it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities. 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.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If the Fund is unable to
effect a closing purchase transaction with respect to covered options it has
written, the Fund will not be able to sell the underlying securities or dispose
of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
8
<PAGE>
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates and securities prices, the
Fund may purchase and sell various kinds of futures contracts, and purchase and
write call and put options on these futures contracts. The Fund may also enter
into closing purchase and sale transactions with respect to any of these
contracts and options. The futures contracts may be based on various securities,
securities indices, and any other financial instruments and indices. All futures
contracts entered into by the Fund are traded on U.S. exchanges or boards of
trade that are licensed, regulated or approved by the Commodity Futures Trading
Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging and Other Strategies With Future Contracts. Hedging is an attempt to
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that the Fund
proposes to acquire. When securities prices are falling, the Fund can seek to
offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When securities prices are rising, the Fund, through
the purchase of futures contracts, can attempt to secure better rates or prices
than might later be available in the market when it effects anticipated
purchases.
9
<PAGE>
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated decline
in market prices that would adversely affect the value of the Fund's portfolio
securities. Such futures contracts may include contracts for the future delivery
of securities held by the Fund or securities with characteristics similar to
those of the Fund's portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. The Fund may also purchase futures
contracts as a substitute for transactions in securities to alter the investment
characteristics of portfolio securities or to gain or increase its exposure to a
particular securities market.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
10
<PAGE>
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish a
segregated account consisting of cash or liquid securities in an amount equal to
the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates or securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. In the event of an imperfect correlation between
a futures position and a portfolio position which is intended to be protected,
the desired protection may not be obtained and the Fund may be exposed to risk
of loss.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Structured or Hybrid Notes. The 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
11
<PAGE>
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. The 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.
Derivative debt 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 Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. The Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund'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.
12
<PAGE>
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities 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 the 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,
the Fund may lend portfolio securities to brokers, dealers, and financial
institutions if the loan is collateralized by cash or U.S. Government securities
according to applicable regulatory requirements. The Fund may reinvest any cash
collateral in short-term securities and money market funds. When the Fund lends
portfolio securities, there is a risk that the borrower may fail to return the
securities involved in the transaction. As a result, the Fund may incur a loss
or, in the event of the borrower's bankruptcy, the Fund may be delayed in or
prevented from liquidating the collateral. It is a fundamental policy of the
Fund not to lend portfolio securities having a total value exceeding 33 1/3% of
its total assets.
Short-Term Trading and Portfolio Turnover. The 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 the Fund is calculated by
13
<PAGE>
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. The Fund's
portfolio turnover rate is set forth in the table under the caption "Financial
Highlights" in the Prospectus.
Special Risks
The following information as to certain special risks associated with investing
in Massachusetts constitutes only a brief summary and does not purport to be a
complete description of the considerations associated with such investments. The
information is based in part on information from official statements related to
securities offerings of Massachusetts 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 3.1% for August 1999, the lowest
annual rate since 1988. The Massachusetts annual average unemployment rate has
now been on the decline for eight consecutive years, since peaking at 9.1% in
1991, and has been below the US rate for the past six years.
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
$14.5 billion in Fiscal 2000, an average annual gain of 6%. For Fiscal 2000, tax
revenues are expected to increase 3.3% over 1999 estimates, while including a
proposed reduction in the tax rate on certain personal income of $226 million .
Initial projections suggest that Fiscal 2000 could mark the commonwealth's ninth
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, Moody's raised the Commonwealth's credit rating from A1 to Aa3 in
April of 1998. S&P currently rates it AA- and Fitch Investors also accords a AA-
rating to the Commonwealth.
Prior Fiscal Years
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.
14
<PAGE>
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.
Fiscal 1998. Governor Weld approved the fiscal 1998 budget providing for
appropriations of approximately $18.4 billion on July 10, 1997. The budget
represented a 2.8% increase over fiscal 1997 expenditures and was based on a tax
revenue forecast of $12.85 billion and a budget revenue forecast of $18.749. On
July 29, 1997 Paul Cellucci became Acting Governor of Massachusetts when
Governor Weld resigned to pursue the U.S. Ambassadorship to Mexico. The tax
forecast was revised after review of quarterly receipts and increased to $13.3
billion on January 16, 1998. Preliminary revenues for fiscal 1998 are a record
$14.026 billion, up $1.161 billion or 9% from fiscal 1997.
Supplemental appropriations were approved in the amount of $94 million,
including the transfer of approximately $34.8 million to the Massachusetts Water
Pollution Abatement Trust for the state revolving fund programs. On November 26,
1997 Acting Governor Cellucci approved legislation transferring off-budget
$206.3 million Department of Medical assistance reserves to indemnify certain
medical facilities against losses that may result from providing uncompensated
care.
Standard & Poor's upgraded Massachusetts to AA- from A+ in October 1997, citing
strong debt management and favorable reserves. In January 1998 Fitch also
upgraded the Commonwealth to AA- from A+ and Moody's followed suit and upgraded
its rating in the spring of 1998, from A1 to AA3. All of the rating agencies
cited concerns surrounding the funding of the $11.6 billion Central
Artery/Tunnel Project. Much of the funding is expected to come from federal aid,
however, any shortfalls will place the burden on the general obligation on the
state and upon the Turnpike Authority and Port Authority.
Fiscal 1999. Estimated spending in 1999 totaled $20 billion, against total
revenue of $21.9 billion. Revenues in 1999 consistently exceeded estimates, with
year-end total exceeding even the May revision by some $300 million. The state
has restored its combined undesignated balance and stabilization fund to a
healthy $1.7 billion or 8.2% of revenues, as of 6/30/99.
Fiscal 1999 budget recommendations call for appropriations of $945.3 million for
pension funding, $93.9 million less tan the amount appropriated for the prior
fiscal year. The recommended amount reflects the elimination in 1997 of the
Commonwealth's responsibility for funding cost-or-living adjustments and the
adoption of a revised funding schedule. The proposed budget also includes a $20
million reserve to reduce the unfunded pension liabilities attributable to
former employees of Franklin, Hampden, Middlesex and Worcester counties.
Current Fiscal Year
Fiscal 2000. The Massachusetts Legislature passed a budget more than four months
late, approving a $20.87 billion FY 2000 budget on 11/10/99. The 2000 budget is
the latest passed since 1965. Governor Paul Cellucci then used his veto power to
reduce some $250 million from the budget, but state lawmakers subsequently
overrode many of the governor's vetoes, and returned some $190 million to the
budget. In the end, FY 2000 budget passed. The FY 2000 budget increases state
spending by some 7%, and phases in tax cuts reducing the income tax rate from
15
<PAGE>
5.95% to 5.75% over three years. One major component of the budget was a
restructuring of the finances of the MBTA from what is essentially full
reimbursement to a defined revenue source, with any expenditure overages to be
made up from other sources. The budget also provides additional funds for Senior
citizen drug costs and other elderly services.
Full details and disclosure have yet to be provided by the Commonwealth
Credit Factors
Massachusetts has one of the highest debt loads among the states. Debt per
capita is $2,580, compared to the state median of $422 and debt, as a percent of
personal income is 7.8%, compared to the median of 2.1%. Financing of the $12
billion Central Artery Tunnel Project remains a concern. Forty-five percent of
the funding is to come from federal aid with the remainder from bondings and
contributions from the Commonwealth, the Turnpike Authority and the Port
Authority. Ultimately, the Commonwealth is responsible for any shortfalls in
federal funding or increased costs.
Despite these concerns, Massachusetts has a vibrant and diverse economy. In
August 1999, unemployment dipped to 3.1%. Employment has risen by 400,000 new
jobs since 1991. The Commonwealth has demonstrated sound fiscal management;
produced strong operating results and has been successful in strengthening its
cash and reserve balances.
The investment objectives and policies described above under the caption
"Investment Objective and Policies" are not fundamental and may be changed by
the Trustees without shareholder approval. The policy of the 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.
Investment Restrictions
Fundamental Investment Restrictions. The fundamental investment restrictions
will not be changed for the Fund without the approval of a majority of the
Fund's outstanding voting securities which, as used in the Prospectus and this
Statement of Additional Information, means the approval by the lesser of (1) the
holders of 67% or more of the Fund's shares represented at a meeting if more
than 50% of the Fund's outstanding shares are present in person or by proxy at
that meeting or (2) more than 50% of the Fund's outstanding shares.
The Fund may not:
(1) Issue senior securities, except as permitted by paragraphs (2)
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
Fund's investment policies, and the pledge, mortgage or
hypothecation of the Fund's assets within the meaning of
paragraph (3) below are not deemed to be senior securities.
(2) Borrow money, except from banks as a temporary measure for
extraordinary emergency purposes in amounts not to exceed 33
1/3% of the Fund's total assets (including the amount
borrowed) taken at market value. The Fund will not purchase
securities while borrowings are outstanding.
16
<PAGE>
(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. The Fund may also participate as part of a group in
bidding for the purchase of Tax- Exempt Bonds directly from an
issuer in order to take advantage of the lower purchase price
available to members of such groups.
(5) Purchase or sell real estate or any interest therein, but this
restriction shall not prevent the Fund from investing in
Tax-Exempt Bonds secured by real estate or interests therein.
(6) Make loans, except that the Fund (1) may lend portfolio
securities in accordance with the Fund's investment policies
in an amount up to 33 1/3% of the Fund's total assets taken at
market value, (2) enter into repurchase agreements, and (3)
purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit,
bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
(7) Purchase or sell commodities or commodity contracts or puts,
calls or combinations of both, except options on securities,
securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency
and other financial instruments and options on such futures
contracts, forward commitments, interest rate swaps, caps and
floors, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's
investment policies.
(8) Purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after
such purchase, the value of its investments in such industry
would exceed 25% of its total assets taken at market value at
the time of each investment. (Tax- Exempt Bonds and securities
issued or guaranteed by the United States Government and its
agencies and instrumentalities are not subject to this
limitation.)
(9) Purchase securities of an issuer (other than the U.S.
Government, its agencies or instrumentalities), if such
purchase would cause more than 10 percent of the outstanding
voting securities of such issuer to be held by the Fund.
Non-fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval:
The Fund may not:
(1) 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.
17
<PAGE>
(2) Purchase securities on margin or make short sales unless by
virtue of its ownership of other securities, the Fund has the
right to obtain securities equivalent in kind and amount to
the securities sold short and, if the right is conditional,
the sale is made upon the same conditions, except that the
Fund may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities.
(3) Purchase a security if, as a result, (i) more than 10% of the
Fund's total assets would be invested in the securities of
other investment companies, (ii) the Fund would hold more than
3% of the total outstanding voting securities of any one
investment company, or (iii) more than 5% of the Fund's total
assets would be invested in the securities of any one
investment company. These limitations do not apply to (a) the
investment of cash collateral, received by the Fund in
connection with lending the Fund's portfolio securities, in
the securities of open-end investment companies or (b) the
purchase of shares of any investment company in connection
with a merger, consolidation, reorganization or purchase of
substantially all of the assets of another investment company.
Subject to the above percentage limitations, the Fund may, in
connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase
securities of other investment companies within the John
Hancock Group of Funds.
(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 the Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trustees of the Trust who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and/or
Trustees of the Fund are also officers and/or directors of the Adviser or
officers and Trustees of the Fund's principal distributor, John Hancock Funds,
Inc. ("John Hancock Funds").
18
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Stephen L. Brown* Trustee and Chairman (1, 2) Chairman and Chief Executive Officer,
John Hancock Place John Hancock Mutual Life Insurance
P.O. Box 111 Company; Chairman and Director, John
Boston, MA 02117 Hancock Advisers, Inc. (The Adviser),
July 1937 John Hancock Funds, Inc. (John
Hancock Funds), The Berkeley
Financial Group, Inc. (The Berkeley
Group); Director, John Hancock
Subsidiaries, Inc.; John Hancock
Insurance Agency, Inc.; (Insurance
Agency), (until June 1999); Federal
Reserve Bank of Boston (until March
1999); John Hancock Signature
Services, Inc. (Signature Services)
(until January 1997) ; Trustee,
John Hancock Asset Management
(until March 1997).
Maureen R. Ford * Trustee, Vice Chairman and Chief President, Broker/Dealer Distributor,
Executive Officer John Hancock Mutual Life Insurance
Company; Vice Chairman, Director
and Chief Executive Officer, the
Advisers, The Berkeley Group, John
Hancock Funds; Chairman, Director
and President, Insurance Agency,
Inc.; Chairman, Director and Chief
Executive Officer, Sovereign Asset
Management Corporation (SAMCorp.);
Senior Vice President, MassMutual
Insurance Co. (until 1996); Senior
Vice President, Connecticut Mutual
Insurance Co. (until 1989).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
19
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1996); Director, Brookline Bankcorp.
June 1931
Richard P. Chapman, Jr. Trustee (1) Chairman, President, and Chief
160 Washington Street Executive Officer, Brookline
Brookline, MA 02147 Bankcorp. (lending); Director,
February 1935 Lumber Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee 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.;
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.
20
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Leland O. Erdahl Trustee Director of Uranium Resources
8046 Mackenzie Court Corporation, Hecla Mining Company,
Las Vegas, NV 89129 Canyon Resources Corporation and
December 1928 Apollo Gold, Inc.; Director Original
Sixteen to One Mines, Inc. (until
1999); Management Consultant (from
1984-1987 and 1991-1998); Director,
Freeport-McMoran Copper & Gold, Inc.
(until 1997); Vice President, Chief
Financial Officer and Director of
Amax Gold, Inc. (until 1998).
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
The Venture Capital Fund of New England (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980,
23rd Floor headed the venture capital group at
Boston, MA 02110 Bank of Boston Corporation.
November 1932
Gail D. Fosler Trustee Senior Vice President and Chief
3054 So. Abingdon Street Economist, The Conference Board
Arlington, VA 22206 (non-profit economic and business
December 1947 research); Director, Unisys Corp.;
and H.B. Fuller Company. Director,
National Bureau of Economic
Research (academic).
William F. Glavin Trustee 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.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
21
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser, The
Boston, MA 02199 Berkeley Group; Director and
April 1953 President, NM Capital and SAMCorp.;
Director, John Hancock Funds,
Advisers International, and John
Hancock Advisers International
(Ireland) Ltd.; Executive Vice
President, the Adviser (until
1994); Director, Insurance Agency,
Inc. (until June 1999); Director,
Signature Services (until January
1997).
Dr. John A. Moore Trustee 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 Executive Director, Council for
Council For International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W. President, Institute of
Washington, D.C. 20008 International Education (since
May 1943 January 1998); Senior Fellow,
Cornell Institute of Public
Affairs, Cornell University (until
December 1997); President Emerita
of Wells College and St. Lawrence
University; Director, Niagara
Mohawk Power Corporation (electric
utility).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
22
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East Emeritus, Harvard University
Cambridge, MA 02138 Graduate School of Business
September 1931 Administration (as of June 1998).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Mutual
John Hancock Place Life Insurance Company; Director,
P.O. Box 111 the Adviser, John Hancock Funds,
Boston, MA 02117 Signator Investors, Inc., John
August 1937 Hancock Subsidiaries, Inc.,
SAMCorp.., NM Capital, The Berkeley
Group, JH Networking Insurance
Agency, Inc.; Insurance Agency, Inc.
(until June 1999), 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.
23
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Osbert M. Hood Executive Vice President and Chief Executive Vice President and Chief
101 Huntington Avenue Financial Officer Financial Officer, each of the John
Boston, MA 02199 Hancock Funds; Executive Vice
August 1952 President, Treasurer and Chief
Financial Officer of the Adviser,
the Berkeley Group, John Hancock
Funds, and SAMCorp.; Senior Vice
President, Chief Financial Officer
and Treasurer, Signature Services,
NM Capital; Director IndoCam Japan
Limited; Vice President and Chief
Financial Officer, John Hancock
Mutual Life Insurance Company,
Retail Sector (until 1997).
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services, John Hancock
July 1950 Funds, NM Capital, SAMCorp. and
Insurance Agency, Inc.; Counsel,
John Hancock Mutual Life Insurance
Company (until February 1996).
- -------------------
* 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.
24
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Susan S. Newton Vice President, Secretary and Chief Vice President and Chief Legal
101 Huntington Avenue Legal Officer Officer the Adviser; John Hancock
Boston, MA 02199 Funds, Signature Services, The
March 1950 Berkeley Group, NM Capital and
SAMCorp..
James J. Stokowski Vice President, Treasurer and Chief Vice President, the Adviser.
101 Huntington Avenue Accounting Officer
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.
</TABLE>
25
<PAGE>
The following tables provide information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Messrs. Brown and Scipione and Ms. Ford
and Ms. Hodsdon, each a non-Independent Trustee, and each of the officers of the
Fund are interested persons of the Adviser, are compensated by the Adviser and
received no compensation from the Fund for their services.
Total Compensation
Aggregate From the Fund and John
Compensation from Hancock Fund Complex
Independent Trustees the Fund (1) to Trustees (2)
- -------------------- ------------ ---------------
Dennis J. Aronowitz $ 303 $ 72,000
Richard P. Chapman* 309 75,100
William J. Cosgrove* 296 72,000
Douglas Costle(3) 268 75,100
Leland O. Erdahl 296 72,000
Richard A. Farrell 309 75,100
Gail D. Fosler 296 72,000
William F. Glavin* 279 72,000
Dr. John A. Moore* 296 72,000
Patti McGill Peterson 309 75,100
John Pratt 296 72,000
------- --------
Total $3,257 $804,400
(1)Compensation is for the fiscal year ended August 31, 1999.
(2) Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 1998. As of this date, there were sixty-five
funds in the John Hancock Fund Complex with each of these Independent Trustees
serving on thirty-one funds.
(3) Mr. Costle resigned as of December 31, 1999.
*As of December 31, 1998, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $81,203, Mr. Cosgrove was $182,174, Mr. Glavin was $248,920 and for
Dr. Moore was $166,978 under the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees.
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers or
Trustees of one or more of the other funds for which the Adviser serves as
investment adviser.
As of December 1, 1999, the officers and Trustees of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund. As of
that date, the following shareholders beneficially owned 5% or more of
outstanding shares of the Fund:
26
<PAGE>
Percentage of Total
Outstanding Shares of the
Name and Address of Shareholder Class of Shares Class of the Fund
- ------------------------------- --------------- -----------------
MLPF&S For The B 19.48%
Sole Benefit of Its Customers
Attn: Fund Administration 97M77
4800 Deerlake Drive East 2nd Floor
Jacksonville FL 32246-6484
Donaldson Lufkin Jenrette C 58.34%
Securities Corp Inc.
PO Box 2052
Jersey City NJ 07302-2052
Dean Witter FBO C 9.13%
Walter V. Zurosky Jr.
PO Box 250
New York NY 10008-0250
MLPF&S For The C 7.31%
Sole Benefit Of Its Customers
Attn: Fund Administration
4800 Deerlake Drive East 2nd Floor
Jacksonville FL 32246-6484
Donaldson Lufkin Jenrette C 6.67%
Securities Corp Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
Dean Witter FBO C 6.41%
Walter V. Zurosky Jr.
PO Box 250
New York NY 10008-0250
Donaldson Lufkin Jenrette C 5.85%
Securities Corp Inc.
PO Box 2052
Jersey City NJ 07303-2052
Investment Advisory And Other Services
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Funds and other funds in the John
Hancock group of funds as well as institutional accounts. The Adviser is an
affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of more
than $100 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries a high rating from Standard and
Poor's and A.M. Best. Founded in 1862, the Life Company has been serving clients
for over 130 years.
27
<PAGE>
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including but not
limited to expenses of preparing, printing and mailing all shareholders'
reports, notices, prospectuses, proxy statements and reports to regulatory
agencies; expenses relating to the issuance, registration and qualification of
shares; government fees; interest charges; expenses of furnishing to
shareholders their account statements; taxes; expenses of redeeming shares;
brokerage and other expenses connected with the execution of portfolio
securities transactions; expenses pursuant to the Fund's plan of distribution;
fees and expenses of custodians including those for keeping books and accounts,
maintaining a committed line of credit and calculating the net asset value of
shares; fees and expenses of transfer agents and dividend disbursing agents;
legal, accounting, financial, management, tax and auditing fees and expenses of
the Fund (including an allocable portion of the cost of the Adviser's employees
rendering such services to the subject Fund); the compensation and expenses of
Trustees who are not otherwise affiliated with the Trust, the Adviser or any of
their affiliates; expenses of Trustees' and shareholders' meetings; trade
association memberships; insurance premiums; and any extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage of the average daily net
assets of the 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 the 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.
For the years ended August 31, 1997, 1998 and 1999, the management fee paid by
the Fund to the Adviser amounted to $64,441, $71,563 and $129,739, for services,
respectively.
Securities held by the 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 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.
28
<PAGE>
Pursuant to the Advisory Agreement, the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which their respective Advisory Agreement relate, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties or from reckless disregard
of the obligations and duties under the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If 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.
The continuation of the Advisory Agreement and Distribution Agreement (discussed
below) was approved by all of the Trustees. The Advisory Agreement and the
Distribution Agreement will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement, or "interested
persons" of any such parties. Both Agreements may be terminated on 60 days
written notice by any party or by a vote of a majority of the outstanding voting
securities of the Fund and will terminate automatically if assigned.
Accounting and Legal Services Agreement The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this Agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal years ended August 31, 1997, 1998 and 1999,
the Fund paid the Adviser $10,451, $10,447 and $10,866, respectively, for
services under this Agreement.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
Distribution Contracts
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class on behalf of the Fund. Shares of the Fund are also sold by
selected broker-dealers (the "Selling Brokers") which have entered into selling
agency agreements with John Hancock Funds. These Selling Brokers are authorized
to designate other intermediaries to receive purchase and redemption orders on
behalf of the Fund. John Hancock Funds accepts orders for the purchase of the
shares of the Fund that are continually offered at net asset value next
determined, plus an applicable sales charge, if any. In connection with the sale
of Fund shares, John Hancock Funds and Selling Brokers receive compensation from
a sales charge imposed, in the case of Class A shares, at the time of sale. In
the case of Class B or Class C shares, the broker receives compensation
immediately but John Hancock Funds is compensated on a deferred basis.
29
<PAGE>
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended August 31, 1997, 1998 and 1999 were $153,486, $138,281 and
$204,621, respectively, and $15,682, $16,835 and $27,189, respectively, were
retained by John Hancock Funds in 1997, 1998 and 1999. The remainder of the
underwriting commissions were reallowed to Selling Brokers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of
1940. Under the Plans, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% for Class A shares and 1.00% for Class B
and Class C shares, of the Fund's average daily net assets attributable to
shares of that class. However, the service fee will not exceed 0.25% of the
Fund's average daily net assets attributable to each class of shares. The
distribution fees will be used to reimburse John Hancock Funds for its
distribution expenses, including but not limited to: (i) initial and ongoing
sales compensation to Selling Brokers and others (including affiliates of John
Hancock Funds) engaged in the sale of the Fund shares; (ii) marketing,
promotional and overhead expenses incurred in connection with the distribution
of Fund shares; and (iii) with respect to Class B and Class C shares only,
interest expenses on unreimbursed distribution expenses. The service fees will
be used to compensate Selling Brokers and others for providing personal and
account maintenance services to shareholders. In the event the John Hancock
Funds is not fully reimbursed for payments or expenses they under the Class A
Plan, these expenses will not be carried beyond twelve months from the date they
were incurred. Unreimbursed expenses under the Class B and Class C Plans will be
carried forward together with interest on the balance of these unreimbursed
expenses. The Fund does not treat unreimbursed expenses under the Class B and
Class C Plans as a liability of the Fund, because the Trustees may terminate
Class B and/or Class C Plans at any time with no additional liability for these
expenses to the shareholders and the Fund. For the fiscal year ended August 31,
1999, an aggregate of $148,815 of distribution expenses or 1.47% of the average
net assets of the Fund's Class B shares was not reimbursed or recovered by John
Hancock Funds through the receipt of deferred sales charges or Rule 12b-1 fees
in prior periods. For the period from April 1, 1999 to August 31, 1999, an
aggregate of $0 distribution expenses or 0% of the average net assets of the
Class C shares of the Fund was not reimbursed or recovered by John Hancock Funds
through receipt of deferred sales charges or 12b-1 fees.
The Plans and all amendments were approved by the Trustees, including a majority
of the Trustees who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the Plans (the
"Independent Trustees"), by votes cast in person at meetings called for the
purpose of voting on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provide the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
Independent Trustees. The Plans provide that they may be terminated without
penalty, (a) by vote of a majority of the Independent Trustees, (b) by a vote of
a majority of the Fund's outstanding shares of the applicable class upon 60
days' written notice to John Hancock Funds, and (c) automatically in the event
of assignment. The Plans further provide that they may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to that Plan. Each Plan provides, that
no material amendment to the Plans will be effective unless it is approved by a
majority vote of the Trustees and the Independent Trustees of the Fund. The
holders of Class A, Class B and Class C shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans, the Trustees concluded that, in their judgment, there is a reasonable
likelihood that the Plans will benefit the holders of the applicable class of
shares of the Fund.
30
<PAGE>
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Fund may participate in joint distribution activities
with other Funds and the costs of those activities will be borne by the Fund in
proportion to the relative net asset value of the participating Fund.
During the fiscal year ended August 31, 1999, the Fund paid John Hancock Funds
the following amounts of expenses in connection with their services.
<TABLE>
<CAPTION>
Expense Items
-------------
Printing and
Mailing of Expenses of Interest,
Prospectuses Compensation John Carrying or
to New to Selling Hancock Other Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A $36,328 $7,785 $58,108 $68,866 $6,921
Class B $22,496 $5,010 $ 7,737 $60,732 $5,488
Class C* $ 94 $ 0 $ 0 $ 146 $ 11
*Commenced Operations April 1, 1999
SALES COMPENSATION
As part of their business strategies the Fund, along with John Hancock Funds,
pays compensation to financial services firms that sell the Fund's shares. These
firms typically pass along a portion of this compensation to your financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the Fund's assets. The sales charges and 12b-1
fees paid by investors are detailed in the prospectus and under "Distribution
Contracts" in this Statement of Additional Information . The portions of these
expenses that are reallowed to financial services firms are shown on the next
page.
Whenever you make an investment in the Fund, 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. 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 by the Fund.
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.
31
<PAGE>
Maximum
Sales charge Reallowance First year
paid by investors Or commission Service fee Maximum
(% of offering (% of offering (% of net total compensation (1)
Class A investments price) price) investment) (% of offering price)
- ------------------- ------ ------ ----------- ---------------------
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 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% (2)
Next $1 and more above that -- 0.00% 0.25% 0.25% (2)
Maximum
Reallowance First year
Or commission Service fee Maximum
(% of offering (% of net total compensation
Class B investments price) investment) (% of offering price)
- ------------------- ------ ----------- ---------------------
All amounts 3.75% 0.25% 4.00%
Maximum
Reallowance First year
Or commission Service fee Maximum
(% of offering (% of net total compensation
Class C investments price) investment) (% of offering price)
- -------------------- ------ ----------- ---------------------
All amounts 0.75% 0.25% 1.00%
</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) For Group Investment Program sales, the maximum total compensation for
investments of $1 million or more is 1.00% of the offering price (one year CDSC
of 1.00% applies for each sale).
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
Net Asset Value
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
32
<PAGE>
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
The NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class' net assets by the number of its shares outstanding.
Initial Sales Charge on Class A Shares
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then only
will be issued for full shares. The Trustees reserve the right to change or
waive the Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining 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 Fund, owned by
the investor, or if John Hancock Signature Services, Inc. ("Signature Services")
is notified by the investor's dealer or the investor at the time of the
purchase, the cost of the Class A shares owned.
Without Sales 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 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, daughter-in-law, son-in-law, niece, nephew,
grandparents and same sex domestic partner) of any of the
foregoing; or any fund, pension, profit sharing or other
benefit plan for the individuals described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into a signed agreement
with John Hancock Funds providing specifically for the use of
Fund shares in fee-based investment products or services made
available to their clients.
o A former participant in an employee benefit plan with John
Hancock Funds, when he or she withdraws from his or her plan
and transfers any or all of his or her plan distributions
directly to a Fund.
33
<PAGE>
o A member of a class action lawsuit against insurance companies
who is investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has more than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. See your
Merrill Lynch financial consultant for further information.
o Retirement plans investing through PruArray Program sponsored
by Prudential Securities.
o Pension plans transferring assets from a John Hancock variable
annuity contract to the Fund pursuant to an exemptive
application approved by the Securities and Exchange
Commission.
o Shareholders of John Hancock Funds PLC who become U.S.
residents or citizens and transfer their existing assets from
John Hancock Funds PLC to the Fund.
o Existing full service clients of the Life Company who were
group annuity contract holders as of September 1, 1994, and
participant directed retirement plans with at least 100
eligible employees at the inception of the Fund account. Each
of these investors may purchase Class A shares with no initial
sales charge. However, if the shares are redeemed within 12
months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class 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.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account, and (c) groups which qualify for the Group Investment Program (see
below). A company's (not an individual's) qualified and non-qualified retirement
plan investments can be combined to take advantage of this privilege. Further
information about combined purchases, including certain restrictions on combined
group purchases, is available from Signature Services or a Selling Broker's
representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount being invested but also
the investor's purchase price or current account value of the Class A shares of
all John Hancock funds which carry a sales charge already held by such person.
Class A shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize. A company's (not an individual's)
qualified and non-qualified retirement plan investments can be combined to take
advantage of this privilege.
34
<PAGE>
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments
pursuant to a Letter of Intention (the "LOI"), which should be read carefully
prior to its execution by an investor. The Fund offers two options regarding the
specified period for making investments under the LOI. All investors have the
option of making their investments over a period of thirteen (13) months.
Investors who are using the Fund as a funding medium for a retirement plan,
however, may opt to make the necessary investments called for by the LOI over a
forty-eight (48) month period. These retirement plans include traditional, Roth
and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs) SIMPLE IRA,
SIMPLE 401(k), Money Purchase Pension, Profit Sharing and Section 457 plans. An
individual's non-qualified and qualified retirement plan investments cannot be
combined to satisfy the LOI of 48 months. Such an investment (including
accumulations and combinations but not including reinvested dividends) must
aggregate $100,000 or more during the specified period from the date of the LOI
or from a date within ninety (90) days prior thereto, upon written request to
Signature Services. The sales charge applicable to all amounts invested under
the LOI is computed as if the aggregate amount intended to be invested had been
invested immediately. If such aggregate amount is not actually invested, the
difference in the sales charge actually paid and the sales charge payable had
the LOI not been in effect is due from the investor. However, for the purchases
actually made within the specified period (either 13 or 48 months), the sales
charge applicable will not be higher than that which would have applied
(including accumulations and combinations) had the LOI been for the amount
actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Signature Services to act as his
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the subject Fund to sell, any additional Class A
shares and may be terminated at any time.
Deferred Sales Charge on Class B AND CLASS C Shares
Investments in Class B and Class C shares are purchased at net asset value per
share without the imposition of an initial sales charge so that the Fund will
receive the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year, respectively, of purchase will be subject to a
CDSC at the rates set forth in the Prospectus as a percentage of the dollar
amount subject to the CDSC. The charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
Class B or Class C shares being redeemed. No CDSC will be imposed on increases
in account value above the initial purchase price or on shares derived from
reinvestment of dividends or capital gains distributions.
35
<PAGE>
Class B shares are not available to full-service retirement 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 both Class B and Class C
shares, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period for Class B or one year CDSC
redemption period for Class C, or those you acquired through dividend and
capital gain reinvestment, and next from the shares you have held the longest
during the six-year period for Class B shares. For this purpose, the amount of
any increase in a share's value above its initial purchase price is not subject
to a CDSC. Thus, when a share that has appreciated in value is redeemed during
the CDSC period, a CDSC is assessed only on its initial purchase price.
When requesting a redemption for a specific dollar amount, please indicate if
you require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to
CDSC (dividend reinvestment) (120.00)
-------
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the account not just the shares
being redeemed.
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C shares and of Class A shares that are subject
to a CDSC, unless indicated otherwise, in the circumstances defined below:
36
<PAGE>
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to Trust
accounts unless Trust is dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B (but not Class C) shares made under a periodic
withdrawal plan, or redemptions for fees charged by planners or
advisors for advisory services, as long as your annual redemptions do
not exceed 12% of your account value, including reinvested dividends,
at the time you established your periodic withdrawal plan and 12% of
the value of subsequent investments (less redemptions) in that account
at the time you notify Signature Services. (Please note, this waiver
does not apply to periodic withdrawal plan redemptions of Class A or
Class C shares that are subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
* Redemptions of Class A shares by retirement plans that invested through
the Pru Array Program sponsored by Prudential Securities.
For Retirement Accounts (such as traditional, Roth and Education IRAs, SIMPLE
IRAs, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under sections
401(a) (such as Money Purchase Pension Plans and Profit-Sharing/401(k)
Plans), 457 and 408 (SEPs and SIMPLE IRAs) of the Internal Revenue
Code.
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
Please see matrix for some examples.
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), MPP, Rollover
PSP) 457 & 408
(SEPs & Simple
IRAs)
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Death or Disability Waived Waived Waived Waived Waived
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions in periodic
or 12% of payments
account value
annually in
periodic
payments
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or value annually
12% of account in periodic
value annually payments
in periodic
payments
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of account
(Class B only) annuity annuity annuity annuity value annually
payments (72t) payments (72t) payments (72t) payments (72t) in periodic
or 12% of or 12% of or 12% of or 12% of payments
account value account value account value account value
annually in annually in annually in annually in
periodic periodic periodic periodic
payments payments payments payments
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Loans Waived Waived N/A N/A N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Hardships Waived Waived Waived N/A N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Qualified Domestic Waived Waived Waived N/A N/A
Relations Orders
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Termination of Waived Waived Waived N/A N/A
Employment Before
Normal Retirement Age
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Return of Excess Waived Waived Waived Waived N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
</TABLE>
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.
38
<PAGE>
Special Redemptions
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purpose of making such
payment at the same value as used in determining the Fund's net asset value. The
Fund has, however, elected to be governed by Rule 18f-1 under the Investment
Company Act. Under that rule, the Fund must redeem its shares for cash except to
the extent that the redemption payments to any shareholder during any 90-day
period would exceed the lesser of $250,000 or 1% of the Fund's net asset value
at the beginning of such period.
Additional Services And Programs
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or 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 500 Index Fund and John Hancock
Intermediate Government Fund will retain the exchanged fund's CDSC schedule).
For purposes of computing the CDSC payable upon redemption of shares acquired in
an exchange, the holding period of the original shares is added to the holding
period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994 for
Class B shares of any other John Hancock fund, the acquired shares will continue
to be subject to the CDSC schedule that was in effect when the exchanged shares
were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares, which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional shares of
the Fund could be disadvantageous to a shareholder because of the initial sales
charge payable on the purchases of Class A shares and the CDSC imposed on
redemptions of Class B and Class C shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase shares at the same time as
a Systematic Withdrawal Plan is in effect. The Fund reserves the right to modify
or discontinue the Systematic Withdrawal Plan of any shareholder on 30 days'
prior written notice to such shareholder, or to discontinue the availability of
such plan in the future. The shareholder may terminate the plan at any time by
giving proper notice to Signature Services.
39
<PAGE>
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.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the order date of any investment.
Reinstatement and Reinvestment Privilege. If Signature Services is notified
prior to reinvestment, a shareholder who has redeemed Fund shares may, within
120 days after the date of redemption, reinvest without payment of a sales
charge any part of the redemption proceeds in shares of the same class of the
Fund or another John Hancock fund, subject to the minimum investment limit of
that fund. The proceeds from the redemption of Class A shares may be reinvested
at net asset value without paying a sales charge in Class A shares of any John
Hancock fund. If a CDSC was paid upon a redemption, a shareholder may reinvest
the proceeds from this redemption at net asset value in additional shares of the
class from which the redemption was made. The shareholder's account will be
credited with the amount of the CDSC charged upon the prior redemption and the
new shares will continue to be subject to the CDSC. The holding period of the
shares acquired through reinvestment will, for purposes of computing the CDSC
payable upon a subsequent redemption, include the holding period of the redeemed
shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS."
Retirement Plans participating in Merrill Lynch's servicing programs.
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
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).
40
<PAGE>
PURCHASES AND REDEMPTIONS THROUGH THIRD PARTIES
Shares of the Fund may be purchased or redeemed through certain broker-dealers.
Brokers may charge for their services or place limitations on the extent to
which you may use the services of the Fund. The Fund will be deemed to have
received a purchase or redemption order when an authorized broker, or if
applicable, a broker's authorized designee, receives the order. If a broker is
an agent or designee of the Fund, orders are processed at the NAV next
calculated after the broker receives the order. The broker must segregate any
orders it receives after the close of regular trading on the New York Stock
Exchange and transmit those orders to the Fund for execution at NAV next
determined. Some brokers that maintain nominee accounts with the Fund for their
clients charge an annual fee on the average net assets held in such accounts for
accounting, servicing, and distribution services they provide with respect to
the underlying Fund shares. The Adviser, the Fund, and John Hancock Funds, Inc.
(the Fund's principal distributor), share in the expense of these fees.
Description Of The Fund's Shares
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund, without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series and classes
without further action by shareholders. As of the date of this Statement of
Additional Information, the Trustees have authorized the issuance of two series
of shares - John Hancock Massachusetts Tax-Free Income Fund and the John Hancock
New York Tax-Free Income Fund. Additional series may be added in the future. The
Trustees have also authorized the issuance of three classes of shares of each
series, designated as Class A, Class B and Class C.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class or series of the Fund.
Holders of each class of shares have certain exclusive voting rights on matters
relating to their respective distribution plans. The different classes of the
Fund may bear different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to each class of shares will be borne
exclusively by that class (ii) Class B and Class C shares will pay higher
distribution and service fees than Class A shares and (iii) each class of shares
will bear any class expenses properly allocable to that class of shares, subject
to the conditions the Internal Revenue Service imposes with respect to the
multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable by the Fund, except as set
forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders. The
Fund's shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Fund's outstanding shares and the Trustees shall promptly call
a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Fund. Shareholders
may, under certain circumstances, communicate with other shareholders in
connection with requesting a special meeting of shareholders. However, at any
time that less than a majority of the Trustees holding office were elected by
the shareholders, the Trustees will call a special meeting of shareholders for
the purpose of electing Trustees.
41
<PAGE>
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder of any Fund held
personally liable by reason of being or having been a shareholder. The
Declaration of Trust also provides that no series of the Fund shall be liable
for the liabilities of any other series. Furthermore, no fund included in this
Fund's Prospectus shall be liable for the liabilities of any other John Hancock
fund. Liability is therefore limited to circumstances in which the Fund itself
would be unable to meet its obligations, and the possibility of this occurrence
is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter, credit card or third party checks. All
checks returned by the post office as undeliverable will be reinvested at net
asset value in the fund or funds from which a redemption was made or dividend
paid. Information provided on the account application may be used by the 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. For telephone transactions, the transfer agent will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, the transfer agent is not responsible for any
losses that may occur to any account due to an unauthorized telephone call. Also
for your protection telephone transactions are not permitted on accounts whose
names or addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
Selling activities for the Fund may not take place outside the U.S. except with
U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on
Non-U.S. investors' accounts with foreign mailing addresses are required to
certify that all sales activities have occurred, and in the future will occur,
only in the U.S. A foreign corporation may purchase shares of the Fund only if
it has a U.S. mailing address.
Tax Status
Federal Income Taxation
The Fund is treated as a separate entity for accounting and tax purposes, has
qualified and elected to be treated as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to so qualify for each taxable year. As such and by complying with the
applicable provisions of the Code regarding the sources of its income, the
timing of its distributions, and the diversification of its assets, the Fund
will not be subject to Federal income tax on its tax-exempt interest and taxable
income (including net realized capital gains) which is distributed to
shareholders in accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
42
<PAGE>
The Fund expects to qualify to pay "exempt-interest dividends," as defined in
the Code. To qualify to pay exempt-interest dividends, the Fund must, at the
close of each quarter of its taxable year, have at least 50% of the value of its
total assets invested in municipal securities whose interest is excluded from
gross income under Section 103(a) of the Code. In purchasing municipal
securities, the Fund intends to rely on opinions of nationally recognized bond
counsel for each issue as to the excludability of interest on such obligations
from gross income for federal income tax purposes and, if available, the
exemption of such interest from Massachusetts personal income tax. The Fund will
not undertake independent investigations concerning the tax-exempt status of
such obligations, nor does it guarantee or represent that bond counsels'
opinions are correct. Bond counsels' opinions will generally be based in part
upon covenants by the issuers and related parties regarding continuing
compliance with federal tax requirements. Tax laws enacted principally during
the 1980's not only had the effect of limiting the purposes for which tax-exempt
bonds could be issued and reducing the supply of such bonds, but also increased
the number and complexity of requirements that must be satisfied on a continuing
basis in order for bonds to be and remain tax-exempt. If the issuer of a bond or
a user of a bond-financed facility fails to comply with such requirements at any
time, interest on the bond could become taxable, retroactive to the date the
obligation was issued. In that event, a portion of the Fund's distributions
attributable to interest the Fund received on such bond for the current year and
for prior years could be characterized or recharacterized as taxable income. The
availability of tax-exempt obligations and the value of the Fund's portfolio may
be affected by restrictive federal income tax legislation enacted in recent
years or by similar future legislation.
If the Fund satisfies the applicable requirements, dividends paid by the Fund
which are attributable to tax exempt interest on municipal securities and
designated by the Fund as exempt-interest dividends in a written notice mailed
to its shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. The recipient of tax-exempt income is required
to report such income on his federal income tax return. However, a shareholder
is advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" or "related person" thereof under Section 147(a)
with respect to any of the tax-exempt obligations held by the Fund. The Code
provides that interest on indebtedness incurred or continued to purchase or
carry shares of the Fund is not deductible to the extent it is deemed related to
the Fund's exempt-interest dividends. Pursuant to published guidelines, the
Internal Revenue Service may deem indebtedness to have been incurred for the
purpose of purchasing or carrying shares of the 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 the Fund may be
excluded by the Fund's shareholders from their gross income for federal income
tax purposes, the Fund may purchase specified private activity bonds, the
interest from which (including the Fund's distributions attributable to such
interest) may be a preference item for purposes of the federal alternative
minimum tax (both individual and corporate). All exempt-interest dividends from
the Fund, whether or not attributable to private activity bond interest, may
increase a corporate shareholder's liability, if any, for corporate alternative
minimum tax and will be taken into account in determining the extent to which a
shareholder's Social Security or certain railroad retirement benefits are
taxable.
Distributions other than exempt-interest dividends from the Fund's current or
accumulated earnings and profits ("E&P") will be taxable under the Code for
investors who are subject to tax. Taxable distributions include distributions
from the Fund that are attributable to (i) taxable income, including but not
limited to taxable bond interest, recognized market discount income, original
issue discount income accrued with respect to taxable bonds, income from
repurchase agreements, income from securities lending, income from dollar rolls,
income from interest rate swaps, caps, floors and collars, and a portion of the
discount from certain stripped tax- exempt obligations or their coupons or (ii)
43
<PAGE>
capital gains from the sale or constructive sale of securities or other
investments (including from the disposition of rights to when-issued securities
prior to issuance) or from options and futures contracts. If these distributions
are paid from the Fund's "investment company taxable income," they will be
taxable as ordinary income; and if they are paid from the Fund's "net capital
gain," they will be taxable as long-term capital gain. (Net capital gain is the
excess (if any) of net long-term capital gain over net short-term capital loss,
and investment company taxable income is all taxable income and capital gains or
losses, other than those gains and losses included in computing net capital
gain, after reduction by deductible expenses.) Some distributions may be paid in
January but may be taxable to shareholders as if they had been received on
December 31 of the previous year. The tax treatment described above will apply
without regard to whether distributions are received in cash or reinvested in
additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Amounts that are not allowable as a deduction in computing
taxable income, including expenses associated with earning tax-exempt interest
income, do not reduce the Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of the Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders who have chosen automatic reinvestment of their distributions will
have a federal tax basis in each share received pursuant to such a reinvestment
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received in the
reinvestment.
After the close of each calendar year, the Fund will inform shareholders of the
federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative minimum tax. Shareholders who have not held shares of
the Fund for its full taxable year may have designated as tax-exempt or as a tax
preference item a percentage of distributions which is not equal to the actual
amount of a pro rata share of tax-exempt income or tax preference item income
earned by the Fund during the period of their investment in the Fund.
The amount of the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
Fund securities and/or engage in options or futures transactions that will
generate capital gains. At the time of an investor's purchase of the 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 the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. A sales charge paid in purchasing
shares of 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
44
<PAGE>
purchase to the extent shares of the Fund or another John Hancock Fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to 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
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess of net long-term capital gain over net short-term
capital loss in any year. The Fund will not, in any event, distribute net
capital gain realized in any year to the extent that a capital loss is carried
forward from prior years against such gain. To the extent such excess was
retained and not exhausted by the carryforward of prior years' capital losses,
it would be subject to federal income tax in the hands of the Fund. Upon proper
designation of this amount by the Fund, each shareholder would be treated for
Federal income tax purposes as if the Fund had distributed to him on the last
day of its taxable year his pro rata share of such excess, and he had paid his
pro rata share of the taxes paid by the Fund and reinvested the remainder in the
Fund. Accordingly, each shareholder would (a) include his pro rata share of such
excess as long-term capital gain in his return for his taxable year in which the
last day of the Fund's taxable year falls, (b) be entitled either to a tax
credit on his return for, or to a refund of, his pro rata share of the taxes
paid by the Fund and (c) be entitled to increase the adjusted tax basis for his
shares in the Fund by the difference between his pro rata share of such excess
and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
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 tax
liability to the Fund and, as noted above, would not be distributed to
shareholders. The Fund has a realized capital loss carryforward of $185,328, of
which $41,406 expires 8/31/2003, $137,277 expires 8/31/2004 and $6,645 expires
8/31/2005.
The 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 the Fund to recognize income or gain without
a concurrent receipt of cash. However, the Fund must distribute to shareholders
for each taxable year substantially all of its net income and net capital gains,
including such income or gain, to qualify as a regulated investment company and
avoid liability for any federal income or excise tax. Therefore, the Fund may
have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash, or 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, dollar rolls and
possibly other investments or transactions, are unclear in certain respects, and
the 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.
45
<PAGE>
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. However, the Fund's
taxable distributions may not be subject to backup withholding if the Fund can
reasonably estimate that at least 95% of its distributions for the year will be
exempt-interest dividends. The Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
The Fund 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 Fund. Tax rules are not entirely clear about
issues such as when the Fund may cease to accrue interest, original issue
discount, or market discount, when and to what extent deductions may be taken
for bad debts or worthless securities, how payments received on obligations in
default should be allocated between principal and income, and whether exchanges
of debt obligations in a workout context are taxable. If the Fund invests in
these debt obligations, it will address these issues in order to seek to ensure
that it distributes sufficient income to preserve its status as a regulated
investment company and seek to avoid becoming subject to Federal income or
excise tax.
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 Fund
may restrict the Fund's ability to enter into futures and options transactions.
Certain options and futures transactions undertaken by the Fund may cause the
Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Additionally, the 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 the 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 the Fund to dispose of investments sooner than would
otherwise have occurred. These transactions may therefore affect the amount,
timing and character of the Fund's distributions to shareholders. The Fund will
take into account the special tax rules (including consideration of available
elections) applicable to options and futures transactions in order to seek to
minimize any potential adverse tax consequences.
46
<PAGE>
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, the Fund in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment 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, W-8BEN or other authorized
withholding certificate is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
STATE INCOME TAX INFORMATION
MASSACHUSETTS TAXES
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
To the extent that exempt-interest dividends paid to shareholders by the Fund
are derived from interest on tax-exempt bonds of the Commonwealth of
Massachusetts and its political subdivisions or Puerto Rico, the U.S. Virgin
Islands or Guam and are properly designated as such, these distributions will be
exempt from Massachusetts personal income tax. For Massachusetts personal income
tax purposes, dividends from the Fund's taxable net investment income,
tax-exempt income from obligations not described in the preceding sentence, and
short-term capital gains, if any, will generally be taxable as ordinary income,
whether received in cash or additional shares. However, any dividends that are
properly designated as attributable to interest the Fund receives on direct U.S.
Government obligations will not be subject to Massachusetts personal income tax.
Dividends properly designated as from net capital gain are generally taxable as
long-term capital gains, regardless of how long shareholders have held their
Fund shares. However, a portion of such a long-term capital gains distribution
will be exempt from Massachusetts personal 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
Fund, assuming that they hold their shares of the Fund as capital assets for
Massachusetts tax purposes. The applicable statutory provision does not address
47
<PAGE>
the Massachusetts tax treatment of dividends paid by the 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 Fund
anticipates that, to the extent practicable, it will provide the appropriate
information under the applicable DOR regulations or other administrative
positions.
CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1999, the annualized yields for the
Fund's Class A, Class B and Class C shares were 4.59%, 4.10% and 4.07% ,
respectively. The average annual total returns of the Fund's Class A shares for
the 1 year, 5 years and the life-of-fund periods ended August 31, 1999 were
- -5.32 %, 5.17% and 6.50%, respectively. The total returns for Class B shares for
the one year period and since inception on October 3, 1996 were -6.28 % and
- -3.89%, respectively. For Class C shares for the period from April 1, 1999 to
August 31, 1999, the average total returns were -4.10%. Class C shares commenced
operations on April 1, 1999; therefore, there are no other periods to report.
The Fund may advertise yield, where appropriate. The Fund's yield is computed by
dividing net investment income per share determined for a 30-day period by the
maximum offering price per share (which includes the full sales charge) on the
last day of the period, according to the following standard formula:
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-------
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the period
(NAV where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by dividing
that portion of the yield of the Fund which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield of
the Fund that is not tax-exempt. The tax equivalent yields for the Fund's Class
A and Class B shares at the combined maximum federal and Massachusetts 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, 1999 were 8.08% and
7.22%, respectively. The tax equivalent yield for the Fund's Class C shares at
the combined maximum federal and Massachusetts tax rates, which assume the full
deductibility of state income taxes on the federal tax return, for the period
ended August 31, 1999 was 7.17%.
48
<PAGE>
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 = \ / ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at the
beginning of the 1-year 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 each class, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC applied at the end of the period. This calculation assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Fund's sales charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B or Class C shares into account. Excluding the Fund's
sales charge on Class A shares and the CDSC on Class B or Class C shares from a
total return calculation produces a higher total return figure.
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
calculation. Where, in the case of a tax-exempt obligation with original issue
discount, the discount based on the current market value is less than the
then-remaining portion of original issue discount (market premium), the yield to
maturity is based on the market value.
From time to time, in reports and promotional literature, the Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed Income Fund
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 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.
49
<PAGE>
Performance rankings and ratings reported periodically in, and excerpts from,
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 also be utilized. The Fund's promotional and sales
literature may make reference to the Fund's "beta". Beta is a reflection of the
market related risk of the Fund by showing how responsive the Fund is to the
market.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
Brokerage Allocation
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates, and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market makers
reflect a "spread." Debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these transactions.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and, conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitment to allocate portfolio transactions upon any
prescribed basis. While the Adviser's officers will be primarily responsible for
the allocation of the Fund's brokerage business, the policies in this regard
must be consistent with the foregoing and will at all times be subject to review
by the Trustees. For the fiscal years ended August 31, 1997, 1998 and 1999, the
Fund paid negotiated brokerage commissions in the amount of $5,172, $2,413 and
$910, respectively.
50
<PAGE>
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 Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that 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, 1999, the
Fund did not pay commissions as compensation to any brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999,
John Hancock Distributors, Inc.) ("Signator" or Affiliated Broker"). Pursuant to
procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through the Affiliated Broker. During the fiscal years ending August 31, 1997,
1998 and 1999, the Fund did not execute any portfolio transactions with the
Affiliated Broker.
Signator may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated customers, except for accounts for which the Affiliated Broker
acts as clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser,
which is affiliated with the Affiliated Broker, has, as an investment adviser to
the Funds, the obligation to provide investment management services, which
includes elements of research and related investment skills, such research and
related skills will not be used by the Affiliated Broker as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transaction as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. Because of
this, client accounts in a particular style may sometimes not sell or acquire
securities as quickly or at the same prices as they might if each were managed
and traded individually.
For purchases of equity securities, when a complete order is not filled, a
partial allocation will be made to each account pro rata based on the order
size. For high demand issues (for example, initial public offerings), shares
will be allocated pro rata by account size as well as on the basis of account
objective, account size ( a small account's allocation may be increased to
provide it with a meaningful position), and the account's other holdings. In
addition, an account's allocation may be increased if that account's portfolio
manager was responsible for generating the investment idea or the portfolio
manager intends to buy more shares in the secondary market. For fixed income
accounts, generally securities will be allocated when appropriate among accounts
based on account size, except if the accounts have different objectives or if an
account is too small to get a meaningful allocation. For new issues, when a
complete order is not filled, a partial allocation will be made to each account
pro rata based on the order size. However, if a partial allocation is too small
to be meaningful, it may be reallocated based on such factors as account
objectives, duration benchmarks and credit and sector exposure. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the adviser may aggregate the securities
to be sold or purchased for the Fund with those to be sold or purchased for
other clients managed by it in order to obtain best execution.
51
<PAGE>
Transfer Agent Services
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Signature
Services an annual fee of $20.00 for each Class A shareholder account, $22.50
for each Class B shareholder account and $21.50 for each Class C shareholder
account. The Fund also pays certain out-of-pocket expenses and these expenses
are aggregated and charged to the Fund on the basis of their relative net asset
values.
Custody Of Portfolio
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and Investors Bank & Trust Company, 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 Fund are PricewaterhouseCoopers LLP, 160
Federal Street, Boston, Massachusetts 02110. PricewaterhouseCoopers LLP audits
and renders an opinion on the Fund's annual financial statements and reviews the
Fund's annual Federal income tax return.
52
<PAGE>
APPENDIX A
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of the fund's
risk profile in the prospectus.
A fund is permitted to utilize -- within limits established by the trustees --
certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that the Fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them with examples of related securities and
investment practices included in brackets. See the "Investment Objectives and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The Fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the Fund will earn income or
show a positive return over any period of time -- days, months or years.
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks. (e.g., futures and related options; securities and index
options, swaps, caps, floors, collars).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. Common to all debt securities.(e.g. borrowing; reverse repurchase
agreements, repurchase agreements, financial futures and options; securities and
index options, securities lending, non-investment grade debt securities, private
activity bonds, participation interests and structured securities, swaps, caps,
floors, collars).
Information risk The risk that key information about a security or market is
inaccurate or unavailable. Common to all municipal securities. (e.g.
non-investment grade debt securities, private activity bonds and participation
interests).
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values. (e.g.
financial futures and options; securities and index options, non-investment
grade debt securities, private activity bonds, participation interests,
structured securities and swaps, caps, floors and collars).
A-1
<PAGE>
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
borrowing; reverse repurchase agreements, when-issued securities and forward
commitments).
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that the
fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
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.
o Liquidity risk The risk that certain securities may be difficult or
impossible to sell at the time and the price that the seller would like.
The seller may have to lower the price, sell other securities instead, or
forego an investment opportunity, any of which could have a negative effect
on fund management or performance. (e.g. financial futures and options;
securities and index options, non-investment-grade debt securities,
restricted and illiquid securities, participation interests, swaps, caps,
floors, collars , structured securities).
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industry, sector of
the economy or the market as a whole. Common to all stocks and bonds and the
mutual funds that invest in them. (e.g. financial futures and options;
securities and index options, short-term trading, when-issued securities and
forward commitments, non-investment-grade debt securities, restricted and
illiquid securities, structured securities).
Natural event risk The risk of losses attributable to natural disasters, such as
earthquakes and similar events. (e.g. private activity bonds).
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments. (e.g. financial futures and options; securities and index options,
when-issued securities and forward commitments).
Political risk The risk of losses attributable to government or political
actions of any sort. (e.g. private activity bonds).
A-2
<PAGE>
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.(e.g. non-investment-grade debt
securities, Restricted and illiquid securities, participation interests,
structured securities, swaps, caps, floors, collars).
A-3
<PAGE>
APPENDIX B
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.
B-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.
B-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.
B-3
<PAGE>
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1+ Exceptionally strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues rated "F-1+"
B-4
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included in the Fund's 1999 Annual
Report to Shareholders for the year ended August 31, 1999; (filed electronically
on November 1, 1999, accession number 0001010521-99-000367) 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
Statement of Assets and Liabilities as of August 31, 1999.
Statement of Operations for the year ended August 31, 1999.
Statement of Change in Net Assets for the period ended August 31, 1999.
Financial Highlights for the period ended August 31, 1999.
Notes to Financial Statements.
Schedule of Investments as of August 31, 1999.
Report of Independent Accountants.
F-1
<PAGE>
JOHN HANCOCK TAX-EXEMPT SERIES
PART C.
OTHER INFORMATION
Item. 23. Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 24. Persons Controlled by or under Common Control with Registrant.
No person is directly or indirectly controlled by or under common control with
Registrant.
Item. 25. Indemnification.
Indemnification provisions relating to the Registrant's Trustees, officers,
employees and agents is set forth in Article VII of the Registrant's By Laws
included as Exhibit 2 herein.
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 John Hancock Mutual Life Insurance Company ("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 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 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 not to be entitled to indemnification.
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc. ("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 director, officer, employee or agent of the
C-1
<PAGE>
Corporation or is or was at any time since the inception of the Corporation
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 a person."
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Declaration of Trust and By-Laws of John
Hancock Funds, the Adviser, or the Insurance Company or otherwise, the
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, the 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 26. 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 Adviser,
reference is made to Form ADV (801-8124) filed under the Investment Advisers Act
of 1940, which is incorporated herein by reference.
Item 27. Principal Underwriters.
(a) John Hancock Funds acts as principal underwriter for the Registrant and also
serves as principal underwriter or distributor of shares for John Hancock Cash
Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John
Hancock Series Trust, John Hancock Tax-Free Bond Trust, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Sovereign Bond
Fund, John Hancock Tax-Exempt Series, John Hancock Strategic Series, John
Hancock World Fund, John Hancock Investment Trust, John Hancock Institutional
Series Trust, John Hancock Investment Trust II and John Hancock Investment Trust
III.
(b) The following table lists, for each director and officer of John Hancock
Funds, the information indicated.
C-2
<PAGE>
<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
Richard O. Hansen Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Osbert M. Hood Senior Vice President Senior Vice President
101 Huntington Avenue and and Chief Financial Officer
Boston, Massachusetts Chief Financial Officer
David A. King Director None
380 Stuart Street
Boston, Massachusetts
John A. Morin Vice President and Secretary Vice President
101 Huntington Avenue
Boston, Massachusetts
C-3
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
Susan S. Newton Vice President Vice President
101 Huntington Avenue and Secretary
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John 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
C-4
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
James V. Bowhers President None
101 Huntington avenue
Boston, Massachusetts
Maureen R. Ford Director None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Suite 950
Albuquerque, New Mexico
Kathleen M. Graveline Senior Vice President None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Peter F. Mawn Vice President None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Keith Hartstein Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Karen Walsh Vice President None
101 Huntington Avenue
Boston, Massachusetts
J. William Bennintende Vice President None
101 Huntington Avenue
Boston, Massachusetts
Gary Cronin Vice President None
101 Huntington Avenue
Boston, Massachusetts
Kristine Pancare Vice President None
101 Huntington Avenue
Boston, Massachusetts
Renee M. Humphrey Vice President None
6501 Americas Parkway
Suite 950
Albuquerque, New Mexico
</TABLE>
(c) None.
C-5
<PAGE>
Item 28. Location of Accounts and Records
The 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 29. Management Services
Not applicable.
Item 30. 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-6
<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 to Rule 485(b)
under the Securities Act of 1933 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 27th day of December,
1999.
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 J. Stokowski
- ------------------------ Vice President, Treasurer
James J. Stokowski and Chief Accounting Officer December 27, 1999
- ------------------------ Trustee
Stephen L. Brown
- ------------------------ 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-7
<PAGE>
Signature Title Date
--------- ----- ----
- ------------------------ Trustee
John A. Moore
- ------------------------ Trustee
Patti McGill Peterson*
- ------------------------ Trustee
John W. Pratt*
- ------------------------ Trustee
Richard S. Scipione*
*By: /s/Susan S. Newton December 27, 1999
------------------
Susan S. Newton
Attorney-in-Fact under
Powers of Attorney dated
May 21, 1996, January 1, 1999 and March 17, 1999.
</TABLE>
C-8
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee of John Hancock Capital Series, John Hancock
Declaration Trust, John Hancock Income Securities Trust, John Hancock Investment
Trust II, John Hancock Investment Trust III, John Hancock Investors Trust, John
Hancock Sovereign Bond Fund, John Hancock Special Equities Fund, John Hancock
Strategic Series, John Hancock Tax-Exempt Series Fund, and John Hancock World
Fund, each a Massachusetts business trust, does hereby severally constitute and
appoint Edward J. Boudreau, Jr., Susan S. Newton, and James J. Stokowksi, and
each acting singly, to be my true, sufficient and lawful attorneys, with full
power to each of them, and each acting singly, to sign for me, in my name and in
the capacity indicated below, any Registration Statement on Form N-1A and any
Registration Statement on Form N-14 to be filed by the Trust or the Corporation
under the Investment Company Act of 1940, as amended ( the "1940 Act"), and
under the Securities Act of 1933, as amended (the "1933 Act"), and any and all
amendments to said Registration Statements, with respect to the offering of
shares and any and all other documents and papers relating thereto, and
generally to do all such things in my name and on my behalf in the capacity
indicated to enable the Trust or Corporation to comply with the 1940 Act and the
1933 Act, and all requirements of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
said attorneys or each of them to any such Registration Statements and any and
all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 1st day of January, 1999.
/s/Dennis S. Aronowitz /s/Richard A. Farrell
- ---------------------- ---------------------
Dennis S. Aronowitz, Trustee Richard A. Farrell, Trustee
/s/Richard P. Chapman, Jr. /s/Gail D. Fosler
- -------------------------- -----------------
Richard P. Chapman, Jr., Trustee Gail D. Fosler, Trustee
/s/William J. Cosgrove /s/William F. Glavin
- ---------------------- --------------------
William J. Cosgrove, Trustee William F. Glavin, Truste
/s/Douglas M. Costle /s/John A. Moore
- -------------------- ----------------
Douglas M. Costle, Trustee John A. Moore, Trustee
/s/Leland O. Erdahl /s/Patti McGill Peterson
- ------------------- ------------------------
Leland O. Erdahl, Trustee Patti McGill Peterson, Trustee
/s/John W. Pratt
- ----------------
John W. Pratt, Trustee
s:corpsecty:trustees\pwrattypanel A
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee of John Hancock Bank and Thrift Opportunity
Fund, John Hancock Bond Trust, John Hancock California Tax-Free Income Fund,
John Hancock Capital Series, John Hancock Current Interest, John Hancock
Declaration Trust, John Hancock Income Securities Trust, John Hancock
Institutional Series Trust, John Hancock Investment Trust, John Hancock
Investment Trust II, John Hancock Investment Trust III, John Hancock Investors
Trust, John Hancock Patriot Global Dividend Fund, John Hancock Patriot Preferred
Dividend Fund, John Hancock Patriot Premium Dividend Fund I, John Hancock
Patriot Premium Dividend Fund II, John Hancock Patriot Select Dividend Trust,
John Hancock Series Trust, John Hancock Sovereign Bond Fund, John Hancock
Special Equities Fund, John Hancock Strategic Series, John Hancock Tax-Exempt
Series Fund, John Hancock Tax-Free Bond Trust, and John Hancock World Fund,
(each a "Trust"), and Director of John Hancock Cash Reserve, Inc., (a
"Corporation") does hereby severally constitute and appoint Susan S. Newton, and
James J. Stokowski, and each acting singly, to be my true, sufficient and lawful
attorneys, with full power to each of them, and each acting singly, to sign for
me, in my name and in the capacity indicated below, any Registration Statement
on Form N-1A and any Registration Statement on Form N-14 to be filed by the
Trust or the Corporation under the Investment Company Act of 1940, as amended (
the "1940 Act"), and under the Securities Act of 1933, as amended (the "1933
Act"), and any and all amendments to said Registration Statements, with respect
to the offering of shares and any and all other documents and papers relating
thereto, and generally to do all such things in my name and on my behalf in the
capacity indicated to enable the Trust or Corporation to comply with the 1940
Act and the 1933 Act, and all requirements of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by said attorneys or each of them to any such Registration Statements and
any and all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 1st day of January, 1999.
/s/Edward J. Boudreau, Jr.
- --------------------------
Edward J. Boudreau, Jr., Trustee
s:corpsecty:trustees\pwrtyattypanelsAB EJB
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Trustee of John Hancock Bank and Thrift Opportunity
Fund, John Hancock Bond Trust, John Hancock California Tax-Free Income Fund,
John Hancock Capital Series, John Hancock Current Interest, John Hancock
Declaration Trust, John Hancock Income Securities Trust, John Hancock
Institutional Series Trust, John Hancock Investment Trust, John Hancock
Investment Trust II, John Hancock Investment Trust III, John Hancock Investors
Trust, John Hancock Patriot Global Dividend Fund, John Hancock Patriot Preferred
Dividend Fund, John Hancock Patriot Premium Dividend Fund I, John Hancock
Patriot Premium Dividend Fund II, John Hancock Patriot Select Dividend Trust,
John Hancock Series Trust, John Hancock Sovereign Bond Fund, John Hancock
Special Equities Fund, John Hancock Strategic Series, John Hancock Tax-Exempt
Series Fund, John Hancock Tax-Free Bond Trust, and John Hancock World Fund,
(each a "Trust"), does hereby severally constitute and appoint Edward J.
Boudreau, Jr., Susan S. Newton, and James J. Stokowski, and each acting singly,
to be my true, sufficient and lawful attorneys, with full power to each of them,
and each acting singly, to sign for me, in my name and in the capacity indicated
below, any Registration Statement on Form N-1A and any Registration Statement on
Form N-14 to be filed by the Trust or the Corporation under the Investment
Company Act of 1940, as amended ( the "1940 Act"), and under the Securities Act
of 1933, as amended (the "1933 Act"), and any and all amendments to said
Registration Statements, with respect to the offering of shares and any and all
other documents and papers relating thereto, and generally to do all such things
in my name and on my behalf in the capacity indicated to enable the Trust or
Corporation to comply with the 1940 Act and the 1933 Act, and all requirements
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by said attorneys or each of them to
any such Registration Statements and any and all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 17th day of March, 1999.
/s/Stephen L Brown
------------------
Stephen L. Brown, Trustee
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee of John Hancock Bank and Thrift Opportunity
Fund, John Hancock Bond Trust, John Hancock California Tax-Free Income Fund,
John Hancock Capital Series, John Hancock Current Interest, John Hancock
Declaration Trust, John Hancock Income Securities Trust, John Hancock
Institutional Series Trust, John Hancock Investment Trust, John Hancock
Investment Trust II, John Hancock Investment Trust III, John Hancock Investors
Trust, John Hancock Patriot Global Dividend Fund, John Hancock Patriot Preferred
Dividend Fund, John Hancock Patriot Premium Dividend Fund I, John Hancock
Patriot Premium Dividend Fund II, John Hancock Patriot Select Dividend Trust,
John Hancock Series Trust, John Hancock Sovereign Bond Fund, John Hancock
Special Equities Fund, John Hancock Strategic Series, John Hancock Tax-Exempt
Series Fund, John Hancock Tax-Free Bond Trust, and John Hancock World Fund,
(each a "Trust"), and Director of John Hancock Cash Reserve, Inc., (a
"Corporation") does hereby severally constitute and appoint Edward J. Boudreau,
Jr., Susan S. Newton, and James J. Stokowski, and each acting singly, to be my
true, sufficient and lawful attorneys, with full power to each of them, and each
acting singly, to sign for me, in my name and in the capacity indicated below,
any Registration Statement on Form N-1A and any Registration Statement on Form
N-14 to be filed by the Trust or the Corporation under the Investment Company
Act of 1940, as amended ( the "1940 Act"), and under the Securities Act of 1933,
as amended (the "1933 Act"), and any and all amendments to said Registration
Statements, with respect to the offering of shares and any and all other
documents and papers relating thereto, and generally to do all such things in my
name and on my behalf in the capacity indicated to enable the Trust or
Corporation to comply with the 1940 Act and the 1933 Act, and all requirements
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by said attorneys or each of them to
any such Registration Statements and any and all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 1st day of January, 1999.
/s/Anne C. Hodsdon
- ------------------
Anne C. Hodsdon, Trustee
/s/Richard S. Scipione
- ----------------------
Richard S. Scipione, Trustee
s:corpsecty:trustees\pwrattypanelsAB
<PAGE>
John Hancock Tax-Exempt Series Trust
INDEX TO EXHIBITS
99.(a) Articles of Incorporation. Amended and Restated Declaration of Trust
dated 7/1/96.**
99.(a).1 Establishment and Designation of Class A Shares and Class B Shares of
Beneficial Interest dated July 1, 1996.**
99.(a).2 Amendment of Section 5.11 and Establishment and Designation of Class C
shares of Beneficial Interest of Massachusetts Tax-Free Income Fund
and New York Tax-Free Income Fund dated December 8 1998.+
99.(b) By-Laws. Amended and Restated By-Laws dated December 3, 1996.**
99.(c) Instruments Defining Rights of Security Holders. See Exhibit 99.(a) and
99.(b).
99.(d) Investment Advisory Contracts. Investment Management Contract between
the New York Tax-Free Income Fund and John Hancock Advisers, Inc. dated
July 1, 1996.**
99.(d).1 Investment Management Contract between Massachusetts Tax-Free Income
Fund and John Hancock Advisers, Inc. dated July 1, 1996.**
99.(e) Underwriting Contracts. Distribution Agreement between John Hancock
Broker Distribution Services, Inc. dated August 1, 1991.*
99.(e).1 Form of Soliciting Dealer Agreement between John Hancock Broker
Distribution, Inc. and Selected Dealers.*****
99.(f) Bonus or Profit Sharing Contracts. Not Applicable.
99.(g) Custodian Agreements. Master Custodian Agreements between John Hancock
Mutual Funds and State Street Bank and Trust Company and Investors
Bank and Trust Company dated March 9, 1999.+
99.(h) Other Material Contracts. Amended and Restated Master Transfer Agency
and Service Agreement between John Hancock Funds and John Hancock
Signature Services, Inc. dated June 1, 1998.****
99.(i) Legal Opinion.+
99.(j) Other Opinions. Auditor's Consent.+
99.(k) Omitted Financial Statements. Not Applicable.
99.(l) Initial Capital Agreements. Subscription agreement between Registrant
and John Hancock Advisers, Inc.*
99.(m) Rule 12b-1 Plan. 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.(m).1 Rule 12b-1 Plan. Amended and Restated Distribution Plan for Class B
shares between John Hancock TaxExempt Series Fund and John Hancock
Funds, Inc. dated July 1, 1996.**
99.(m).2 Rule 12-b1 Plan. Amended and Restated Distribution Plan for Class C
shares between John Hancock Massachusetts Tax-Free Income Fund and John
Hancock New York Tax-Free Income Fund and John Hancock Funds, Inc.
dated April 1, 1999.+
99.(n) Financial Data Schedule. Not Applicable
99.(o) Rule 18f-3 Plan. John Hancock Funds Class A and Class B Multiple Class
Plan Pursuant to Rule 18f-3 dated May 1, 1998.****
99.(o).1 John Hancock Funds Class A, Class B and Class C amended and restated
Multiple Class Plan pursuant to Rule 18f-3 for John Hancock Tax Exempt
Series dated April 1, 1999.******
* Previously filed electronically with post-effective amendment no. 10,
file nos. 811-5079 and 33-12947 on December 25, 1995, accession number
0000950156-95-000881.
** Previously filed electronically with post-effective amendment no. 12
file nos. 811-5079 and 33- 12947 on December 20, 1996, accession number
0001010521-96-000226.
*** Previously filed electronically with post-effective amendment no. 13,
file nos. 811-5079 and 33-12947 on December 23, 1997, accession number
0001010521-97-000441.
**** Previously filed electronically with post-effective amendment no. 14,
file nos. 811-5079 and 33-12947 on October 13, 1998, accession nu,ber
0001010521-98-000347.
***** Previously filed electronically with post-effective amendment no. 15,
file nos. 811-5079 and 33-12947 on December 28, 1998, accession number
0001010521-98-000404.
****** Previously filed electronically with post-effective amendment no. 16,
file nos. 811-5079 and 33-12947 on January 25, 1999, accession number
0001010521-99-000057.
+ Filed herewith.
JOHN HANCOCK TAX-EXEMPT SERIES FUND
John Hancock Massachusetts Tax-Free Income Fund
John Hancock New York Tax-Free Income Fund
Amendment of Section 5.11 and
Establishment and Designation of Class C Shares
of Beneficial Interest of
John Hancock Massachusetts Tax-Free Income Fund, and
John Hancock New York Tax-Free Income Fund,
each a Series of John Hancock Tax-Exempt Series Fund
Amendment of Section 5.11
-------------------------
The undersigned, being a majority of the Trustees of John Hancock
Tax-Exempt Series Fund, a Massachusetts business trust (the "Trust"), acting
pursuant to Section 8.3 of the Amended and Restated Declaration of Trust dated
July 1, 1996, as amended from time to time, do hereby amend Section 5.11,
effective April 1, 1999, as follows:
1. Section 5.11 (a) shall be deleted and replaced with the
following:
Without limiting the authority of the Trustees set forth in
Section 5.1 to establish and designate any further Series or
Classes, the Trustees hereby establish the following Series,
each of which consists of Class A Shares, Class B Shares, and
Class C Shares: John Hancock Massachusetts Tax-Free Income
Fund, and John Hancock New York Tax-Free Income Fund, (the
"Existing Series").
Establishment and Designation of Class C Shares
-----------------------------------------------
The undersigned, being a majority of the Trustees of John Hancock
Tax-Exempt Series Fund, a Massachusetts business trust (the "Trust"), acting
pursuant to Sections 5.1 and 5.11 of the Amended and Restated Declaration of
Trust dated July 1, 1996, as amended from time to time (the "Declaration of
Trust"), do hereby establish and designate an additional class of shares of John
Hancock Massachusetts Tax-Free Income Fund, and John Hancock New York Tax-Free
Income Fund (the "Funds"), effective April 1, 1999, as follows:
1. The additional class of Shares of the Funds established and designated
hereby is "Class C Shares".
2. Class C Shares shall be entitled to all of the rights and preferences
accorded to Shares under the Declaration of Trust.
<PAGE>
3. The purchase price of Class C Shares, the method of determining the net
asset value of Class C Shares, and the relative dividend rights of
holders of Class C Shares shall be established by the Trustees of the
Trust in accordance with the provisions of the Declaration of Trust and
shall be as set forth in the Prospectus and Statement of Additional
Information of the Funds included in the Trust's Registration
Statement, as amended from time to time, under the Securities Act of
1933, as amended and/or the Investment Company Act of 1940, as amended.
The Declaration of Trust is hereby amended to the extent necessary to
reflect the amendment of Section 5.11 and the establishment of an additional
class of Shares, effective April 1, 1999.
Capitalized terms not otherwise defined herein shall have the meanings
set forth in the Declaration of Trust.
IN WITNESS WHEREOF, the undersigned have executed this instrument on
the 8th day of December 1998.
/s/Dennis S. Aronowitz /s/William F. Glavin
- ---------------------- --------------------
Dennis S. Aronowitz William F. Glavin
/s/Edward J. Boudreau, Jr. /s/Anne C. Hodsdon
- -------------------------- ------------------
Edward J. Boudreau, Jr. Anne C. Hodsdon
/s/Richard P. Chapman, Jr. /s/John A. Moore
- -------------------------- ----------------
Richard P. Chapman, Jr. John A. Moore
/s/William J. Cosgrove /s/Patti McGill Peterson
- ---------------------- ------------------------
William J. Cosgrove Patti McGill Peterson
/s/Douglas M. Costle /s/John W. Pratt
- -------------------- ----------------
Douglas M. Costle John W. Pratt
/s/Leland O. Erdahl /s/Richard S. Scipione
- ------------------- ----------------------
Leland O. Erdahl Richard S. Scipione
- ------------------------ ------------------------
Richard A. Farrell Edward J. Spellman
- ------------------------
Gail D. Fosler
<PAGE>
The Declaration of Trust, a copy of which, together with all amendments
thereto, is on file in the office of the Secretary of State of The Commonwealth
of Massachusetts, provides that no Trustee, officer, employee or agent of the
Trust or any Series thereof shall be subject to any personal liability
whatsoever to any Person, other than to the Trust or its shareholders, in
connection with Trust Property or the affairs of the Trust, save only that
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard of his/her duties with respect to such Person; and all such Persons
shall look solely to the Trust Property, or to the Trust Property of one or more
specific Series of the Trust if the claim arises from the conduct of such
Trustee, officer, employee or agent with respect to only such Series, for
satisfaction of claims of any nature arising in connection with the affairs of
the Trust.
COMMONWEALTH OF MASSACHUSETTS )
)ss
COUNTY OF SUFFOLK )
Then personally appeared the above-named Dennis S. Aronowitz, Edward J.
Boudreau, Jr., Richard P. Chapman, Jr., William J. Cosgrove, Douglas M. Costle,
Leland O. Erdahl, Richard A. Farrell, William F. Glavin, Anne C. Hodsdon, John
A. Moore, Patti McGill Peterson, John W. Pratt, and Richard S. Scipione, who
acknowledged the foregoing instrument to be his or her free act and deed, before
me, this 8th day of December, 1998.
/s/Ann Marie White
------------------
Notary Public
My Commission Expires: 10/20/00
s:\dectrust\amendmts\taxexser\establishclassc.doc
MASTER CUSTODIAN AGREEMENT
between
JOHN HANCOCK MUTUAL FUNDS
and
INVESTORS BANK & TRUST COMPANY
Amended and Restated
March 9, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
1. Definitions.............................................................1-3
2. Employment of Custodian and Property to be held by it.....................3
3. The Custodian as a Foreign Custody Manager................................3
A. Definitions......................................................3-4
B. Delegation to the Custodian as Foreign Custody Manager.............4
C. Countries Covered..................................................4
D. Scope of Delegated Responsibilities..............................5-7
E. Standard of Care as Foreign Custody Manager of the Fund............7
F. Reporting Requirements.............................................7
G. Representations with respect to Rule 17f-5.........................7
H. Effective Date and Termination of the Custodian as Foreign.......7-8
Custody Manager
I. Withdrawal of Custodian as Foreign Custody Manager with............8
Respect to Designated Countries and with Respect to
Eligible Foreign Custodians
J. Guidelines for the Exercise of Delegated Authority and ..........8-9
Provision of Information Regarding Country Risk
K. Most Favored Client.............................................9-10
L. Direction as to Eligible Foreign Custodians.......................10
4. Duties of the Custodian with Respect toProperty of the Fund..............10
A. Safekeeping and Holding of Property...............................10
B. Delivery of Securities.........................................10-13
C. Registration of Securities........................................13
D. Bank Accounts..................................................13-14
i
<PAGE>
E. Payments for Shares of the Fund...................................14
F. Investment and Availability of Federal Funds......................14
G. Collections....................................................14-15
H. Payment of Fund Moneys.........................................15-16
I. Liability for Payment in Advance of Receipt of.................16-17
Securities Purchased
J. Payments for Repurchases of Redemptions of Shares of the Fund.....17
K. Appointment of Agents by the Custodian.........................17-18
L. Deposit of Fund Portfolio Securities in Securities Systems.....18-19
M. Deposit of Fund Commercial Paper in an Approved................19-22
Book-Entry System for Commercial Paper
N. Segregated Account................................................22
O. Ownership Certificates for Tax Purposes...........................22
P. Proxies...........................................................22
Q. Communications Relating to Fund Portfolio Securities...........22-23
R. Exercise of Rights; Tender Offers................................23
S. Depository Receipts............................................23-24
T. Interest Bearing Call or Time Deposits............................24
U. Options, Futures Contracts and Foreign Currency Transactions...24-25
V. Actions Permitted Without Express Authority.......................25
5. Duties of Bank with Respect to Books of Account and......................26
Calculations of Net Asset Value
6. Records and Miscellaneous Duties......................................26-27
7. Opinion of Fund`s Independent Public Accountants.........................27
ii
<PAGE>
8. Compensation and Expenses of Bank........................................27
9. Responsibility of Bank................................................27-28
10. Persons Having Access to Assets of the Fund...........................28-29
11. Effective Period, Termination and Amendment;..........................29-30
Successor Custodian
12. Interpretive and Additional Provisions...................................30
13. Certification as to Authorized Officers..................................30
14. Notices..................................................................30
15. Massachusetts Law to Apply; Limitations on Liability..................30-31
16. Adoption of the Agreement by the Fund....................................31
iii
<PAGE>
MASTER CUSTODIAN AGREEMENT
This Agreement is made as of December 15, 1992 as amended and restated
March 9, 1999 between each investment company advised by John Hancock Advisers,
Inc. which has adopted this Agreement in the manner provided herein and
Investors Bank & Trust Company (hereinafter called "Bank", "Custodian" and
"Agent"), a trust company established under the laws of Massachusetts with a
principal place of business in Boston, Massachusetts.
Whereas, each such investment company is registered under the Investment
Company Act of 1940 and has appointed the Bank to act as Custodian of its
property and to perform certain duties as its Agent, as more fully hereinafter
set forth; and
Whereas, the Bank is willing and able to act as each such investment
company's Custodian and Agent, subject to and in accordance with the provisions
hereof;
Now, therefore, in consideration of the premises and of the mutual
covenants and agreements herein contained, each such investment company and the
Bank agree as follows:
1. Definitions
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
(a) "Fund" shall mean the investment company which has adopted this
Agreement and is listed on Appendix A hereto. If the Fund is a Massachusetts
business trust or Maryland corporation, it may in the future establish and
designate other separate and distinct series of shares, each of which may be
called a "portfolio"; in such case, the term "Fund" shall also refer to each
such separate series or portfolio.
(b) "Board" shall mean the board of directors/trustees/managing general
partners/director general partners of the Fund, as the case may be.
(c) "The Depository Trust Company", a clearing agency registered with
the Securities and Exchange Commission under Section 17A of the Securities
Exchange Act of 1934 which acts as a securities depository and which has been
specifically approved as a securities depository for the Fund by the Board.
(d) "Authorized Officer", shall mean any of the following officers of
the Fund: The Chairman of the Board of Trustees, the President, a Vice
President, the Secretary, the Treasurer or Assistant Secretary or Assistant
Treasurer, or any other officer of the Fund duly authorized to sign by
appropriate resolution of the Board of Trustees of the Trust.
(e) "Participants Trust Company", a clearing agency registered with the
Securities and Exchange Commission under Section 17A of the Securities Exchange
Act of 1934 which acts as a securities depository and which has been
specifically approved as a securities depository for the Fund by the Board.
1
<PAGE>
(f) "Approved Clearing Agency" shall mean any other domestic clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934 which acts as a securities depository but
only if the Custodian has received a certified copy of a vote of the Board
approving such clearing agency as a securities depository for the Fund.
(g) "Federal Book-Entry System" shall mean the book-entry system
referred to in Rule 17f-4(b) under the Investment Company Act of 1940 for United
States and federal agency securities (i.e., as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, and the book-entry
regulations of federal agencies substantially in the form of Subpart O).
(h) "Approved Book-Entry System for Commercial Paper" shall mean a
system maintained by the Custodian or by a subcustodian employed pursuant to
Section 2 hereof for the holding of commercial paper in book-entry form but only
if the Custodian has received a certified copy of a vote of the Board approving
the participation by the Fund in such system.
(i) The Custodian shall be deemed to have received "proper instructions"
in respect of any of the matters referred to in this Agreement upon receipt of
written or facsimile instructions signed by such one or more person or persons
as the Board shall have from time to time authorized to give the particular
class of instructions in question. Electronic instructions for the purchase and
sale of securities which are transmitted by John Hancock Advisers, Inc. (the
"Adviser") to the Custodian shall be deemed to be proper instructions; the Fund
shall cause all such instructions to be confirmed in writing. Different persons
may be authorized to give instructions for different purposes. A certified copy
of a vote of the Board may be received and accepted by the Custodian as
conclusive evidence of the authority of any such person to act and may be
considered as in full force and effect until receipt of written notice to the
contrary. Such instructions may be general or specific in terms and, where
appropriate, may be standing instructions. Unless the vote delegating authority
to any person or persons to give a particular class of instructions specifically
requires that the approval of any person, persons or committee shall first have
been obtained before the Custodian may act on instructions of that class, the
Custodian shall be under no obligation to question the right of the person or
persons giving such instructions in so doing. Oral instructions will be
considered proper instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be confirmed
in writing. The Fund authorizes
2
<PAGE>
the Custodian to tape record any and all telephonic or other oral instructions
given to the Custodian. "Proper instructions" may also include communications
effected directly between electromechanical or electronic devices provided that
the President and Treasurer of the Fund and the Custodian are satisfied that
such procedures afford adequate safeguards for the Fund's assets. In performing
its duties generally, and more particularly in connection with the purchase,
sale and exchange of securities made by or for the Fund, the Custodian may take
cognizance of the provisions of the governing documents and registration
statement of the Fund as the same may from time to time be in effect (and votes,
resolutions or proceedings of the shareholders or the Board), but, nevertheless,
except as otherwise expressly provided herein, the Custodian may assume unless
and until notified in writing to the contrary that so-called proper instructions
received by it are not in conflict with or in any way contrary to any provisions
of such governing documents and registration statement, or votes, resolutions or
proceedings of the shareholders or the Board.
2. Employment of Custodian and Property to be Held by It
The Fund hereby appoints and employs the Bank as its Custodian and Agent
in accordance with and subject to the provisions hereof, and the Bank hereby
accepts such appointment and employment. The Fund agrees to deliver to the
Custodian all securities, participation interests, cash and other assets owned
by it, and all payments of income, payments of principal and capital
distributions and adjustments received by it with respect to all securities and
participation interests owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares ("Shares") of the
Fund as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held by the Fund and not delivered by
the Fund to the Custodian. The Fund will also deliver to the Bank from time to
time copies of its currently effective charter (or declaration of trust or
partnership agreement, as the case may be), by-laws, prospectus, statement of
additional information and distribution agreement with its principal
underwriter, together with such resolutions, votes and other proceedings of the
Fund as may be necessary for or convenient to the Bank in the performance of its
duties hereunder.
The Custodian may from time to time employ one or more subcustodians to
perform such acts and services upon such terms and conditions as shall be
approved from time to time by the Board. Any such subcustodian so employed by
the Custodian shall be deemed to be the agent of the Custodian, and the
Custodian shall remain primarily responsible for the securities, participation
interests, moneys and other property of the Fund held by such subcustodian. For
the purposes of this Agreement, any property of the Fund held by any such
subcustodian (domestic or foreign) shall be deemed to be held by the Custodian
under the terms of this Agreement.
3. The Custodian as a Foreign Custody Manager
A. Definitions Capitalized terms in this Article 3 shall have the
following meanings:
(a) "Country risk" means all factors reasonably related to
the systemic risk of holding Foreign Assets in a
particular country including, but not limited to, a
country's political environment; economic and financial
infrastructure (including financial institutions such as
any Mandatory Securities Depositories operating in the
country); prevailing custody and settlement practices; and
laws and regulations applicable to the safekeeping and
recovery of Foreign Assets held in custody in that
country.
3
<PAGE>
(b) "Eligible Foreign Custodian" has the meaning set forth in section
(a)(1) of Rule 17f-5 and also includes a U.S. Bank.
(c) "Foreign Assets" means any of the Fund's investments (including foreign
currencies) for which the primary market is outside the United States and
cash and cash equivalents as are reasonably necessary to effect the Fund's
transactions in these investments.
(d) "Foreign Custody Manager" has the meaning set forth in section (a)(2)
of Rule 17f-5; it is a Fund's Board of Directors or any person serving as
the Board's delegate under sections (b) or (d) of Rule 17f-5.
(e) "Mandatory Securities Depository" means a Securities Depository the use
of which is mandatory (i) by law or regulation; (ii) because securities
cannot be withdrawn from the depository; (iii) because maintaining
securities outside the Securities Depository would impair the liquidity of
the securities because settlement within the depository is mandatory and
the period of time required to deposit securities is longer than the
settlement period or where particular classes of transactions, such as
large trades or turn-around trades, are not available if the securities are
held in physical form; or (iv) because maintaining securities outside of
the Securities Depository is not consistent with prevailing custodial or
market practices generally accepted by institutional investors.
(f) "Securities Depository" has the same meaning set forth in section
(a)(6) of Rule 17f-5: it is a system for the central handling of securities
where all securities are of a particular class or series of any issuer
deposited within the system are treated as fungible and may be transferred
or pledged by bookkeeping entry without physical delivery of the
securities.
(g) "U.S. Bank" means a bank which qualifies to serve as a custodian of
assets of investment companies under ss.17(f) of the Investment Company Act
of 1940, as amended.
B. Delegation to the Custodian as Foreign Custody Manager Each Fund,
by resolution adopted by its Board, hereby appoints the Custodian
as the Foreign Custody Manager of the Fund and delegates to the
Custodian, the responsibilities set forth in this Article 3 with
respect to Foreign Assets held outside the United States, and the
Custodian hereby accepts this delegation.
C. Countries Covered The Foreign Custody Manager shall be responsible
for performing the delegated responsibilities defined below only
with respect to the countries listed on Schedule A, which may be
amended from time to time by the Foreign Custody Manager.
Mandatory Securities Depositories are listed on Schedule B, which
may be amended from time to time by the Foreign Custody Manager.
Schedules A and B may also be amended in accordance with
subsection F of Article 3.
4
<PAGE>
D. Scope of Delegated Responsibilities
1) Selection of Eligible Foreign Custodians Subject to the
provisions of this Article 3 and Rule 17f-5 (and any other
applicable law), the Foreign Custody Manager may place and
maintain the Foreign Assets in the care of an Eligible
Foreign Custodian selected by the Foreign Custody Manager in
each country listed on Schedule A, as amended from time to
time. In addition, the Foreign Custody Manager shall provide
the Fund with all requisite forms and documentation to open
an account in any country listed on Schedule A as requested
by any Authorized Officer and shall assist the Fund with the
filing and processing of these forms and documents.
Execution of this amended and restated Agreement by the Fund
shall be deemed to be a Proper Instruction to open an
account, or to place or maintain Foreign Assets in each
country listed on Schedule A.
In performing its delegated responsibilities as Foreign
Custody Manager to place or maintain Foreign Assets with an
Eligible Foreign Custodian, the Foreign Custody Manager
shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to
custodians in the country in which the Foreign Assets will
be held by that Eligible Foreign Custodian, after
considering all factors relevant to the safekeeping of those
assets. These factors include, without limitation:
(i) the Eligible Foreign Custodian's practices, procedures
and internal controls, including but not limited to, the
physical protections available for certificated securities
(if applicable), its methods of keeping custodial records
and its security and data protection practices;
(ii) whether the Eligible Foreign Custodian has the
requisite financial strength to provide reasonable care for
Foreign Assets;
(iii) the Eligible Foreign Custodian's general reputation
and standing and, in the case of any Securities Depository,
the Securities Depository's operating history and the number
of participants; and
(iv) whether the Fund will have jurisdiction over and be
able to enforce judgments against the Eligible Foreign
Custodian, such as by virtue of the existence of any offices
of the Eligible Foreign Custodian in the United States or
the Eligible Foreign Custodian's consent to service of
process in the United States.
2) Contracts With Eligible Foreign Custodians For each Eligible
Foreign Custodian selected by the Foreign Custody Manager,
the Foreign Custody Manager shall (or, in the case of a
Securities Depository which is not a Mandatory Securities
Depository, may under the rules or established practices or
procedures of the Securities Depository) enter into a
written
5
<PAGE>
contract governing the Fund's foreign custody
arrangements with the Eligible Foreign Custodian. The
Foreign Custody Manager shall determine that each contract
will provide reasonable care for the Foreign Assets held by
that Eligible Foreign Custodian based on the standards
specified in paragraph 1 of subsection D of Article 3 of
this Agreement. Each contract shall include provisions that
provide:
(i) for indemnification or insurance arrangements (or any
combination of the foregoing) so that the Fund will be
adequately protected against the risk of loss of the
Foreign Assets held in accordance with the contract;
(ii) that the Foreign Assets will not be subject to any
right, security interest, lien or claim of any kind in
favor of the Eligible Foreign Custodian or its creditors
except a claim of payment for their safe custody or
administration or, in the case of cash deposits, liens or
rights in favor of creditors of the Eligible Foreign
Custodian arising under bankruptcy, insolvency or similar
laws;
(iii) that beneficial ownership of the Foreign Assets will
be freely transferable without the payment of money or
value other than for safe custody or administration;
(iv) that adequate records will be maintained identifying
the Foreign Assets as belonging to the Fund or as being
held by a third party for the benefit of the Fund;
(v) that the Fund's independent public accountants will be
given access to those records or confirmation of the
contents of those records; and
(vi) that the Fund will receive periodic reports with
respect to the safekeeping of the Foreign Assets,
including, but not limited to, notification of any
transfer of the Foreign Assets to or from the Fund's
account or a third party account containing the Foreign
Assets held for the benefit of the Fund, or, in lieu of
any or all of the provisions set forth in (i) through (vi)
above, such other provisions that the Foreign Custody
Manager determines will provide, in their entirety, the
same or greater level of care and protection for the
Foreign Assets as the provisions set forth in (i) through
(vi) above in their entirety.
3) Monitoring In each case in which the Foreign Custody
Manager maintains Foreign Assets with an Eligible Foreign
Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to
monitor at reasonable intervals the initial and continued
appropriateness of (i) maintaining the Foreign Assets with
the Eligible Foreign Custodian and (ii) the contract
governing the custody arrangements established by the
Foreign Custody Manager with the Eligible Foreign
Custodian. The Foreign Custody Manager shall consider all
factors and criteria set forth in subparagraphs 1 and 2 of
subsection D of Article 3 of this Agreement.
6
<PAGE>
E. Standard of Care as Foreign Custody Manager of the Fund In
performing the responsibilities delegated to it, the Foreign
Custody Manager agrees to exercise reasonable care, prudence and
diligence as a person having responsibility for the safekeeping of
assets of management investment companies registered under the
Investment Company Act of 1940, as amended, would exercise. The
Foreign Custody Manager agrees to notify immediately the Adviser
and the Board if, at any time, the Foreign Custody Manager
believes it cannot perform, in accordance with the foregoing
standard of care, its duties hereunder generally or with respect
to any country specified in Schedule A.
F. Reporting Requirements The Foreign Custody Manager shall list on
Schedule A the Eligible Foreign Custodians selected by the Foreign
Custody Manager to maintain the Fund's assets. The Foreign Custody
Manager shall report the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of the Foreign Assets
with another Eligible Foreign Custodian by providing to the
Adviser an amended Schedule A promptly. The Foreign Custody
Manager shall make written reports notifying the Adviser and the
Board of any other material change in the foreign custody
arrangements of the Fund described in this Article 3. Amended
Schedules A or B and material change reports shall be provided to
the Board quarterly, provided that, if the Foreign Custody Manager
or the Adviser determines that any matter should be reported
sooner, the Foreign Custody Manager shall promptly, following the
occurrence of the event, direct the report to the Fund's Secretary
for forwarding to the Board. At least annually, the Foreign
Custody Manager shall provide the Adviser and the Board a
written statement enabling the Board to determine that it is
reasonable to rely on the Foreign Custody Manager to perform its
delegated duties under this Article 3 and that the foreign custody
arrangements delegated to the Foreign Custody Manager continue to
meet the requirements of Rule 17f-5 under the Investment Company
Act of 1940, as amended. The Foreign Custody Manager will also
provide monthly reports on each Eligible Foreign Custodian listing
all holdings and current market values.
G. Representations with respect to Rule 17f-5 The Foreign Custody
Manager represents to the Fund that it is a U.S. Bank as defined
in section (a)(7) of Rule 17f-5.
The Fund represents to the Custodian that the Board has determined
that it is reasonable for the Board to rely on the Custodian to
perform the responsibilities delegated pursuant to this Article as
the Foreign Custody Manager of the Fund.
H. Effective Date and Termination of the Custodian as Foreign Custody
Manager The Board's delegation to the Custodian as Foreign Custody
Manager of the Fund shall be effective as of the date of execution
of this amended and restated Agreement and shall remain in effect
until terminated at any time, without penalty, by written notice
from the terminating party to the non-terminating party.
Termination will become effective sixty days after receipt by the
non-terminating party of the notice.
7
<PAGE>
I. Withdrawal of Custodian as Foreign Custody Manager with respect to
Designated Countries and with respect to Eligible Foreign
Custodians Following the receipt of Proper Instructions directing
the Foreign Custody Manager to close the account of the Fund with
the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country and to remove that country from
Schedule A, the delegation by the Board to the Custodian as
Foreign Custody Manager for that country shall be deemed to have
been withdrawn with respect to that country and the Custodian
shall cease to be the Foreign Custody Manager of the Fund with
respect to that country after settlement of all pending trades.
The Foreign Custody Manager may withdraw its acceptance of
delegated responsibilities with respect to a country listed on
Schedule A upon written notice to the Fund in accordance with
subsection F. Sixty days (or other period agreed to by the parties
in writing) after receipt of any notice by the Fund, the Custodian
shall have no further responsibility as Foreign Custody Manager to
the Fund with respect to that country.
In the event the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has
selected are no longer appropriate because the applicable Eligible
Foreign Custodian is no longer able to provide reasonable care for
Foreign Assets held in the country, or an arrangement no longer
meets the requirements of Rule 17f-5, the Foreign Custody Manager
shall notify the Adviser, the Board and the Fund in accordance
with subsection F hereunder. If the Adviser determines that
withdrawal is in the best interest of the Fund, the Foreign
Custody Manager shall withdraw all Foreign Assets from the
Eligible Foreign Custodian, as soon as reasonably practicable, and
shall provide alternative safe keeping acceptable to the Foreign
Custody Manager. If the Adviser determines that it is in the best
interest of the Fund to withdraw all Foreign Assets and this
withdrawal would require liquidation of any Foreign Assets or
would materially and adversely impair the liquidity, value or
other investment characteristic of any Foreign Assets, the Foreign
Custody Manager shall immediately provide information regarding
the particular circumstances to the Adviser and to the Board and
shall act in accordance with instructions received from an
Authorized Officer, with respect to the liquidation or other
withdrawal.
J. Guidelines for the Exercise of Delegated Authority and Provision
of Information Regarding Country Risk Nothing in this Article 3
shall require the Foreign Custody Manager to consider Country Risk
as part of its delegated responsibilities under subsection D of
Article 3. The Fund and the Custodian each expressly acknowledge
that the Foreign Custody Manager shall not be responsible for, or
liable for any loss in connection with the placement of Foreign
Assets with or withdrawal of Foreign Assets from a Mandatory
Securities Depository nor be delegated any responsibilities under
this Article 3 with respect to Mandatory Securities Depositories
other than those set forth below.
8
<PAGE>
With respect to the countries listed in Schedule A, or added
thereto, the Foreign Custody Manager agrees to provide annually to
the Board and the Adviser, information relating to the Country
Risks of holding Foreign Assets in such countries, including but
not limited to, the Mandatory Securities Depositories, if any,
operating in the country. In addition, the Foreign Custody Manager
shall use reasonable care in the gathering of this information and
with regard to, among other things, the completeness and accuracy
of this information. The information furnished annually by the
Foreign Custody Manager to the Board should include but not be
limited to the following, if available:
(i) Legal Opinion regarding whether applicable foreign law
would restrict the access of the Fund's independent public
accountants to the books and records of the foreign
custodian, whether applicable foreign law would restrict
the Fund's ability to recover its assets in the event of
bankruptcy of the foreign custodian, whether applicable
foreign law would restrict the Fund's ability to recover
assets lost while under the foreign custodian's control,
the likelihood of expropriation, nationalization, freezes
or confiscation of the Fund's assets and whether there are
reasonably foreseeable difficulties in converting the
Fund's cash into U.S. dollars, or such other form of Legal
Opinion as is customary in association with Rule 17f-5
from time to time,
(ii) audit report of the Foreign Custody Manager,
(iii) copy of balance sheet from annual report of the
custodian,
(iv) summary of Central Depository Information,
(v) country profile materials containing market practice
for: delivery versus payment, settlement method, currency
restrictions, buy-in practice, Foreign ownership limits
and unique market arrangements,
(vi) The Foreign Custody Manager shall also provide such
other information as may be reasonably available relating
to Mandatory Securities Depositories, and, in accordance
with applicable requirements promulgated by the SEC from
time to time, to the criteria as set forth on Appendix B
hereto, as such Appendix may be revised by the parties
hereto from time to time; and,
(vii) such other materials as the Board may reasonably
request from time to time, including copies of contracts
with the subcustodians.
K. Most Favored Client If at any time the Foreign Custody Manager
shall be a party to an agreement, to serve as a Foreign Custody
Manager to an investment company, that provides for either (a) a
standard of care with respect to the selection of Eligible
Foreign Custodians in any jurisdiction higher than that set forth
in paragraph 1 of subsection D of Article 3 of this Agreement or
(b) a standard of care with respect to the exercise of the Foreign
Custody Manager's duties other than that set forth in subsection F
of Article 3 of this Agreement, the Foreign Custody Manager
9
<PAGE>
agrees to notify the Fund of this fact and to negotiate in good
faith the applicable standard of care hereunder to the standard
specified in the other agreement. In the event that the Foreign
Custody Manager shall in the future offer review or information
services with respect to Mandatory Securities Depositories in
addition to any services provided hereunder, the Foreign Custody
Manager agrees that it shall notify the Fund of this fact and
shall offer these services to the Fund.
L. Direction as to Eligible Foreign Custodians Notwithstanding
Article 3 of this Agreement, the Fund or the Adviser may direct
the Custodian to place and maintain Foreign Assets with a
particular Eligible Foreign Custodian acceptable to the Foreign
Custody Manager. In such event, the Custodian shall be entitled to
rely on any instruction as a Proper Instruction and may limit its
duties under this Article 3 of the Agreement with respect to such
arrangements by describing any limitations in writing with respect
to each instance.
4. Duties of the Custodian with Respect to Property of the Fund
A. Safekeeping and Holding of Property The Custodian shall keep
safely all property of the Fund and on behalf of the Fund shall
from time to time receive delivery of Fund property for
safekeeping. The Custodian shall hold, earmark and segregate on
its books and records for the account of the Fund all property of
the Fund, including all securities, participation interests and
other assets of the Fund (1) physically held by the Custodian,
(2) held by any subcustodian referred to in Section 2 hereof or by
any agent referred to in Paragraph K hereof, (3) held by or
maintained in The Depository Trust Company or in Participants
Trust Company or in an Approved Clearing Agency or in the Federal
Book-Entry System or in an Approved Foreign Securities Depository,
each of which from time to time is referred to herein as a
"Securities System", and (4) held by the Custodian or by any
subcustodian referred to in Section 2 hereof and maintained in any
Approved Book-Entry System for Commercial Paper.
B. Delivery of Securities The Custodian shall release and deliver
securities or participation interests owned by the Fund held (or
deemed to be held) by the Custodian or maintained in a Securities
System account or in an Approved Book-Entry System for Commercial
Paper account only upon receipt of proper instructions, which may
be continuing instructions when deemed appropriate by the parties,
and only in the following cases:
1) Upon sale of such securities or participation interests
for the account of the Fund, but only against receipt of
payment therefor; if delivery is made in Boston or New
York City, payment therefor shall be made in accordance
with generally accepted clearing house procedures or by
use of Federal Reserve Wire System procedures; if delivery
is made elsewhere payment therefor shall be in accordance
with the then current "street delivery" custom or in
accordance with such procedures
10
<PAGE>
agreed to in writing from time to time by the parties
hereto; if the sale is effected through a Securities
System, delivery and payment therefor shall be made in
accordance with the provisions of Paragraph L hereof; if
the sale of commercial paper is to be effected through an
Approved Book-Entry System for Commercial Paper,
delivery and payment therefor shall be made in accordance
with the provisions of Paragraph M hereof; if the
securities are to be sold outside the United States,
delivery may be made in accordance with procedures
agreed to in writing from time to time by the parties
hereto; for the purposes of this subparagraph, the
term "sale" shall include the disposition of a portfolio
security (i) upon the exercise of an option written by the
Fund and (ii) upon the failure by the Fund to make a
successful bid with respect to a portfolio security, the
continued holding of which is contingent upon the making
of such a bid;
2) Upon the receipt of payment in connection with any
repurchase agreement or reverse repurchase agreement
relating to such securities and entered into by the Fund;
3) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
4) To the issuer thereof or its agent when such securities or
participation interests are called, redeemed, retired or
otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
5) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee of the
Custodian or into the name or nominee name of any agent
appointed pursuant to Paragraph K hereof or into the name
or nominee name of any subcustodian employed pursuant to
Section 2 hereof; or for exchange for a different number
of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided
that, in any such case, the new securities or
participation interests are to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
6) To the broker selling the same for examination in
accordance with the "street delivery" custom; provided
that the Custodian shall adopt such procedures as the Fund
from time to time shall approve to ensure their prompt
return to the Custodian by the broker in the event the
broker elects not to accept them;
11
<PAGE>
7) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion of
such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian or any
subcustodian employed pursuant to Section 2 hereof;
8) In the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such
warrants, rights or similar securities, or the surrender
of interim receipts or temporary securities for definitive
securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
9) For delivery in connection with any loans of securities
made by the Fund (such loans to be made pursuant to the
terms of the Fund's current registration statement), but
only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may
be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities.
10) For delivery as security in connection with any borrowings
by the Fund requiring a pledge or hypothecation of assets
by the Fund (if then permitted under circumstances
described in the current registration statement of the
Fund), provided, that the securities shall be released
only upon payment to the Custodian of the monies borrowed,
except that in cases where additional collateral is
required to secure a borrowing already made, further
securities may be released for that purpose; upon receipt
of proper instructions, the Custodian may pay any such
loan upon redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note or
notes evidencing the loan;
11) When required for delivery in connection with any
redemption or repurchase of Shares of the Fund in
accordance with the provisions of Paragraph J hereof;
12) For delivery in accordance with the provisions of any
agreement between the Custodian (or a subcustodian
employed pursuant to Section 2 hereof) and a broker-dealer
registered under the Securities Exchange Act of 1934 and,
if necessary, the Fund, relating to compliance with the
rules of The Options Clearing Corporation or of any
registered national securities exchange, or of any similar
organization or organizations, regarding deposit or escrow
or other arrangements in connection with options
transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian (or a subcustodian
employed pursuant to Section 2 hereof), and a futures
commission merchant, relating to compliance with the rules
of the Commodity Futures Trading
12
<PAGE>
Commission and/or of any contract market or commodities
exchange or similar organization, regarding futures
margin account deposits or payments in connection with
futures transactions by the Fund;
14) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions, a
certified copy of a vote of the Board specifying the
securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose
to be proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
C. Registration of Securities Securities held by the Custodian (other
than bearer securities) for the account of the Fund shall be
registered in the name of the Fund or in the name of any nominee
of the Fund or of any nominee of the Custodian, or in the name or
nominee name of any agent appointed pursuant to Paragraph K
hereof, or in the name or nominee name of any subcustodian
employed pursuant to Section 2 hereof, or in the name or nominee
name of The Depository Trust Company or Participants Trust Company
or Approved Clearing Agency or Federal Book-Entry System or
Approved Book-Entry System for Commercial Paper; provided, that
securities are held in an account of the Custodian or of such
agent or of such subcustodian containing only assets of the Fund
or only assets held by the Custodian or such agent or such
subcustodian as a custodian or subcustodian or in a fiduciary
capacity for customers. All certificates for securities accepted
by the Custodian or any such agent or subcustodian on behalf of
the Fund shall be in "street" or other good delivery form or shall
be returned to the selling broker or dealer who shall be advised
of the reason thereof.
D. Bank Accounts The Custodian shall open and maintain a separate
bank account or accounts in the name of the Fund, subject only to
draft or order by the Custodian acting in pursuant to the terms
of this Agreement, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or
for the account of the Fund other than cash maintained by the Fund
in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as the Custodian may in its
discretion deem necessary or desirable; provided, however, that
every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each
such bank or trust company and the funds to be deposited with each
such bank or trust company shall be approved in writing by two
officers of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be subject to
withdrawal only by the Custodian in that capacity.
13
<PAGE>
The Custodian may, on behalf of any Fund, open and cause to be
maintained outside the United States a bank account with (a) an
Eligible Foreign Custodian (as defined in Article 3) or (b) any
person with whom property of the Fund may be placed and maintained
outside of the United States under (i) ss.17(f) or 26(a) of the
1940 Act, without regard to Rule 17f-5 or (ii) an order of the
U.S. Securities and Exchange Commission (a "Permissible Foreign
Custodian"). Such account(s) shall be subject only to draft or
order by the Custodian or Eligible Foreign Custodian or
Permissible Foreign Custodian acting pursuant to the terms of this
Agreement to hold cash received by or from or for the account of
the Fund.
E. Payment for Shares of the Fund The Custodian shall make
appropriate arrangements with the Transfer Agent and the principal
underwriter of the Fund to enable the Custodian to make certain it
promptly receives the cash or other consideration due to the Fund
for such new or treasury Shares as may be issued or sold from time
to time by the Fund, in accordance with the governing documents
and offering prospectus and statement of additional information of
the Fund. The Custodian will provide prompt notification to the
Fund of any receipt by it of payments for Shares of the Fund.
F. Investment and Availability of Federal Funds Upon agreement
between the Fund and the Custodian, the Custodian shall, upon the
receipt of proper instructions, which may be continuing
instructions when deemed appropriate by the parties, invest in
such securities and instruments as may be set forth in such
instructions on the same day as received all federal funds
received after a time agreed upon between the Custodian and the
Fund.
G. Collections The Custodian shall promptly collect all income and
other payments with respect to registered securities held
hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall promptly
collect all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such
securities are held by the Custodian or agent thereof and shall
credit such income, as collected, to the Fund's custodian account.
The Custodian shall do all things necessary and proper in connection with such
prompt collections and, without limiting the generality of the foregoing, the
Custodian shall
1) Present for payment all coupons and other income items
requiring presentations;
2) Present for payment all securities which may mature or be
called, redeemed, retired or otherwise become payable;
3) Endorse and deposit for collection, in the name of the
Fund, checks, drafts or other negotiable instruments;
14
<PAGE>
4) Credit income from securities maintained in a Securities
System or in an Approved Book-Entry System for Commercial
Paper at the time funds become available to the Custodian;
in the case of securities maintained in The Depository
Trust Company funds shall be deemed available to the Fund
not later than the opening of business on the first
business day after receipt of such funds by the Custodian.
The Custodian shall notify the Fund as soon as reasonably practicable whenever
income due on any security is not promptly collected. In any case in which the
Custodian does not receive any due and unpaid income after it has made demand
for the same, it shall immediately so notify the Fund in writing, enclosing
copies of any demand letter, any written response thereto, and memoranda of all
oral responses thereto and to telephonic demands, and await instructions from
the Fund; the Custodian shall in no case have any liability for any nonpayment
of such income provided the Custodian meets the standard of care set forth in
Section 8 hereof. The Custodian shall not be obligated to take legal action for
collection unless and until reasonably indemnified to its satisfaction.
The Custodian shall also receive and collect all stock dividends, rights and
other items of like nature, and deal with the same pursuant to proper
instructions relative thereto.
H. Payment of Fund Moneys Upon receipt of proper instructions, which
may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out moneys of the Fund in the
following cases only:
1) Upon the purchase of securities, participation interests,
options, futures contracts, forward contracts and options
on futures contracts purchased for the account of the Fund
but only (a) against the receipt of
(i) such securities registered as provided in
Paragraph C hereof or in proper form for transfer
or
(ii) detailed instructions signed by an officer of the
Fund regarding the participation interests to be
purchased or
(iii) written confirmation of the purchase by the Fund
of the options, futures contracts, forward
contracts or options on futures contracts
by the Custodian (or by a subcustodian employed pursuant
to Section 2 hereof or by a clearing corporation of a
national securities exchange of which the Custodian is a
member or by any bank, banking institution or trust
company doing business in the United States or abroad
which is qualified under the Investment Company Act of
1940 to act as a custodian and which has been designated
by the Custodian as its agent for this purpose or by the
agent specifically designated in such instructions as
representing the purchasers of a new issue of privately
placed securities); (b) in the case of a purchase effected
through a Securities System, upon receipt of the
15
<PAGE>
securities by the Securities System in accordance with the
conditions set forth in Paragraph L hereof; (c) in the
case of a purchase of commercial paper effected through an
Approved Book-Entry System for Commercial Paper, upon
receipt of the paper by the Custodian or subcustodian in
accordance with the conditions set forth in Paragraph M
hereof; (d) in the case of repurchase agreements entered
into between the Fund and another bank or a broker-dealer,
against receipt by the Custodian of the securities
underlying the repurchase agreement either in certificate
form or through an entry crediting the Custodian's
segregated, non-proprietary account at the Federal Reserve
Bank of Boston with such securities along with written
evidence of the agreement by the bank or broker-dealer to
repurchase such securities from the Fund; or (e) with
respect to securities purchased outside of the United
States, in accordance with written procedures agreed to
from time to time in writing by the parties hereto;
2) When required in connection with the conversion, exchange
or surrender of securities owned by the Fund as set forth
in Paragraph B hereof;
3) When required for the redemption or repurchase of Shares
of the Fund in accordance with the provisions of Paragraph
J hereof;
4) For the payment of any expense or liability incurred by
the Fund, including but not limited to the following
payments for the account of the Fund: advisory fees,
distribution plan payments, interest, taxes, management
compensation and expenses, accounting, transfer agent and
legal fees, and other operating expenses of the Fund
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends or other distributions to
holders of Shares declared or authorized by the Board; and
6) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions, a
certified copy of a vote of the Board, specifying the
amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose
to be a proper corporate purpose, and naming the person or
persons to whom such payment is to be made.
I. Liability for Payment in Advance of Receipt of Securities
Purchased In any and every case where payment for purchase of
securities for the account of the Fund is made by the Custodian in
advance of receipt of the securities purchased in the absence of
specific written instructions signed by two officers of the Fund
to so pay in advance, the Custodian shall be absolutely liable to
the Fund for such securities to the same extent as if the
securities had been received by the Custodian; except that in the
case of a repurchase agreement entered into by the Fund with a
bank which is a member of the Federal Reserve System, the
Custodian may transfer funds
16
<PAGE>
to the account of such bank prior to the receipt of (i) the
securities in certificate form subject to such repurchase
agreement or (ii) written evidence that the securities subject to
such repurchase agreement have been transferred by book-entry into
a segregated non-proprietary account of the Custodian maintained
with the Federal Reserve Bank of Boston or (iii) the safekeeping
receipt, provided that such securities have in fact been so
transferred by book-entry and the written repurchase agreement is
received by the Custodian in due course. With respect to
securities and funds held by a subcustodian, either directly or
indirectly (including by a Securities Depository or clearing
corporation), notwithstanding any provisions of this Agreement to
the contrary, payment for securities purchased and delivery of
securities sold may be made prior to receipt of securities or
payment respectively, and securities or payment may be received in
a form in accordance with (a) governmental regulations, (b) rules
of Securities Depositories and clearing agencies, (c) generally
accepted trade practice in the applicable local market, (d) the
terms and characteristics of the particular investment, or (e) the
terms of instructions.
J. Payments for Repurchases or Redemptions of Shares of the Fund From
such funds as may be available for the purpose, but subject to any
applicable votes of the Board and the current redemption and
repurchase procedures of the Fund, the Custodian shall, upon
receipt of written instructions from the Fund or from the Fund's
transfer agent or from the principal underwriter, make funds
and/or portfolio securities available for payment to holders of
Shares who have caused their Shares to be redeemed or repurchased
by the Fund or for the Fund's account by its transfer agent or
principal underwriter.
The Custodian may maintain a special checking account upon which
special checks may be drawn by shareholders of the Fund holding
Shares for which certificates have not been issued. Such checking
account and such special checks shall be subject to such rules and
regulations as the Custodian and the Fund may from time to time
adopt. The Custodian or the Fund may suspend or terminate use of
such checking account or such special checks (either generally or
for one or more shareholders) at any time. The Custodian and the
Fund shall notify the other immediately of any such suspension or
termination.
K. Appointment of Agents by the Custodian The Custodian may at any
time or times in its discretion appoint (and may at any time
remove) any other bank or trust company (provided such bank or
trust company is itself qualified under the Investment Company Act
of 1940 to act as a custodian or is itself an eligible foreign
custodian within the meaning of Rule 17f-5 under said Act) as the
agent of the Custodian to carry out such of the duties and
functions of the Custodian described in this Section 3 as the
Custodian may from time to time direct; provided, however, that
the appointment of any such agent shall not relieve the Custodian
of any of its responsibilities or liabilities hereunder, and as
between the Fund and the Custodian the Custodian shall be fully
responsible for the acts and omissions of any such agent. For the
purposes of this Agreement, any property of the Fund held by any
such agent shall be deemed to be held by the Custodian hereunder.
17
<PAGE>
L. Deposit of Fund Portfolio Securities in Securities Systems The
Custodian may deposit and/or maintain securities owned by the Fund
(1) in The Depository Trust Company;
(2) in Participants Trust Company;
(3) in any other Approved Clearing Agency;
(4) in the Federal Book-Entry System; or
(5) in a Securities Depository (as defined in
Article 3).
in each case only in accordance with applicable Federal Reserve
Board and Securities and Exchange Commission rules and
regulations, and at all times subject to the following
provisions:
(a) The Custodian may (either directly or through one or more
subcustodians employed pursuant to Section 2) keep securities of
the Fund in a Securities System provided that such securities are
maintained in a non-proprietary account ("Account") of the
Custodian or such subcustodian in the Securities System which
shall not include any assets of the Custodian or such subcustodian
or any other person other than assets held by the Custodian or
such subcustodian as a fiduciary, custodian, or otherwise for its
customers.
(b) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall identify by
book-entry those securities belonging to the Fund, and the
Custodian shall be fully and completely responsible for
maintaining a recordkeeping system capable of accurately and
currently stating the Fund's holdings maintained in each such
Securities System.
(c) The Custodian shall pay for securities purchased in book-entry
form for the account of the Fund only upon (i) receipt of notice
or advice from the Securities System that such securities have
been transferred to the Account, and (ii) the making of any entry
on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund only upon (i)
receipt of notice or advice from the Securities System that
payment for such securities has been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for
18
<PAGE>
the account of the Fund. Copies of all notices or advises from
the Securities System of transfers of securities for the account
of the Fund shall identify the Fund, be maintained for the Fund by
the Custodian and be promptly provided to the Fund at its request.
The Custodian shall promptly send to the Fund confirmation of each
transfer to or from the account of the Fund in the form of a
written advice or notice of each such transaction, and shall
furnish to the Fund copies of daily transaction sheets reflecting
each day's transactions in the Securities System for the account
of the Fund on the next business day.
(d) The Custodian shall promptly send to the Fund any report or other
communication received or obtained by the Custodian relating to
the Securities System's accounting system, system of internal
accounting controls or procedures for safeguarding securities
deposited in the Securities System; the Custodian shall promptly
send to the Fund any report or other communication relating to the
Custodian's internal accounting controls and procedures for
safeguarding securities deposited in any Securities System; and
the Custodian shall ensure that any agent appointed pursuant to
Paragraph K hereof or any subcustodian employed pursuant to
Section 2 hereof shall promptly send to the Fund and to the
Custodian any report or other communication relating to such
agent's or subcustodian's internal accounting controls and
procedures for safeguarding securities deposited in any Securities
System. The Custodian's books and records relating to the Fund's
participation in each Securities System will at all times during
regular business hours be open to the inspection of the Fund's
authorized officers, employees or agents.
(e) The Custodian shall not act under this Paragraph L in the absence
of receipt of a certificate of an officer of the Fund that the
Board has approved the use of a particular Securities System; the
Custodian shall also obtain appropriate assurance from the
officers of the Fund that the Board has annually reviewed and
approved the continued use by the Fund of each Securities System,
so long as such review and approval is required by Rule 17f-4
under the Investment Company Act of 1940, and the Fund shall
promptly notify the Custodian if the use of a Securities System is
to be discontinued; at the request of the Fund, the Custodian will
terminate the use of any such Securities System as promptly as
practicable.
(f) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to
the Fund resulting from use of the Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or any
of its agents or subcustodians or of any of its or their employees
or from any failure of the Custodian or any such agent or
subcustodian to enforce effectively such rights as it may have
against the Securities System or any other person; at the election
of the Fund, it shall be entitled to be subrogated to the rights
of the Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent that
the Fund has not been made whole for any such loss or damage.
M. Deposit of Fund Commercial Paper in an Approved Book-Entry System for
Commercial Paper Upon receipt of proper instructions with respect to
each issue of direct issue commercial paper purchased by the Fund, the
Custodian may deposit and/or maintain direct issue commercial paper
owned by the Fund in any Approved Book-Entry System for Commercial
Paper, in each case only in accordance with applicable Securities and
Exchange Commission rules, regulations, and no-action correspondence,
and at all times subject to the following provisions:
19
<PAGE>
(a) The Custodian may (either directly or through one or more
subcustodians employed pursuant to Section 2) keep
commercial paper of the Fund in an Approved Book-Entry
System for Commercial Paper, provided that such paper is
issued in book entry form by the Custodian or subcustodian
on behalf of an issuer with which the Custodian or
subcustodian has entered into a book-entry agreement and
provided further that such paper is maintained in a
non-proprietary account ("Account") of the Custodian or
such subcustodian in an Approved Book-Entry System for
Commercial Paper which shall not include any assets of the
Custodian or such subcustodian or any other person other
than assets held by the Custodian or such subcustodian as
a fiduciary, custodian, or otherwise for its customers.
(b) The records of the Custodian with respect to commercial
paper of the Fund which is maintained in an Approved
Book-Entry System for Commercial Paper shall identify by
book-entry each specific issue of commercial paper
purchased by the Fund which is included in the System and
shall at all times during regular business hours be open
for inspection by authorized officers, employees or agents
of the Fund. The Custodian shall be fully and completely
responsible for maintaining a recordkeeping system capable
of accurately and currently stating the Fund's holdings of
commercial paper maintained in each such System.
(c) The Custodian shall pay for commercial paper purchased in
book-entry form for the account of the Fund only upon
contemporaneous (i) receipt of notice or advice from the
issuer that such paper has been issued, sold and
transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such
purchase, payment and transfer for the account of the
Fund. The Custodian shall transfer such commercial paper
which is sold or cancel such commercial paper which is
redeemed for the account of the Fund only upon
contemporaneous (i) receipt of notice or advice that
payment for such paper has been transferred to the
Account, and (ii) the making of an entry on the records of
the Custodian to reflect such transfer or redemption and
payment for the account of the Fund. Copies of all
notices, advises and confirmations of transfers of
commercial paper for the account of the Fund shall
identify the Fund, be maintained for the Fund by the
Custodian and be promptly provided to the Fund at its
request. The Custodian shall promptly send to the Fund
confirmation of each transfer to or from the account of
the Fund in the form of a written advice or notice of each
such transaction, and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's
transactions in the System for the account of the Fund o
the next business day.
20
<PAGE>
(d) The Custodian shall promptly send to the Fund any report
or other communication received or obtained by the
Custodian relating to each System's accounting system,
system of internal accounting controls or procedures for
safeguarding commercial paper deposited in the System;
the Custodian shall promptly send to the Fund any report
or other communication relating to the Custodian's
internal accounting controls and procedures for
safeguarding commercial paper deposited in any Approved
Book-Entry System for Commercial Paper; and the Custodian
shall ensure that any agent appointed pursuant to
Paragraph K hereof or any subcustodian employed pursuant
to Section 2 hereof shall promptly send to the Fund and to
the Custodian any report or other communication relating
to such agent's or subcustodian's internal accounting
controls and procedures for safeguarding securities
deposited in any Approved Book-Entry System for Commercial
Paper.
(e) The Custodian shall not act under this Paragraph M in the
absence of receipt of a certificate of an officer of the
Fund that the Board has approved the use of a particular
Approved Book-Entry System for Commercial Paper; the
Custodian shall also obtain appropriate assurance from the
officers of the Fund that the Board has annually reviewed
and approved the continued use by the Fund of each
Approved Book-Entry System for Commercial Paper, so long
as such review and approval is required by Rule 17f-4
under the Investment Company Act of 1940, and the Fund
shall promptly notify the Custodian if the use of an
Approved Book-Entry System for Commercial Paper is to be
discontinued; at the request of the Fund, the Custodian
will terminate the use of any such System as promptly as
practicable.
(f) The Custodian (or subcustodian, if the Approved Book-Entry
System for Commercial Paper is maintained by the
subcustodian) shall issue physical commercial paper or
promissory notes whenever requested to do so by the Fund
or in the event of an electronic system failure which
impedes issuance, transfer or custody of direct issue
commercial paper by book-entry.
(g) Anything to the contrary in this Agreement
notwithstanding, the Custodian shall be liable to the Fund
for any loss or damage to the Fund resulting from use of
any Approved Book-Entry System for Commercial Paper by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or subcustodians or of any
of its or their employees or from any failure of the
Custodian or any such agent or subcustodian to enforce
effectively such rights as it may have against the System,
the issuer of the commercial paper or any other person; at
the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to
any claim against the System, the issuer of the commercial
paper or any other person which the Custodian may have as
a consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any such
loss or damage.
21
<PAGE>
N. Segregated Account The Custodian shall upon receipt of proper
instructions establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Paragraph L hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and any registered
broker-dealer (or any futures commission merchant), relating to
compliance with the rules of the Options Clearing Corporation and
of any registered national securities exchange (or of the
Commodity Futures Trading Commission or of any contract market or
commodities exchange), or of any similar organization or
organizations, regarding escrow or deposit or other arrangements
in connection with transactions by the Fund, (ii) for purposes of
segregating cash or U.S. Government securities in connection with
options purchased, sold or written by the Fund or futures
contracts or options thereon purchased or sold by the Fund, (iii)
for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper
purposes, but only, in the case of clause (iv), upon receipt of,
in addition to proper instructions, a certificate signed by two
officers of the Fund, setting forth the purpose such segregated
account and declaring such purpose to be a proper purpose.
O. Ownership Certificates for Tax Purposes The Custodian shall
execute ownership and other certificates and affidavits for all
foreign, federal and state tax purposes in connection with
receipt of income or other payments with respect to securities
of the Fund held by it and in connection with transfers of
securities.
P. Proxies The Custodian shall, with respect to the securities
held by it hereunder, cause to be promptly delivered to the Fund
all forms of proxies and all notices of meetings and any
other notices or announcements or other written information
affecting or relating to the securities, and upon receipt of
proper instructions shall execute and deliver or cause its
nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor
its nominee shall vote upon any of the securities or
execute any proxy to vote thereon or give any consent or take
any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper
instructions.
Q. Communications Relating to Fund Portfolio Securities The Custodian
shall deliver promptly to the Fund all written information
(including, without limitation, pendency of call and maturities
of securities and participation interests and expirations of
rights in connection therewith and notices of exercise of call
and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the
Custodian from issuers and other
22
<PAGE>
persons relating to the securities and participation
interests being held for the Fund. With respect to tender or
exchange offers, the Custodian shall deliver promptly to the Fund
all written information received by the Custodian from
issuers and other persons relating to the securities and
participation interests whose tender or exchange is sought and
from the party (or his agents) making the tender or exchange
offer.
R. Exercise of Rights; Tender Offers In the case of tender offers,
similar offers to purchase or exercise rights (including,
without limitation, pendency of calls and maturities of
securities and participation interests and expirations of
rights in connection therewith and notices of exercise of call
and put options and the maturity of futures contracts) affecting
or relating to securities and participation interests held by
the Custodian under this Agreement, the Custodian shall have
responsibility for promptly notifying the Fund of all such
offers in accordance with the standard of reasonable care set
forth in Section 8 hereof. For all such offers for which the
Custodian is responsible as provided in this Paragraph R, the
Fund shall have responsibility for providing the Custodian with
all necessary instructions in timely fashion. Upon receipt of
proper instructions, the Custodian shall timely deliver to the
issuer or trustee thereof, or to the agent of either,
warrants, puts, calls, rights or similar securities for
the purpose of being exercised or sold upon proper receipt
therefor and upon receipt of assurances satisfactory to the
Custodian that the new securities and cash, if any, acquired by
such action are to be delivered to the Custodian or any
subcustodian employed pursuant to Section 2 hereof. Upon receipt
of proper instructions, the Custodian shall timely deposit
securities upon invitations for tenders of securities upon proper
receipt therefor and upon receipt of assurances satisfactory to
the Custodian that the consideration to be paid or delivered or
the tendered securities are to be returned to the Custodian or
subcustodian employed pursuant to Section 2 hereof.
Notwithstanding any provision of this Agreement to the contrary,
the Custodian shall take all necessary action, unless otherwise
directed to the contrary by proper instructions, to comply with
the terms of all mandatory or compulsory exchanges, calls,
tenders, redemptions, or similar rights of security ownership, and
shall thereafter promptly notify the Fund in writing of such
action.
S. Depository Receipts The Custodian shall, upon receipt of proper
instructions, surrender or cause to be surrendered foreign
securities to the depository used by an issuer of American
Depository Receipts, European Depository Receipts or International
Depository Receipts (hereinafter collectively referred to as
"ADRs") for such securities, against a written receipt therefor
adequately describing such securities and written evidence
satisfactory to the Custodian that the depository has acknowledged
receipt of instructions to issue with respect to such securities
ADRs in the name of a nominee of the Custodian or in the name or
nominee name of any subcustodian employed pursuant to Section 2
hereof, for delivery to the Custodian or such subcustodian at such
place as the Custodian or such subcustodian may from time to time
designate. The Custodian shall, upon receipt of proper
instructions, surrender ADRs to the issuer thereof against a
written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian
that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depository to deliver the securities
underlying such ADRs to the Custodian or to a subcustodian
employed pursuant to Section 2 hereof.
23
<PAGE>
T. Interest Bearing Call or Time Deposits The Custodian shall, upon
receipt of proper instructions, place interest bearing fixed ter
and call deposits with the banking department of such banking
institution (other than the Custodian) and in such amounts as
the Fund may designate. Deposits may be denominated in U.S.
Dollars or other currencies. The Custodian shall include in
its records with respect to the assets of the Fund appropriate
notation as to the amount and currency of each such deposit, the
accepting banking institution and other appropriate details
and shall retain such forms of advice or receipt evidencing the
deposit, if any, as may be forwarded to the Custodian by the
banking institution. Such deposits shall be deemed portfolio
securities of the applicable Fund for the purposes of this
Agreement, and the Custodian shall be responsible for the
collection of income from such accounts and the transmission of
cash to and from such accounts.
U. Options, Futures Contracts and Foreign Currency Transactions
1. Options. The Custodians shall, upon receipt of proper
instructions and in accordance with the provisions of any
agreement between the Custodian, any registered broker-dealer
and, if necessary, the Fund, relating to compliance with the
rules of the Options Clearing Corporation or of any registered
national securities exchange or similar organization or
organizations, receive and retain confirmations or other
documents, if any, evidencing the purchase or writing of an
option on a security, securities index, currency or other
financial instrument or index by the Fund; deposit and
maintain in a segregated account for each Fund separately,
either physically or by book-entry in a Securities System,
securities subject to a covered call option written by the
Fund; and release and/or transfer such securities or other
assets only in accordance with a notice or other communication
evidencing the expiration, termination or exercise of such
covered option furnished by the Options Clearing Corporation,
the securities or options exchange on which such covered
option is traded or such other organization as may be
responsible for handling such options transactions. The
Custodian and the broker-dealer shall be responsible for the
sufficiency of assets held in each Fund's segregated account
in compliance with applicable margin maintenance requirements.
2. Futures Contracts The Custodian shall, upon receipt of
proper instructions, receive and retain confirmations and
other documents, if any, evidencing the purchase or sale of a
futures contract or an option on a futures contract by the
Fund; deposit and maintain in a segregated account, for the
benefit of any futures commission merchant, assets designated
by the Fund as initial, maintenance or variation "margin"
deposits (including mark-to-market payments) intended to
secure the Fund's performance of its obligations under any
futures contracts purchased
24
<PAGE>
or sold or any options on futures contracts written by Fund,
in accordance with the provisions of any agreement or
agreements among the Fund, the Custodian and such futures
commission merchant, designed to comply with the rules of the
Commodity Futures Trading Commission and/or of any contract
market or commodities exchange or similar organization
regarding such margin deposits or payments; and release and/or
transfer assets in such margin accounts only in accordance
with any such agreements or rules. The Custodian and the
futures commission merchant shall be responsible for the
sufficiency of assets held in the segregated account in
compliance with the applicable margin maintenance and
mark-to-market payment requirements.
3. Foreign Exchange Transactions The Custodian shall, pursuant
to proper instructions, enter into or cause a subcustodian to
enter into foreign exchange contracts, currency swaps or
options to purchase and sell foreign currencies for spot and
future delivery on behalf and for the account of the Fund.
Such transactions may be undertaken by the Custodian or
subcustodian with such banking or financial institutions or
other currency brokers, as set forth in proper instructions.
Foreign exchange contracts, swaps and options shall be deemed
to be portfolio securities of the Fund; and accordingly, the
responsibility of the Custodian therefor shall be the same as
and no greater than the Custodian's responsibility in respect
of other portfolio securities of the Fund. The Custodian shall
be responsible for the transmittal to and receipt of cash from
the currency broker or banking or financial institution with
which the contract or option is made, the maintenance of
proper records with respect to the transaction and the
maintenance of any segregated account required in connection
with the transaction. The Custodian shall have no duty with
respect to the selection of the currency brokers or banking or
financial institutions with which the Fund deals or for their
failure to comply with the terms of any contract or option.
Without limiting the foregoing, it is agreed that upon receipt
of proper instructions, the Custodian may, and insofar as
funds are made available to the Custodian for the purpose, (if
determined necessary by the Custodian to consummate a
particular transaction on behalf and for the account of the
Fund) make free outgoing payments of cash in the form of U.S.
dollars or foreign currency before receiving confirmation of a
foreign exchange contract or swap or confirmation that the
countervalue currency completing the foreign exchange contract
or swap has been delivered or received. The Custodian shall
not be responsible for any costs and interest charges which
may be incurred by the Fund or the Custodian as a result of
the failure or delay of third parties to deliver foreign
exchange; provided that the Custodian shall nevertheless be
held to the standard of care set forth in, and shall be liable
to the Fund in accordance with, the provisions of Section 9.
V. Actions Permitted Without Express Authority The Custodian may in its
discretion, without express authority from the Fund:
25
<PAGE>
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Agreement, provided, that all such
payments shall be accounted for by the Custodian to the
Treasurer of the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all nondiscretionary details in
connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the securities
and property of the Fund except as otherwise directed by
the Fund.
5. Duties of Bank with Respect to Books of Account and Calculations of Net
Asset Value
The Bank shall as Agent (or as Custodian, as the case may be) keep such books of
account and render as at the close of business on each day a detailed statement
of the amounts received or paid out and of securities received or delivered for
the account of the Fund during said day and such other statements, including a
daily trial balance and inventory of the Fund's portfolio securities; and shall
furnish such other financial information and data as from time to time requested
by the Treasurer or any authorized officer of the Fund; and shall compute and
determine, as of the close of regular trading on the New York Stock Exchange, or
at such other time or times as the Board may determine, the net asset value of a
Share in the Fund, such computation and determination to be made in accordance
with the governing documents of the Fund and the votes and instructions of the
Board at the time in force and applicable, and promptly notify the Fund and its
investment adviser and such other persons as the Fund may request of the result
of such computation and determination. In computing the net asset value the
Custodian may rely upon security quotations received by telephone or otherwise
from sources or pricing services designated by the Fund by proper instructions,
and may further rely upon information furnished to it by any authorized officer
of the Fund relative (a) to liabilities of the Fund not appearing on its books
of account, (b) to the existence, status and proper treatment of any reserve or
reserves, (c) to any procedures established by the Board regarding the valuation
of portfolio securities, and (d) to the value to be assigned to any bond, note,
debenture, Treasury bill, repurchase agreement, subscription right, security,
participation interest or other asset or property for which market quotations
are not readily available.
6. Records and Miscellaneous Duties
The Bank shall create, maintain and preserve all records relating to its
activities and obligations under this Agreement in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All books of account and
records maintained by the Bank in connection with the performance of its duties
under this Agreement shall be the property of the Fund, shall at all times
during the regular business hours of the Bank be open for inspection by
authorized officers, employees or agents of the Fund, and in the event of
termination of this Agreement
26
<PAGE>
shall be delivered to the Fund or to such other person or persons as shall be
designated by the Fund. Disposition of any account or record after any required
period of preservation shall be only in accordance with specific instructions
received from the Fund. The Bank shall assist generally in the preparation of
reports to shareholders, audits of accounts, and other ministerial matters of
like nature; and, upon request, shall furnish the Fund's auditors with an
attested inventory of securities held with appropriate information as to
securities in transit or in the process of purchase or sale and with such other
information as said auditors may from time to time request. The Custodian shall
also maintain records of all receipts, deliveries and locations of such
securities, together with a current inventory thereof, and shall conduct
periodic verifications (including sampling counts at the Custodian) of
certificates representing bonds and other securities for which it is responsible
under this Agreement in such manner as the Custodian shall determine from time
to time to be advisable in order to verify the accuracy of such inventory. The
Bank shall not disclose or use any books or records it has prepared or
maintained by reason of this Agreement in any manner except as expressly
authorized herein or directed by the Fund, and the Bank shall keep confidential
any information obtained by reason of this Agreement.
7. Opinion of Fund's Independent Public Accountants
The Custodian shall take all reasonable action, as the Fund may from time to
time request, to enable the Fund to obtain from year to year favorable opinions
from the Fund's independent public accountants with respect to its activities
hereunder in connection with the preparation of the Fund's registration
statement and Form N-SAR or other periodic reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
8. Compensation and Expenses of Bank
The Bank shall be entitled to reasonable compensation for its services as
Custodian and Agent, as agreed upon from time to time between the Fund and the
Bank. The Bank shall entitled to receive from the Fund on demand reimbursement
for its cash disbursements, expenses and charges, including counsel fees, in
connection with its duties as Custodian and Agent hereunder, but excluding
salaries and usual overhead expenses.
9. Responsibility of Bank
So long as and to the extent that it is in the exercise of reasonable care, the
Bank as Custodian and Agent shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties.
27
<PAGE>
The Bank as Custodian and Agent shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
The Bank as Custodian and Agent shall be held to the exercise of reasonable care
in carrying out the provisions of this Agreement but shall be liable only for
its own negligent or bad faith acts or failures to act. Notwithstanding the
foregoing, nothing contained in this paragraph is intended to nor shall it be
construed to modify the standards of care and responsibility set forth in
Section 2 hereof with respect to subcustodians and in subparagraph f of
Paragraph L of Section 3 hereof with respect to Securities Systems and in
subparagraph g of Paragraph M of Section 3 hereof with respect to an Approved
Book-Entry System for Commercial Paper.
The Custodian shall be liable for the acts or omissions of a foreign banking
institution to the same extent as set forth with respect to subcustodians
generally in Section 2 hereof, provided that, regardless of whether assets are
maintained in the custody of a foreign banking institution, a foreign securities
depository or a branch of a U.S. bank, the Custodian shall not be liable for any
loss, damage, cost, expense, liability or claim resulting from, or caused by,
the direction of or authorization by the Fund to maintain custody of any
securities or cash of the Fund in a foreign county including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
acts of war, civil war or terrorism, insurrection, revolution, military or
usurped powers, nuclear fission, fusion or radiation, earthquake, storm or other
disturbance of nature or acts of God.
If the Fund requires the Bank in any capacity to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Bank, result in the Bank or its nominee assigned to the Fund
being liable for the payment of money or incurring liability of some other form,
the Fund, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
Except as may arise from the Custodian's own negligence or bad faith, the
Custodian shall be without liability to any Fund for any loss, liability, claim
or expense resulting from or caused by anything which is (a) part of Country
Risk or (b) part of the "prevailing country risk" of the Fund, as that term is
used in SEC Release Nos. IC-22658; IS-1080 (May 12, 1997) or as that term is now
or in the future interpreted by the U.S. Securities and Exchange Commission or
by the staff of the Division of Investment Management of the Commission.
10. Persons Having Access to Assets of the Fund
(i) No trustee, director, general partner, officer, employee
or agent of the Fund shall have physical access to the
assets of the Fund held by the Custodian or be authorized
or permitted to withdraw any investments of the Fund, nor
shall the Custodian deliver any assets of the Fund to any
such person. No officer or director, employee or agent of
the Custodian who holds any similar position with the Fund
or the investment adviser of the Fund shall have access to
the assets of the Fund.
28
<PAGE>
(ii) Access to assets of the Fund held hereunder shall only be
available to duly authorized officers, employees,
representatives or agents of the Custodian or other
persons or entities for whose actions the Custodian shall
be responsible to the extent permitted hereunder, or to
the Fund's independent public accountants in connection
with their auditing duties performed on behalf of the
Fund.
(iii) Nothing in this Section 9 shall prohibit any officer,
employee or agent of the Fund or of the investment adviser
of the Fund from giving instructions to the Custodian or
executing a certificate so long as it does not result in
delivery of or access to assets of the Fund prohibited by
paragraph (i) of this Section 9.
11. Effective Period, Termination and Amendment; Successor Custodian
This Agreement shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, that the Fund may at any
time by action of its Board, (i) substitute another bank or trust company for
the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Agreement in the event of the appointment of a
conservator or receiver for the Custodian by the Federal Deposit Insurance
Corporation or by the Banking Commissioner of The Commonwealth of Massachusetts
or upon the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction. Upon termination of the
Agreement, the Fund shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its costs, expenses and disbursements.
Unless the holders of a majority of the outstanding Shares of the Fund vote to
have the securities, funds and other properties held hereunder delivered and
paid over to some other bank or trust company, specified in the vote, having not
less than $2,000,000 of aggregate capital, surplus and undivided profits, as
shown by its last published report, and meeting such other qualifications for
custodians set forth in the Investment Company Act of 1940, the Board shall,
forthwith, upon giving or receiving notice of termination of this Agreement,
appoint as successor custodian, a bank or trust company having such
qualifications. The Bank, as Custodian, Agent or otherwise, shall, upon
termination of the Agreement, deliver to such successor custodian, all
securities then held hereunder and all funds or other properties of the Fund
deposited with or held by the Bank hereunder and all books of account and
records kept by the Bank pursuant to this Agreement, and all documents held by
the Bank relative thereto. In the event that no such vote has been adopted by
the shareholders and that no written order designating a successor custodian
shall have been delivered to the Bank on or before the date when such
termination shall become effective, then the Bank shall not deliver the
securities, funds and other properties of the Fund to the Fund but shall have
the right to deliver to a bank or trust company doing business in Boston,
Massachusetts of its own selection, having an aggregate capital, surplus and
undivided profits, as shown by its last published report, of not less than
$2,000,000, all funds, securities and properties of the Fund held by or
deposited with the Bank, and all books of account and records kept by the Bank
pursuant to this Agreement, and all documents held by the Bank relative thereto.
Thereafter such bank or trust company shall be the successor of the Custodian
under this Agreement.
29
<PAGE>
12. Interpretive and Additional Provisions
In connection with the operation of this Agreement, the Custodian and the Fund
may from time to time agree on such provisions interpretive of or in addition to
the provisions of this Agreement as may in their joint opinion be consistent
with the general tenor of this Agreement. Any such interpretive or additional
provisions shall be in a writing signed by both parties and shall be annexed
hereto, provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any provision of the
governing instruments of the Fund. No interpretive or additional provisions made
as provided in the preceding sentence shall be deemed to be an amendment of this
Agreement.
13. Certification as to Authorized Officers
The Secretary of the Fund shall at all times maintain on file with the Bank his
certification to the Bank, in such form as may be acceptable to the Bank, of the
names and signatures of the authorized officers of each fund, it being
understood that upon the occurence of any change in the information set forth in
the most recent certification on file (including without limitation any person
named in the most recent certification who has ceased to hold the office
designated therein), the Secretary of the Fund shall sign a new or amended
certification setting forth the change and the new, additional or ommitted names
or signatures. The Bank shall be entitled to rely and act upon any officers
named in the most recent certification.
14. Notices
Notices and other writings delivered or mailed postage prepaid to the Fund
addressed to Susan S. Newton, John Hancock Advisers, Inc., 101 Huntington
Avenue, Boston, Massachusetts 02199, or to such other address as the Fund may
have designated to the Bank, in writing, or to Investors Bank & Trust Company,
200 Clarendon Street, Boston, Massachusetts 02116, with a copy to its General
Counsel at the same address, or such other address as the Custodian may
designate to the Fund in writing, shall be deemed to have been properly
delivered or given hereunder to the respective addressees.
15. Massachusetts Law to Apply; Limitations on Liability
This Agreement shall be construed and the provisions thereof interpreted under
and in accordance with the laws of The Commonwealth of Massachusetts.
If the Fund is a Massachusetts business trust, the Custodian expressly
acknowledges the provision in the Fund's declaration of trust limiting the
personal liability of the trustees and shareholders of the Fund; and the
Custodian agrees that it shall have recourse only to the assets of the Fund for
the payment of claims or obligations as between the Custodian and the Fund
arising out of this Agreement, and the Custodian
30
<PAGE>
shall not seek satisfaction of any such claim or obligation from the trustees or
shareholders of the Fund. Each Fund, and each series or portfolio of a Fund,
shall be liable only for its own obligations to the Custodian under this
Agreement and shall not be jointly or severally liable for the obligations of
any other Fund, series or portfolio hereunder.
16. Adoption of the Agreement by the Fund
The Fund represents that its Board has approved this Agreement and has duly
authorized the Fund to adopt this Agreement. This Agreement shall be deemed to
supersede and terminate, as of the date first written above, all prior
agreements between the Fund and the Bank relating to the custody of the Fund's
assets.
In Witness Whereof, the parties hereto have caused this agreement to be executed
in duplicate as of the date first written above by their respective officers
thereunto duly authorized.
John Hancock Funds
By: /s/ Osbert Hood
---------------
Osbert Hood
Senior Vice President and Chief Financial Officer
Attest:
Investors Bank & Trust Company
By: /s/ Robert D. Mancuso
---------------------
Name: Robert D. Mancuso
Title: Senior Vice President
Attest:
31
<PAGE>
Appendix B
Additional Information Relating to Mandatory Securities Depositories
The Foreign Custody Manager shall furnish annually to the Board such
information as may be reasonably available relating to the proposed
"safeharbor" criteria with respect to Mandatory Securities Depositories
as set forth below:
(a) whether an Eligible Foreign Custodian or a U.S. bank holding
assets at the depository undertakes to adhere to the rules, practices
and procedures of the depository;
(b) whether a regulatory authority with oversight responsibility for
the depository has issued a public notice that the depository is not in
compliance with any material capital, solvency, insurance, or other
similar financial strength requirements imposed by such authority, or,
in the case of such a notice having been issued, that such notice has
been withdrawn or the remedy of such noncompliance has been publicly
announced by the depository;
(c) whether a regulatory authority with oversight responsibility over
the depository has issued a public notice that the depository is not in
compliance with any material internal controls requirement imposed by
such authority, or, in the case of such notice having been issued, that
such notice has been withdrawn or the remedy of such noncompliance has
been publicly announced by the depository;
(d) whether the depository maintains the assets of the Fund's depositor
under no less favorable safekeeping conditions than those that apply
generally to depositors;
(e) whether the depository maintains records that segregate the
depository's own assets from the assets of depositors;
(f) whether the depository maintains records that identify the assets
of each of its depositors;
(g) whether the depository provides periodic reports to its depositors
with respect to the safekeeping of assets maintained by the depository,
including, but not limited to, notification of any transfer to or from
a depositor's account; and
(h) whether the depository is subject to periodic review, such as
audits by independent accountants or inspections by regulatory
authorities, and
s:\agrcont\agreement\custodia\ibt amended with delegation
B-1
MASTER CUSTODIAN AGREEMENT
between
JOHN HANCOCK MUTUAL FUNDS
and
STATE STREET BANK AND TRUST COMPANY
Amended and Restated
March 9, 1999
<PAGE>
TABLE OF CONTENTS
1. Definitions.............................................................1-3
2. Employment of Custodian and Property to be Held by It.....................3
3. The Custodian as a Foreign Custody Manager................................3
A. Definitions......................................................3-4
B. Delegation to the Custodian as Foreign Custody Manager.............4
C. Countries Covered..................................................4
D. Scope of Delegated Responsibilities..............................4-6
E. Standard of Care as Foreign Custody Manager of the Fund............7
F. Reporting Requirements.............................................7
G. Representations with respect to Rule 17f-5.........................7
H. Effective Date and Termination of the Custodian as Foreign.........7
Custody Manager
I. Withdrawal of Custsodian as Foreign Custody Manager................8
with Respect to Designated Countries and with Respect
to Eligible Foreign Custodians
J. Guidelines for the Exercise of Delegated Authority...............8-9
and Provision of Information Regarding Country Risk
K. Most Favored Client.............................................9-10
L. Direction as to Eligible Foreign Custodians.......................10
4. Duties of the Custodian with Respect to..................................10
Property of the Fund
A. Safekeeping and Holding of Property...............................10
B. Delivery of Securities.........................................10-13
i
<PAGE>
C. Registration of Securities........................................13
D. Bank Accounts..................................................13-14
E. Payments for Shares of the Fund...................................14
F. Investment and Availability of Federal Funds......................14
G. Collections....................................................14-15
H. Payment of Fund Moneys.........................................15-16
I. Liability for Payment in Advance of............................16-17
Receipt of Securities Purchased
J. Payments for Repurchases of Redemptions...........................17
of Shares of the Fund
K. Appointment of Agents by the Custodian............................17
L. Deposit of Fund Portfolio Securities in........................18-19
Securities Systems
M. Deposit of Fund Commercial Paper in an Approved................19-21
Book-Entry System for Commercial Paper
N. Segregated Account................................................22
O. Ownership Certificates for Tax Purposes...........................22
P. Proxies...........................................................22
Q. Communications Relating to Fund Portfolio......................22-23
Securities
R. Exercise of Rights; Tender Offers................................23
S. Depository Receipts............................................23-24
T. Interest Bearing Call or Time Deposits............................24
U. Options, Futures Contracts and Foreign.........................24-25
Currency Transactions
V. Actions Permitted Without Express Authority....................25-26
ii
<PAGE>
5. Duties of Bank with Respect to Books of Account and......................26
Calculations of Net Asset Value
6. Records and Miscellaneous Duties......................................26-27
7. Opinion of Fund's Independent Public Accountants.........................27
8. Compensation and Expenses of Bank........................................27
9. Responsibility of Bank................................................27-28
10. Persons Having Access to Assets of the Fund...........................28-29
11. Effective Period, Termination and Amendment;..........................29-30
Successor Custodian
12. Interpretive and Additional Provisions...................................30
13. Certification as to Authorized Officers..................................30
14. Notices..................................................................30
15. Massachusetts Law to Apply; Limitations on Liability..................30-31
16. Adoption of the Agreement by the Fund....................................31
iii
<PAGE>
MASTER CUSTODIAN AGREEMENT
This Agreement made as of June 15, 1994 as amended and restated March 9,
1999 between each investment company advised by John Hancock Advisers, Inc.
which has adopted this Agreement in the manner provided herein and State Street
Bank and Trust Company (hereinafter called "Bank", "Custodian" and "Agent"), a
trust company established under the laws of Massachusetts with a principal place
of business in Boston, Massachusetts.
Whereas, each such investment company is registered under the Investment
Company Act of 1940 and has appointed the Bank to act as Custodian of its
property and to perform certain duties as its Agent, as more fully hereinafter
set forth; and
Whereas, the Bank is willing and able to act as each such investment
company's Custodian and Agent, subject to and in accordance with the provisions
hereof;
Now, therefore, in consideration of the premises and of the mutual
covenants and agreements herein contained, each such investment company and the
Bank agree as follows:
1. Definitions
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
(a) "Fund" shall mean the investment company which has adopted this
Agreement and is listed on Appendix A hereto. If the Fund is a Massachusetts
business trust or Maryland corporation, it may in the future establish and
designate other separate and distinct series of shares, each of which may be
called a "portfolio"; in such case, the term "Fund" shall also refer to each
such separate series or portfolio.
(b) "Board" shall mean the board of directors/trustees/managing general
partners/director general partners of the Fund, as the case may be.
(c) "The Depository Trust Company", a clearing agency registered with
the Securities and Exchange Commission under Section 17A of the Securities
Exchange Act of 1934 which acts as a securities depository and which has been
specifically approved as a securities depository for the Fund by the Board.
(d) "Authorized Officer", shall mean any of the following officers of
the Fund : The Chairman of the Board of Trustees, the President, a Vice
President, the Secretary, the Treasurer or Assistant Secretary or Assistant
Treasurer, or any other officer of the Fund duly authorized to sign by
appropriate resolution of the Board of Trustees. .
(e) "Participants Trust Company", a clearing agency registered with the
Securities and Exchange Commission under Section 17A of the Securities Exchange
Act of 1934 which acts as a securities depository and which has been
specifically approved as a securities depository for the Fund by the Board.
1
<PAGE>
(f) "Approved Clearing Agency" shall mean any other domestic clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934 which acts as a securities depository but
only if the Custodian has received a certified copy of a vote of the Board
approving such clearing agency as a securities depository for the Fund.
(g) "Federal Book-Entry System" shall mean the book-entry system
referred to in Rule 17f-4(b) under the Investment Company Act of 1940 for United
States and federal agency securities (i.e., as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, and the book-entry
regulations of federal agencies substantially in the form of Subpart O).
(h) "Approved Book-Entry System for Commercial Paper" shall mean a
system maintained by the Custodian or by a subcustodian employed pursuant to
Section 2 hereof for the holding of commercial paper in book-entry form but only
if the Custodian has received a certified copy of a vote of the Board approving
the participation by the Fund in such system.
(i) The Custodian shall be deemed to have received "proper instructions"
in respect of any of the matters referred to in this Agreement upon receipt of
written or facsimile instructions signed by such one or more person or persons
as the Board shall have from time to time authorized to give the particular
class of instructions in question. Electronic instructions for the purchase and
sale of securities which are transmitted by John Hancock Advisers, Inc. (the
"Adviser") to the Custodian shall be deemed to be proper instructions; the Fund
shall cause all such instructions to be confirmed in writing. Different persons
may be authorized to give instructions for different purposes. A certified copy
of a vote of the Board may be received and accepted by the Custodian as
conclusive evidence of the authority of any such person to act and may be
considered as in full force and effect until receipt of written notice to the
contrary. Such instructions may be general or specific in terms and, where
appropriate, may be standing instructions. Unless the vote delegating authority
to any person or persons to give a particular class of instructions specifically
requires that the approval of any person, persons or committee shall first have
been obtained before the Custodian may act on instructions of that class, the
Custodian shall be under no obligation to question the right of the person or
persons giving such instructions in so doing. Oral instructions will be
considered proper instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be confirmed
in writing. The Fund authorizes the Custodian to
2
<PAGE>
tape record any and all telephonic or other oral instructions given to the
Custodian. "Proper instructions" may also include communications effected
directly between electromechanical or electronic devices provided that the
President and Treasurer of the Fund and the Custodian are satisfied that such
procedures afford adequate safeguards for the Fund's assets. In performing its
duties generally, and more particularly in connection with the purchase, sale
and exchange of securities made by or for the Fund, the Custodian may take
cognizance of the provisions of the governing documents and registration
statement of the Fund as the same may from time to time be in effect (and votes,
resolutions or proceedings of the shareholders or the Board), but, nevertheless,
except as otherwise expressly provided herein, the Custodian may assume unless
and until notified in writing to the contrary that so-called proper instructions
received by it are not in conflict with or in any way contrary to any provisions
of such governing documents and registration statement, or votes, resolutions or
proceedings of the shareholders or the Board.
2. Employment of Custodian and Property to be Held by It
The Fund hereby appoints and employs the Bank as its Custodian and Agent
in accordance with and subject to the provisions hereof, and the Bank hereby
accepts such appointment and employment. The Fund agrees to deliver to the
Custodian all securities, participation interests, cash and other assets owned
by it, and all payments of income, payments of principal and capital
distributions and adjustments received by it with respect to all securities and
participation interests owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares ("Shares") of the
Fund as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held by the Fund and not delivered by
the Fund to the Custodian. The Fund will also deliver to the Bank from time to
time copies of its currently effective charter (or declaration of trust or
partnership agreement, as the case may be), By-Laws, prospectus, statement of
additional information and distribution agreement with its principal
underwriter, together with such resolutions, votes and other proceedings of the
Fund as may be necessary for or convenient to the Bank in the performance of its
duties hereunder.
The Custodian may from time to time employ one or more subcustodians to
perform such acts and services upon such terms and conditions as shall be
approved from time to time by the Board. Any such subcustodian so employed by
the Custodian shall be deemed to be the agent of the Custodian, and the
Custodian shall remain primarily responsible for the securities, participation
interests, moneys and other property of the Fund held by such subcustodian. For
the purposes of this Agreement, any property of the Fund held by any such
subcustodian (domestic or foreign) shall be deemed to be held by the Custodian
under the terms of this Agreement.
3. The Custodian as a Foreign Custody Manager
A. Definitions Capitalized terms in this Article 3 shall have the
following meanings:
(a) "Country risk" means all factors reasonably related to the systemic
risk of holding Foreign Assets in a particular country including, but not
limited to, a country's political environment; economic and financial
infrastructure (including financial institutions such as any Mandatory
Securities Depositories operating in the country); prevailing custody and
settlement practices; and laws and regulations applicable to the
safekeeping and recovery of Foreign Assets held in custody in that country.
(b) "Eligible Foreign Custodian" has the meaning set forth in section
(a)(1) of Rule 17f-5 and also includes a U.S. Bank.
3
<PAGE>
(c) "Foreign Assets" means any of the Fund's investments (including foreign
currencies) for which the primary market is outside the United States and
cash and cash equivalents as are reasonably necessary to effect the Fund's
transactions in these investments.
(d) "Foreign Custody Manager" has the meaning set forth in section (a)(2)
of Rule 17f-5; it is a Fund's Board of Directors or any person serving as
the Board's delegate under sections (b) or (d) of Rule 17f-5.
(e) "Mandatory Securities Depository" means a Securities Depository the use
of which is mandatory (i) by law or regulation; (ii) because securities
cannot be withdrawn from the depository; (iii) because maintaining
securities outside the Securities Depository would impair the liquidity of
the securities because settlement within the depository is mandatory and
the period of time required to deposit securities is longer than the
settlement period or where particular classes of transactions, such as
large trades or turn-around trades, are not available if the securities are
held in physical form; or (iv) because maintaining securities outside of
the Securities Depository is not consistent with prevailing custodial or
market practices generally accepted by institutional investors.
(f) "Securities Depository" has the same meaning set forth in section
(a)(6) of Rule 17f-5: it is a system for the central handling of securities
where all securities are of a particular class or series of any issuer
deposited within the system are treated as fungible and may be transferred
or pledged by bookkeeping entry without physical delivery of the
securities.
(g) "U.S. Bank" means a bank which qualifies to serve as a custodian of
assets of investment companies under ss.17(f) of the Investment Company Act
of 1940, as amended.
B. Delegation to the Custodian as Foreign Custody Manager Each Fund,
by resolution adopted by its Board, hereby appoints the Custodian
as the Foreign Custody Manager of the Fund and delegates to the
Custodian, the responsibilities set forth in this Article 3 with
respect to Foreign Assets held outside the United States, and the
Custodian hereby accepts this delegation.
C. Countries Covered The Foreign Custody Manager shall be responsible
for performing the delegated responsibilities defined below only
with respect to the countries listed on Schedule A, which may be
amended from time to time by the Foreign Custody Manager.
Mandatory Securities Depositories are listed on Schedule B, which
may be amended from time to time by the Foreign Custody Manager.
Schedules A and B may also be amended in accordance with
subsection F of Article 3.
D. Scope of Delegated Responsibilities
1) Selection of Eligible Foreign Custodians Subject to the
provisions of this Article 3 and Rule 17f-5 (and any other
applicable law), the Foreign Custody Manager may place and
maintain the Foreign Assets in the care of an Eligible
Foreign Custodian selected by the Foreign Custody Manager in
each country listed
4
<PAGE>
on Schedule A, as amended from time to time. In addition,
the Foreign Custody Manager shall provide the Fund with all
requisite forms and documentation to open an account in any
country listed on Schedule A as requested by any Authorized
Officer and shall assist the Fund with the filing and
processing of these forms and documents. Execution of this
amended and restated Agreement by the Fund shall be deemed
to be a Proper Instruction to open an account, or to place
or maintain Foreign Assets in each country listed on
Schedule A.
In performing its delegated responsibilities as Foreign
Custody Manager to place or maintain Foreign Assets with an
Eligible Foreign Custodian, the Foreign Custody Manager
shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to
custodians in the country in which the Foreign Assets will
be held by that Eligible Foreign Custodian, after
considering all factors relevant to the safekeeping of those
assets. These factors include, without limitation:
(i) the Eligible Foreign Custodian's practices, procedures
and internal controls, including but not limited to, the
physical protections available for certificated securities
(if applicable), its methods of keeping custodial records
and its security and data protection practices;
(ii) whether the Eligible Foreign Custodian has the
requisite financial strength to provide reasonable care for
Foreign Assets;
(iii) the Eligible Foreign Custodian's general reputation
and standing and, in the case of any Securities Depository,
the Securities Depository's operating history and the number
of participants; and
(iv) whether the Fund will have jurisdiction over and be
able to enforce judgments against the Eligible Foreign
Custodian, such as by virtue of the existence of any offices
of the Eligible Foreign Custodian in the United States or
the Eligible Foreign Custodian's consent to service of
process in the United States.
2) Contracts With Eligible Foreign Custodians For each Eligible
Foreign Custodian selected by the Foreign Custody Manager,
the Foreign Custody Manager shall (or, in the case of a
Securities Depository which is not a Mandatory Securities
Depository, may under the rules or established practices or
procedures of the Securities Depository) enter into a
written contract governing the Fund's foreign custody
arrangements with the Eligible Foreign Custodian. The
Foreign Custody Manager shall determine that each contract
will provide reasonable care for the Foreign Assets held by
that Eligible Foreign Custodian based on the standards
specified in paragraph 1 of subsection D of Article 3 of
this Agreement. Each contract shall include provisions that
provide:
5
<PAGE>
(i) for indemnification or insurance arrangements (or any
combination of the foregoing) so that the Fund will be
adequately protected against the risk of loss of the
Foreign Assets held in accordance with the contract;
(ii) that the Foreign Assets will not be subject to any
right, security interest, lien or claim of any kind in
favor of the Eligible Foreign Custodian or its creditors
except a claim of payment for their safe custody or
administration or, in the case of cash deposits, liens or
rights in favor of creditors of the Eligible Foreign
Custodian arising under bankruptcy, insolvency or similar
laws;
(iii) that beneficial ownership of the Foreign Assets will
be freely transferable without the payment of money or
value other than for safe custody or administration;
(iv) that adequate records will be maintained identifying
the Foreign Assets as belonging to the Fund or as being
held by a third party for the benefit of the Fund;
(v) that the Fund's independent public accountants will be
given access to those records or confirmation of the
contents of those records; and
(vi) that the Fund will receive periodic reports with
respect to the safekeeping of the Foreign Assets,
including, but not limited to, notification of any
transfer of the Foreign Assets to or from the Fund's
account or a third party account containing the Foreign
Assets held for the benefit of the Fund, or, in lieu of
any or all of the provisions set forth in (i) through (vi)
above, such other provisions that the Foreign Custody
Manager determines will provide, in their entirety, the
same or greater level of care and protection for the
Foreign Assets as the provisions set forth in (i) through
(vi) above in their entirety.
3) Monitoring In each case in which the Foreign Custody
Manager maintains Foreign Assets with an Eligible Foreign
Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to
monitor at reasonable intervals the initial and continued
appropriateness of (i) maintaining the Foreign Assets with
the Eligible Foreign Custodian and (ii) the contract
governing the custody arrangements established by the
Foreign Custody Manager with the Eligible Foreign
Custodian. The Foreign Custody Manager shall consider all
factors and criteria set forth in subparagraphs 1 and 2 of
subsection D of Article 3 of this Agreement.
6
<PAGE>
E. Standard of Care as Foreign Custody Manager of the Fund In
performing the responsibilities delegated to it, the Foreign
Custody Manager agrees to exercise reasonable care, prudence and
diligence as a person having responsibility for the safekeeping of
assets of management investment companies registered under the
Investment Company Act of 1940, as amended, would exercise. The
Foreign Custody Manager agrees to notify immediately the Adviser
and the Board if, at any time, the Foreign Custody Manager
believes it cannot perform, in accordance with the foregoing
standard of care, its duties hereunder generally or with respect
to any country specified in Schedule A.
F. Reporting Requirements The Foreign Custody Manager shall list on
Schedule A the Eligible Foreign Custodians selected by the Foreign
Custody Manager to maintain the Fund's assets. The Foreign
Custody Manager shall report the withdrawal of the Foreign Assets
from an Eligible Foreign Custodian and the placement of the
Foreign Assets with another Eligible Foreign Custodian by
providing to the Adviser an amended Schedule A promptly. The
Foreign Custody Manager shall make written reports notifying the
Adviser and the Board of any other material change in the foreign
custody arrangements of the Fund described in this Article 3.
Amended Schedules A or B and material change reports shall be
provided to the Board quarterly, provided that, if the Foreign
Custody Manager or the Adviser determines that any matter should
be reported sooner, the Foreign Custody Manager shall promptly,
following the occurrence of the event, direct the report to the
Fund's Secretary for forwarding to the Board. At least annually,
the Foreign Custody Manager shall provide the Adviser and the
Board a written statement enabling the Board to determine that it
is reasonable to rely on the Foreign Custody Manager to perform
its delegated duties under this Article 3 and that the foreign
custody arrangements delegated to the Foreign Custody Manager
continue to meet the requirements of Rule 17f-5 under the
Investment Company Act of 1940, as amended. The Foreign Custody
Manager will also provide monthly reports on each Eligible Foreign
Custodian listing all holdings and current market values.
G. Representations with respect to Rule 17f-5 The Foreign Custody
Manager represents to the Fund that it is a U.S. Bank as defined
in section (a)(7) of Rule 17f-5.
The Fund represents to the Custodian that the Board has determined
that it is reasonable for the Board to rely on the Custodian to
perform the responsibilities delegated pursuant to this Article as
the Foreign Custody Manager of the Fund.
H. Effective Date and Termination of the Custodian as Foreign Custody
Manager The Board's delegation to the Custodian as Foreign Custody
Manager of the Fund shall be effective as of the date of execution
of this amended and restated Agreement and shall remain in effect
until terminated at any time, without penalty, by written notice
from the terminating party to the non-terminating party.
Termination will become effective sixty days after receipt by the
non-terminating party of the notice.
7
<PAGE>
I. Withdrawal of Custodian as Foreign Custody Manager with respect to
Designated Countries and with respect to Eligible Foreign
Custodians Following the receipt of Proper Instructions directing
the Foreign Custody Manager to close the account of the Fund with
the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country and to remove that country from
Schedule A, the delegation by the Board to the Custodian as
Foreign Custody Manager for that country shall be deemed to have
been withdrawn with respect to that country and the Custodian
shall cease to be the Foreign Custody Manager of the Fund with
respect to that country after settlement of all pending trades.
The Foreign Custody Manager may withdraw its acceptance of
delegated responsibilities with respect to a country listed on
Schedule A upon written notice to the Fund in accordance with
subsection F. Sixty days (or other period agreed to by the parties
in writing) after receipt of any notice by the Fund, the Custodian
shall have no further responsibility as Foreign Custody Manager to
the Fund with respect to that country.
In the event the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has
selected are no longer appropriate because the applicable Eligible
Foreign Custodian is no longer able to provide reasonable care for
Foreign Assets held in the country, or an arrangement no longer
meets the requirements of Rule 17f-5, the Foreign Custody Manager
shall notify the Adviser, the Board and the Fund in accordance
with subsection F hereunder. If the Adviser determines that
withdrawal is in the best interest of the Fund, the Foreign
Custody Manager shall withdraw all Foreign Assets from the
Eligible Foreign Custodian, as soon as reasonably practicable, and
shall provide alternative safe keeping acceptable to the Foreign
Custody Manager. If the Adviser determines that it is in the best
interest of the Fund to withdraw all Foreign Assets and this
withdrawal would require liquidation of any Foreign Assets or
would materially and adversely impair the liquidity, value or
other investment characteristic of any Foreign Assets, the Foreign
Custody Manager shall immediately provide information regarding
the particular circumstances to the Adviser and to the Board and
shall act in accordance with instructions received from an
Authorized Officer, with respect to the liquidation or other
withdrawal.
J. Guidelines for the Exercise of Delegated Authority and Provision
of Information Regarding Country Risk Nothing in this Article 3
shall require the Foreign Custody Manager to consider Country Risk
as part of its delegated responsibilities under subsection D of
Article 3. The Fund and the Custodian each expressly acknowledge
that the Foreign Custody Manager shall not be responsible for, or
liable for any loss in connection with the placement of Foreign
Assets with or withdrawal of Foreign Assets from a Mandatory
Securities Depository nor be delegated any responsibilities under
this Article 3 with respect to Mandatory Securities Depositories
other than those set forth below.
8
<PAGE>
With respect to the countries listed in Schedule A, or added
thereto, the Foreign Custody Manager agrees to provide annually to
the Board and the Adviser, information relating to the Country
Risks of holding Foreign Assets in such countries, including but
not limited to, the Mandatory Securities Depositories, if any,
operating in the country. In addition, the Foreign Custody Manager
shall use reasonable care in the gathering of this information and
with regard to, among other things, the completeness and accuracy
of this information. The information furnished annually by the
Foreign Custody Manager to the Board should include but not be
limited to the following, if available:
(i) Legal Opinion regarding whether applicable foreign law
would restrict the access of the Fund's independent public
accountants to the books and records of the foreign
custodian, whether applicable foreign law would restrict
the Fund's ability to recover its assets in the event of
bankruptcy of the foreign custodian, whether applicable
foreign law would restrict the Fund's ability to recover
assets lost while under the foreign custodian's control,
the likelihood of expropriation, nationalization, freezes
or confiscation of the Fund's assets and whether there are
reasonably foreseeable difficulties in converting the
Fund's cash into U.S. dollars, or such other form of Legal
Opinion as is customary in association with Rule 17f-5
from time to time,
(ii) audit report of the Foreign Custody Manager,
(iii) copy of balance sheet from annual report of the
custodian,
(iv) summary of Central Depository Information,
(v) country profile materials containing market practice
for: delivery versus payment, settlement method, currency
restrictions, buy-in practice, Foreign ownership limits
and unique market arrangements,
(vi) The Foreign Custody Manager shall also provide such
other information as may be reasonably available relating
to Mandatory Securities Depositories, and, in accordance
with applicable requirements promulgated by the SEC from
time to time, to the criteria as set forth on Appendix B
hereto, as such Appendix may be revised by the parties
hereto from time to time; and,
(vii) such other materials as the Board may reasonably
request from time to time, including copies of contracts
with the subcustodians.
K. Most Favored Client If at any time the Foreign Custody Manager
shall be a party to an agreement, to serve as a Foreign Custody
Manager to an investment company, that provides for either (a) a
standard of care with respect to the selection of Eligible Foreign
Custodians in any jurisdiction higher than that set forth in
paragraph 1 of subsection D of Article 3 of this Agreement or
(b) a standard of care with respect to the exercise of the Foreign
Custody Manager's duties other than
9
<PAGE>
that set forth in subsection F of Article 3 of this Agreement, the
Foreign Custody Manager agrees to notify the Fund of this fact and
to raise the applicable standard of care hereunder to the standard
specified in the other agreement. In the event that the Foreign
Custody Manager shall in the future offer review or information
services with respect to Mandatory Securities Depositories in
addition to any services provided hereunder, the Foreign Custody
Manager agrees that it shall notify the Fund of this fact and
shall offer these services to the Fund.
L. Direction as to Eligible Foreign Custodians Notwithstanding
Article 3 of this Agreement, the Fund or the Adviser may direct
the Custodian to place and maintain Foreign Assets with a
particular Eligible Foreign Custodian acceptable to the Foreign
Custody Manager. In such event, the Custodian shall be entitled to
rely on any instruction as a Proper Instruction and may limit its
duties under this Article 3 of the Agreement with respect to such
arrangements by describing any limitations in writing with respect
to each instance.
4. Duties of the Custodian with Respect to Property of the Fund
A. Safekeeping and Holding of Property The Custodian shall keep
safely all property of the Fund and on behalf of the Fund shall
from time to time receive delivery of Fund property for
safekeeping. The Custodian shall hold, earmark and segregate on
its books and records for the account of the Fund all property of
the Fund, including all securities, participation interests and
other assets of the Fund (1) physically held by the Custodian,
(2) held by any subcustodian referred to in Section 2 hereof or by
any agent referred to in Paragraph K hereof, (3) held by or
maintained in The Depository Trust Company or in Participants
Trust Company or in an Approved Clearing Agency or in the Federal
Book-Entry System or in an Approved Foreign Securities Depository,
each of which from time to time is referred to herein as a
"Securities System", and (4) held by the Custodian or by any
subcustodian referred to in Section 2 hereof and maintained in any
Approved Book-Entry System for Commercial Paper.
B. Delivery of Securities The Custodian shall release and deliver
securities or participation interests owned by the Fund held (or
deemed to be held) by the Custodian or maintained in a Securities
System account or in an Approved Book-Entry System for Commercial
Paper account only upon receipt of proper instructions, which may
be continuing instructions when deemed appropriate by the parties,
and only in the following cases:
1) Upon sale of such securities or participation interests
for the account of the Fund, but only against receipt of
payment therefor; if delivery is made in Boston or New
York City, payment therefor shall be made in accordance
with generally accepted clearing house procedures or by
use of Federal Reserve Wire System procedures; if delivery
is made elsewhere payment therefor shall be in accordance
with the then current "street delivery" custom or in
accordance with such procedures agreed to in writing from
time to time by the parties hereto; if the sale is
10
<PAGE>
effected through a Securities System, delivery and payment
therefor shall be made in accordance with the provisions
of Paragraph L hereof; if the sale of commercial paper is
to be effected through an Approved Book-Entry System for
Commercial Paper, delivery and payment therefor shall be
made in accordance with the provisions of Paragraph M
hereof; if the securities are to be sold outside the
United States, delivery may be made in accordance with
procedures agreed to in writing from time to time by the
parties hereto; for the purposes of this subparagraph, the
term "sale" shall include the disposition of a portfolio
security (i) upon the exercise of an option written by the
Fund and (ii) upon the failure by the Fund to make a
successful bid with respect to a portfolio security, the
continued holding of which is contingent upon the making
of such a bid;
2) Upon the receipt of payment in connection with any
repurchase agreement or reverse repurchase agreement
relating to such securities and entered into by the Fund;
3) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
4) To the issuer thereof or its agent when such securities or
participation interests are called, redeemed, retired or
otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
5) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee of the
Custodian or into the name or nominee name of any agent
appointed pursuant to Paragraph K hereof or into the name
or nominee name of any subcustodian employed pursuant to
Section 2 hereof; or for exchange for a different number
of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided
that, in any such case, the new securities or
participation interests are to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
6) To the broker selling the same for examination in
accordance with the "street delivery" custom; provided
that the Custodian shall adopt such procedures as the Fund
from time to time shall approve to ensure their prompt
return to the Custodian by the broker in the event the
broker elects not to accept them;
7) For exchange or conversion pursuant to any plan of merger,
consolidation, re capitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion of
such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian or any
subcustodian employed pursuant to Section 2 hereof;
11
<PAGE>
8) In the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such
warrants, rights or similar securities, or the surrender
of interim receipts or temporary securities for definitive
securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
9) For delivery in connection with any loans of securities
made by the Fund (such loans to be made pursuant to the
terms of the Fund's current registration statement), but
only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may
be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities.
10) For delivery as security in connection with any borrowings
by the Fund requiring a pledge or hypothecation of assets
by the Fund (if then permitted under circumstances
described in the current registration statement of the
Fund), provided, that the securities shall be released
only upon payment to the Custodian of the monies borrowed,
except that in cases where additional collateral is
required to secure a borrowing already made, further
securities may be released for that purpose; upon receipt
of proper instructions, the Custodian may pay any such
loan upon redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note or
notes evidencing the loan;
11) When required for delivery in connection with any
redemption or repurchase of Shares of the Fund in
accordance with the provisions of Paragraph J hereof;
12) For delivery in accordance with the provisions of any
agreement between the Custodian (or a subcustodian
employed pursuant to Section 2 hereof) and a broker-dealer
registered under the Securities Exchange Act of 1934 and,
if necessary, the Fund, relating to compliance with the
rules of The Options Clearing Corporation or of any
registered national securities exchange, or of any similar
organization or organizations, regarding deposit or escrow
or other arrangements in connection with options
transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian (or a subcustodian
employed pursuant to Section 2 hereof), and a futures
commission merchant, relating to compliance with the rules
of the Commodity Futures Trading Commission and/or of any
contract market or commodities exchange or similar
organization, regarding futures margin account deposits or
payments in connection with futures transactions by the
Fund;
12
<PAGE>
14) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions, a
certified copy of a vote of the Board specifying the
securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose
to be proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
C. Registration of Securities Securities held by the Custodian
(other than bearer securities) for the account of the Fund shall
be registered in the name of the Fund or in the name of any
nominee of the Fund or of any nominee of the Custodian, or in the
name or nominee name of any agent appointed pursuant to Paragraph
K hereof, or in the name or nominee name of any subcustodian
employed pursuant to Section 2 hereof, or in the name or nominee
name of The Depository Trust Company or Participants Trust Company
or Approved Clearing Agency or Federal Book-Entry System or
Approved Book-Entry System for Commercial Paper; provided, that
securities are held in an account of the Custodian or of such
agent or of such subcustodian containing only assets of the Fund
or only assets held by the Custodian or such agent or such
subcustodian as a custodian or subcustodian or in a fiduciary
capacity for customers. All certificates for securities accepted
by the Custodian or any such agent or subcustodian on behalf of
the Fund shall be in "street" or other good delivery form or shall
be returned to the selling broker or dealer who shall be advised
of the reason thereof.
D. Bank Accounts The Custodian shall open and maintain a separate
bank account or accounts in the name of the Fund, subject only to
draft or order by the Custodian acting in pursuant to the terms
of this Agreement, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or
for the account of the Fund other than cash maintained by the Fund
in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as
Custodian in the banking department of the Custodian or in such
other banks or trust companies as the Custodian may in its
discretion deem necessary or desirable; provided, however, that
every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each
such bank or trust company and the funds to be deposited with each
such bank or trust company shall be approved in writing by an
Authorized Officer. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be subject to
withdrawal only by the Custodian in that capacity.
The Custodian may, on behalf of any Fund, open and cause to be
maintained outside the United States a bank account with (a) an
Eligible Foreign Custodian (as defined in Article 3) or (b) any
person with whom property of the Fund may be placed and maintained
outside of the United States under (i) ss.17(f) or 26(a) of the
1940 Act, without regard to Rule 17f-5 or (ii) an order of the
U.S. Securities and Exchange Commission (a "permissible Foreign
Custodian"). Such account(s) shall be subject only to draft or
order by the Custodian or Eligible Foreign Custodian or
Permissible Foreign Custodian acting pursuant to the terms of this
Agreement to hold cash received by or from or for the account of
the Fund.
13
<PAGE>
E. Payment for Shares of the Fund The Custodian shall make
appropriate arrangements with the Transfer Agent and the principal
underwriter of the Fund to enable the Custodian to make certain it
promptly receives the cash or other consideration due to the Fund
for such new or treasury Shares as may be issued or sold from time
to time by the Fund, in accordance with the governing documents
and offering prospectus and statement of additional information of
the Fund. The Custodian will provide prompt notification to the
Fund of any receipt by it of payments for Shares of the Fund.
F. Investment and Availability of Federal Funds Upon agreement
between the Fund and the Custodian, the Custodian shall, upon the
receipt of proper instructions, which may be continuing
instructions when deemed appropriate by the parties, invest in
such securities and instruments as may be set forth in such
instructions on the same day as received all federal funds
received after a time agreed upon between the Custodian and the
Fund.
G. Collections The Custodian shall promptly collect all income and
other payments with respect to registered securities held
hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall promptly
collect all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such
securities are held by the Custodian or agent thereof and shall
credit such income, as collected, to the Fund's custodian account.
The Custodian shall do all things necessary and proper in connection with such
prompt collections and, without limiting the generality of the foregoing, the
Custodian shall
1) Present for payment all coupons and other income items
requiring presentations;
2) Present for payment all securities which may mature or be
called, redeemed, retired or otherwise become payable;
3) Endorse and deposit for collection, in the name of the
Fund, checks, drafts or other negotiable instruments;
4) Credit income from securities maintained in a Securities
System or in an Approved Book-Entry System for Commercial
Paper at the time funds become available to the Custodian;
in the case of securities maintained in The Depository
Trust Company funds shall be deemed available to the Fund
not later than the opening of business on the first
business day after receipt of such funds by the Custodian.
14
<PAGE>
The Custodian shall notify the Fund as soon as reasonably practicable whenever
income due on any security is not promptly collected. In any case in which the
Custodian does not receive any due and unpaid income after it has made demand
for the same, it shall immediately so notify the Fund in writing, enclosing
copies of any demand letter, any written response thereto, and memoranda of all
oral responses thereto and to telephonic demands, and await instructions from
the Fund; the Custodian shall in no case have any liability for any nonpayment
of such income provided the Custodian meets the standard of care set forth in
Section 8 hereof. The Custodian shall not be obligated to take legal action for
collection unless and until reasonably indemnified to its satisfaction.
The Custodian shall also receive and collect all stock dividends, rights and
other items of like nature, and deal with the same pursuant to proper
instructions relative thereto.
H. Payment of Fund Moneys Upon receipt of proper instructions, which
may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out moneys of the Fund in the
following cases only:
1) Upon the purchase of securities, participation interests,
options, futures contracts, forward contracts and options
on futures contracts purchased for the account of the Fund
but only (a) against the receipt of:
(i) such securities registered as provided in
Paragraph C hereof or in proper form for
transfer or
(ii) detailed instructions signed by an officer of the
Fund regarding the participation interests to be
purchased or
(iii) written confirmation of the purchase by the Fund
of the options, futures contracts, forward
contracts or options on futures contracts
by the Custodian (or by a subcustodian employed pursuant
to Section 2 hereof or by a clearing corporation of a
national securities exchange of which the Custodian is a
member or by any bank, banking institution or trust
company doing business in the United States or abroad
which is qualified under the Investment Company Act of
1940 to act as a custodian and which has been designated
by the Custodian as its agent for this purpose or by the
agent specifically designated in such instructions as
representing the purchasers of a new issue of privately
placed securities); (b) in the case of a purchase effected
through a Securities System, upon receipt of the
securities by the Securities System in accordance with the
conditions set forth in Paragraph L hereof; (c) in the
case of a purchase of commercial paper effected through an
Approved
15
<PAGE>
Book-Entry System for Commercial Paper, upon
receipt of the paper by the Custodian or subcustodian in
accordance with the conditions set forth in Paragraph M
hereof; (d) in the case of repurchase agreements entered
into between the Fund and another bank or a broker-dealer,
against receipt by the Custodian of the securities
underlying the repurchase agreement either in certificate
form or through an entry crediting the Custodian's
segregated, non-proprietary account at the Federal Reserve
Bank of Boston with such securities along with written
evidence of the agreement by the bank or broker-dealer to
repurchase such securities from the Fund; or (e) with
respect to securities purchased outside of the United
States, in accordance with written procedures agreed to
from time to time in writing by the parties hereto;
2) When required in connection with the conversion, exchange
or surrender of securities owned by the Fund as set forth
in Paragraph B hereof;
3) When required for the redemption or repurchase of Shares
of the Fund in accordance with the provisions of Paragraph
J hereof;
4) For the payment of any expense or liability incurred by
the Fund, including but not limited to the following
payments for the account of the Fund: advisory fees,
distribution plan payments, interest, taxes, management
compensation and expenses, accounting, transfer agent and
legal fees, and other operating expenses of the Fund
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends or other distributions to
holders of Shares declared or authorized by the Board; and
6) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions, a
certified copy of a vote of the Board, specifying the
amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose
to be a proper corporate purpose, and naming the person or
persons to whom such payment is to be made.
I. Liability for Payment in Advance of Receipt of Securities
Purchased In any and every case where payment for purchase of
securities for the account of the Fund is made by the Custodian in
advance of receipt of the securities purchased in the absence of
specific written instructions signed by two officers of the Fund
to so pay in advance, the Custodian shall be absolutely liable to
the Fund for such securities to the same extent as if the
securities had been received by the Custodian; except that in the
case of a repurchase agreement entered into by the Fund with a
bank which is a member of the Federal Reserve System, the
Custodian may transfer funds to the account of such bank prior to
the receipt of (i) the securities in certificate form subject to
such repurchase agreement
16
<PAGE>
or (ii) written evidence that the securities subject to such
repurchase agreement have been transferred by book-entry into a
segregated non-proprietary account of the Custodian maintained
with the Federal Reserve Bank of Boston or (iii) the safekeeping
receipt, provided that such securities have in fact been so
transferred by book-entry and the written repurchase agreement is
received by the Custodian in due course. With respect to
securities and funds held by a subcustodian, either directly or
indirectly (including by a Securities Depository or clearing
corporation), notwithstanding any provisions of this Agreement to
the contrary, payment for securities purchased and delivery of
securities sold may be made prior to receipt of securities or
payment respectively, and securities or payment may be received in
a form in accordance with (a) governmental regulations, (b) rules
of Securities Depositories and clearing agencies, (c) generally
accepted trade practice in the applicable local market, (d) the
terms and characteristics of the particular investment, or (e) the
terms of instructions.
J. Payments for Repurchases or Redemptions of Shares of the Fund From
such funds as may be available for the purpose, but subject to any
applicable votes of the Board and the current redemption and
repurchase procedures of the Fund, the Custodian shall, upon
receipt of written instructions from the Fund or from the Fund's
transfer agent or from the principal underwriter, make funds
and/or portfolio securities available for payment to holders of
Shares who have caused their Shares to be redeemed or repurchased
by the Fund or for the Fund's account by its transfer agent or
principal underwriter.
The Custodian may maintain a special checking account upon which
special checks may be drawn by shareholders of the Fund holding
Shares for which certificates have not been issued. Such checking
account and such special checks shall be subject to such rules and
regulations as the Custodian and the Fund may from time to time
adopt. The Custodian or the Fund may suspend or terminate use of
such checking account or such special checks (either generally or
for one or more shareholders) at any time. The Custodian and the
Fund shall notify the other immediately of any such suspension or
termination.
K. Appointment of Agents by the Custodian The Custodian may at any
time or times in its discretion appoint (and may at any time
remove) any other bank or trust company (provided such bank or
trust company is itself qualified under the Investment Company Act
of 1940 to act as a custodian or is itself an eligible foreign
custodian within the meaning of Rule 17f-5 under said Act) as the
agent of the Custodian to carry out such of the duties and
functions of the Custodian described in this Section 3 as the
Custodian may from time to time direct; provided, however, that
the appointment of any such agent shall not relieve the Custodian
of any of its responsibilities or liabilities hereunder, and as
between the Fund and the Custodian the Custodian shall be fully
responsible for the acts and omissions of any such agent. For the
purposes of this Agreement, any property of the Fund held by any
such agent shall be deemed to be held by the Custodian hereunder.
17
<PAGE>
L. Deposit of Fund Portfolio Securities in Securities Systems The
Custodian may deposit and/or maintain securities owned by the Fund
(1) in The Depository Trust Company;
(2) in Participants Trust Company;
(3) in any other Approved Clearing Agency;
(4) in the Federal Book-Entry System; or
(5) in a Securities Depository (as defined in
Article 3).
in each case only in accordance with applicable Federal Reserve
Board and Securities and Exchange Commission rules and
regulations, and at all times subject to the following
provisions:
(a) The Custodian may (either directly or through one or more
subcustodians employed pursuant to Section 2) keep securities of
the Fund in a Securities System provided that such securities are
maintained in a non-proprietary account ("Account") of the
Custodian or such subcustodian in the Securities System which
shall not include any assets of the Custodian or such subcustodian
or any other person other than assets held by the Custodian or
such subcustodian as a fiduciary, custodian, or otherwise for its
customers.
(b) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall identify by
book-entry those securities belonging to the Fund, and the
Custodian shall be fully and completely responsible for
maintaining a record keeping system capable of accurately and
currently stating the Fund's holdings maintained in each such
Securities System.
(c) The Custodian shall pay for securities purchased in book-entry
form for the account of the Fund only upon (i) receipt of notice
or advice from the Securities System that such securities have
been transferred to the Account, and (ii) the making of any entry
on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund only upon
(i) receipt of notice or advice from the Securities System that
payment for such securities has been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Fund.
Copies of all notices or advises from the Securities System of
transfers of securities for the account of the Fund shall identify
the Fund, be maintained for the Fund by the Custodian and be
promptly provided to the Fund at its request. The Custodian shall
promptly send to the Fund confirmation of each transfer to or from
the account of the Fund in the form of a written advice or notice
of each such transaction, and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's transactions in the
Securities System for the account of the Fund on the next business
day.
18
<PAGE>
(d) The Custodian shall promptly send to the Fund any report or other
communication received or obtained by the Custodian relating to the
Securities System's accounting system, system of internal accounting
controls or procedures for safeguarding securities deposited in the
Securities System; the Custodian shall promptly send to the Fund any
report or other communication relating to the Custodian's internal
accounting controls and procedures for safeguarding securities
deposited in any Securities System; and the Custodian shall ensure that
any agent appointed pursuant to Paragraph K hereof or any subcustodian
employed pursuant to Section 2 hereof shall promptly send to the Fund
and to the Custodian any report or other communication relating to such
agent's or subcustodian's internal accounting controls and procedures
for safeguarding securities deposited in any Securities System. The
Custodian's books and records relating to the Fund's participation in
each Securities System will at all times during regular business hours
be open to the inspection of the Fund's Authorized Officers, employees
or agents.
(e) The Custodian shall not act under this Paragraph L in the absence
of receipt of a certificate of an Authorized Officer that the Board has
approved the use of a particular Securities System; the Custodian shall
also obtain appropriate assurance from an Authorized Officer that the
Board has annually reviewed and approved the continued use by the Fund
of each Securities System, so long as such review and approval is
required by Rule 17f-4 under the Investment Company Act of 1940, and
the Fund shall promptly notify the Custodian if the use of a Securities
System is to be discontinued; at the request of the Fund, the Custodian
will terminate the use of any such Securities System as promptly as
practicable.
(f) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of its
agents or subcustodians or of any of its or their employees or from any
failure of the Custodian or any such agent or subcustodian to enforce
effectively such rights as it may have against the Securities System or
any other person; at the election of the Fund, it shall be entitled to
be subrogated to the rights of the Custodian with respect to any claim
against the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any such loss or
damage.
M. Deposit of Fund Commercial Paper in an Approved Book-Entry System
for Commercial Paper Upon receipt of proper instructions with respect
to each issue of direct issue commercial paper purchased by the Fund,
the Custodian may deposit and/or maintain direct issue commercial paper
owned by the Fund in any Approved Book-Entry System for Commercial
Paper, in each case only in accordance with applicable Securities and
Exchange Commission rules, regulations, and no-action correspondence,
and at all times subject to the following provisions:
19
<PAGE>
(a) The Custodian may (either directly or through one or more
subcustodians employed pursuant to Section 2) keep
commercial paper of the Fund in an Approved Book-Entry
System for Commercial Paper, provided that such paper is
issued in book entry form by the Custodian or
subcustodian on behalf of an issuer with which the
Custodian or subcustodian has entered into a book-entry
agreement and provided further that such paper is
maintained in a non-proprietary account ("Account") of the
Custodian or such subcustodian in an Approved Book-Entry
System for Commercial Paper which shall not include any
assets of the Custodian or such subcustodian or any other
person other than assets held by the Custodian or such
subcustodian as a fiduciary, custodian, or otherwise for
its customers.
(b) The records of the Custodian with respect to commercial
paper of the Fund which is maintained in an Approved
Book-Entry System for Commercial Paper shall identify by
book-entry each specific issue of commercial paper
purchased by the Fund which is included in the System and
shall at all times during regular business hours be open
for inspection by authorized officers, employees or agents
of the Fund. The Custodian shall be fully and completely
responsible for maintaining a record keeping system
capable of accurately and currently stating the Fund's
holdings of commercial paper maintained in each such
System.
(c) The Custodian shall pay for commercial paper purchased in
book-entry form for the account of the Fund only upon
contemporaneous (i) receipt of notice or advice from the
issuer that such paper has been issued, sold and
transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such
purchase, payment and transfer for the account of the
Fund. The Custodian shall transfer such commercial paper
which is sold or cancel such commercial paper which is
redeemed for the account of the Fund only upon
contemporaneous (i) receipt of notice or advice that
payment for such paper has been transferred to the
Account, and (ii) the making of an entry on the records of
the Custodian to reflect such transfer or redemption and
payment for the account of the Fund. Copies of all
notices, advises and confirmations of transfers of
commercial paper for the account of the Fund shall
identify the Fund, be maintained for the Fund by the
Custodian and be promptly provided to the Fund at its
request. The Custodian shall promptly send to the Fund
confirmation of each transfer to or from the account of
the Fund in the form of a written advice or notice of each
such transaction, and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's
transactions in the System for the account of the Fund on
the next business day.
20
<PAGE>
(d) The Custodian shall promptly send to the Fund any report
or other communication received or obtained by the Custodian
relating to each System's accounting system, system of
internal accounting controls or procedures for safeguarding
commercial paper deposited in the System; the Custodian shall
promptly send to the Fund any report or other communication
relating to the Custodian's internal accounting controls and
procedures for safeguarding commercial paper deposited in any
Approved Book-Entry System for Commercial Paper; and the
Custodian shall ensure that any agent appointed pursuant to
Paragraph K hereof or any subcustodian employed pursuant to
Section 2 hereof shall promptly send to the Fund and to the
Custodian any report or other communication relating to such
agent's or subcustodian's internal accounting controls and
procedures for safeguarding securities deposited in any
Approved Book-Entry System for Commercial Paper.
(e) The Custodian shall not act under this Paragraph M in the
absence of receipt of a certificate of an officer of the Fund
that the Board has approved the use of a particular Approved
Book-Entry System for Commercial Paper; the Custodian shall
also obtain appropriate assurance from an Authorized Officer
that the Board has annually reviewed and approved the
continued use by the Fund of each Approved Book-Entry System
for Commercial Paper, so long as such review and approval is
required by Rule 17f-4 under the Investment Company Act of
1940, and the Fund shall promptly notify the Custodian if the
use of an Approved Book-Entry System for Commercial Paper is
to be discontinued; at the request of the Fund, the Custodian
will terminate the use of any such System as promptly as
practicable.
(f) The Custodian (or subcustodian, if the Approved Book-Entry
System for Commercial Paper is maintained by the subcustodian)
shall issue physical commercial paper or promissory notes
whenever requested to do so by the Fund or in the event of an
electronic system failure which impedes issuance, transfer or
custody of direct issue commercial paper by book-entry.
(g) Anything to the contrary in this Agreement notwithstanding,
the Custodian shall be liable to the Fund for any loss or
damage to the Fund resulting from use of any Approved
Book-Entry System for Commercial Paper by reason of any
negligence, misfeasance or misconduct of the Custodian or any
of its agents or subcustodians or of any of its or their
employees or from any failure of the Custodian or any such
agent or subcustodian to enforce effectively such rights as it
may have against this System, the issuer of the commercial
paper or any other person; at the election of the Fund, it
shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against this System, the
issuer of the commercial paper or any other person which the
Custodian may have as a consequence of any such loss or damage
if and to the extent that the Fund has not been made whole for
any such loss or damage.
21
<PAGE>
N. Segregated Account The Custodian shall upon receipt of proper
instructions establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Paragraph L hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and any registered
broker-dealer (or any futures commission merchant), relating to
compliance with the rules of the Options Clearing Corporation and
of any registered national securities exchange (or of the
Commodity Futures Trading Commission or of any contract market or
commodities exchange), or of any similar organization or
organizations, regarding escrow or deposit or other arrangements
in connection with transactions by the Fund, (ii) for purposes of
segregating cash or U.S. Government securities in connection with
options purchased, sold or written by the Fund or futures
contracts or options thereon purchased or sold by the Fund, (iii)
for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper
purposes, but only, in the case of clause (iv), upon receipt of,
in addition to proper instructions, a certificate signed by two
officers of the Fund, setting forth the purpose such segregated
account and declaring such purpose to be a proper purpose.
O. Ownership Certificates for Tax Purposes The Custodian shall
execute ownership and other certificates and affidavits for all
foreign, federal and state tax purposes in connection with
receipt of income or other payments with respect to securities
of the Fund held by it and in connection with transfers of
securities.
P. Proxies The Custodian shall, with respect to the securities
held by it hereunder, cause to be promptly delivered to the Fund
all forms of proxies and all notices of meetings and any other
notices or announcements or other written information affecting
or relating to the securities, and upon receipt of proper
instructions shall execute and deliver or cause its nominee to
execute and deliver such proxies or other authorizations as may
be required. Neither the Custodian nor its nominee shall
vote upon any of the securities or execute any proxy to
vote thereon or give any consent or take any other action with
respect thereto (except as otherwise herein provided) unless
ordered to do so by proper instructions.
Q. Communications Relating to Fund Portfolio Securities The Custodian
shall deliver promptly to the Fund all written information
(including, without limitation, pendency of call and maturities
of securities and participation interests and expirations of
rights in connection therewith and notices of exercise of call
and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the
Custodian from issuers and other persons relating to the
securities and participation interests being held for the Fund.
With respect to tender or exchange offers, the Custodian shall
deliver promptly to the Fund all written information received by
the Custodian from issuers and other persons relating to
the securities and participation interests whose tender or
exchange is sought and from the party (or his agents) making
the tender or exchange offer.
22
<PAGE>
R. Exercise of Rights; Tender Offers In the case of tender offers,
similar offers to purchase or exercise rights (including,
without limitation, pendency of calls and maturities of
securities and participation interests and expirations of rights
in connection therewith and notices of exercise of call and put
options and the maturity of futures contracts) affecting or
relating to securities and participation interests held by the
Custodian under this Agreement, the Custodian shall have
responsibility for promptly notifying the Fund of all such
offers in accordance with the standard of reasonable care set
forth in Section 8 hereof. For all such offers for which the
Custodian is responsible as provided in this Paragraph R, the
Fund shall have responsibility for providing the Custodian with
all necessary instructions in timely fashion. Upon receipt of
proper instructions, the Custodian shall timely deliver to the
issuer or trustee thereof, or to the agent of either,
warrants, puts, calls, rights or similar securities for
the purpose of being exercised or sold upon proper receipt
therefor and upon receipt of assurances satisfactory to the
Custodian that the new securities and cash, if any, acquired by
such action are to be delivered to the Custodian or any
subcustodian employed pursuant to Section 2 hereof. Upon receipt
of proper instructions, the Custodian shall timely deposit
securities upon invitations for tenders of securities upon proper
receipt therefor and upon receipt of assurances satisfactory to
the Custodian that the consideration to be paid or delivered or
the tendered securities are to be returned to the Custodian or
subcustodian employed pursuant to Section 2 hereof.
Notwithstanding any provision of this Agreement to the contrary,
the Custodian shall take all necessary action, unless otherwise
directed to the contrary by proper instructions, to comply with
the terms of all mandatory or compulsory exchanges, calls,
tenders, redemptions, or similar rights of security ownership, and
shall thereafter promptly notify the Fund in writing of such
action.
S. Depository Receipts The Custodian shall, upon receipt of proper
instructions, surrender or cause to be surrendered foreign
securities to the depository used by an issuer of American
Depository Receipts, European Depository Receipts or International
Depository Receipts (hereinafter collectively referred to as
"ADRs") for such securities, against a written receipt therefor
adequately describing such securities and written evidence
satisfactory to the Custodian that the depository has acknowledged
receipt of instructions to issue with respect to such securities
ADRs in the name of a nominee of the Custodian or in the name or
nominee name of any subcustodian employed pursuant to Section 2
hereof, for delivery to the Custodian or such subcustodian at such
place as the Custodian or such subcustodian may from time to time
designate. The Custodian shall, upon receipt of proper
instructions, surrender ADRs to the issuer thereof against a
written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian
that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depository to deliver the securities
underlying such ADRs to the Custodian or to a subcustodian
employed pursuant to Section 2 hereof.
23
<PAGE>
T. Interest Bearing Call or Time Deposits The Custodian shall, upon
receipt of proper instructions, place interest bearing fixed term
and call deposits with the banking department of such banking
institution (other than the Custodian) and in such amounts as
the Fund may designate. Deposits may be denominated in U.S.
Dollars or other currencies. The Custodian shall include in its
records with respect to the assets of the Fund appropriate
notation as to the amount and currency of each such deposit, the
accepting banking institution and other appropriate details
and shall retain such forms of advice or receipt evidencing the
deposit, if any, as may be forwarded to the Custodian by the
banking institution. Such deposits shall be deemed portfolio
securities of the applicable Fund for the purposes of this
Agreement, and the Custodian shall be responsible for the
collection of income from such accounts and the transmission of
cash to and from such accounts.
U. Options, Futures Contracts and Foreign Currency Transactions
1. Options. The Custodians shall, upon receipt of proper
instructions and in accordance with the provisions of any
agreement between the Custodian, any registered broker-dealer
and, if necessary, the Fund, relating to compliance with the
rules of the Options Clearing Corporation or of any registered
national securities exchange or similar organization or
organizations, receive and retain confirmations or other
documents, if any, evidencing the purchase or writing of an
option on a security, securities index, currency or other
financial instrument or index by the Fund; deposit and
maintain in a segregated account for each Fund separately,
either physically or by book-entry in a Securities System,
securities subject to a covered call option written by the
Fund; and release and/or transfer such securities or other
assets only in accordance with a notice or other communication
evidencing the expiration, termination or exercise of such
covered option furnished by the Options Clearing Corporation,
the securities or options exchange on which such covered
option is traded or such other organization as may be
responsible for handling such options transactions.
2. Futures Contracts The Custodian shall, upon receipt of
proper instructions, receive and retain confirmations and
other documents, if any, evidencing the purchase or sale of a
futures contract or an option on a futures contract by the
Fund; deposit and maintain in a segregated account, for the
benefit of any futures commission merchant, assets designated
by the Fund as initial, maintenance or variation "margin"
deposits (including mark-to-market payments) intended to
secure the Fund's performance of its obligations under any
futures contracts purchased or sold or any options on futures
contracts written by Fund, in accordance with the provisions
of any agreement or agreements among the Fund, the Custodian
and such futures commission merchant, designed to comply with
the rules of the Commodity Futures Trading Commission and/or
of any contract market or commodities exchange or similar
organization regarding such margin deposits or payments; and
release and/or transfer assets in such margin accounts only in
accordance with any such agreements or rules.
24
<PAGE>
3. Foreign Exchange Transactions The Custodian shall, pursuant
to proper instructions, enter into or cause a subcustodian to
enter into foreign exchange contracts, currency swaps or
options to purchase and sell foreign currencies for spot and
future delivery on behalf and for the account of the Fund.
Such transactions may be undertaken by the Custodian or
subcustodian with such banking or financial institutions or
other currency brokers, as set forth in proper instructions.
Foreign exchange contracts, swaps and options shall be deemed
to be portfolio securities of the Fund; and accordingly, the
responsibility of the Custodian therefor shall be the same as
and no greater than the Custodian's responsibility in respect
of other portfolio securities of the Fund. The Custodian shall
be responsible for the transmittal to and receipt of cash from
the currency broker or banking or financial institution with
which the contract or option is made, the maintenance of
proper records with respect to the transaction and the
maintenance of any segregated account required in connection
with the transaction. The Custodian shall have no duty with
respect to the selection of the currency brokers or banking or
financial institutions with which the Fund deals or for their
failure to comply with the terms of any contract or option.
Without limiting the foregoing, it is agreed that upon receipt
of proper instructions, the Custodian may, and insofar as
funds are made available to the Custodian for the purpose, (if
determined necessary by the Custodian to consummate a
particular transaction on behalf and for the account of the
Fund) make free outgoing payments of cash in the form of U.S.
dollars or foreign currency before receiving confirmation of a
foreign exchange contract or swap or confirmation that the
countervalue currency completing the foreign exchange contract
or swap has been delivered or received. The Custodian shall
not be responsible for any costs and interest charges which
may be incurred by the Fund or the Custodian as a result of
the failure or delay of third parties to deliver foreign
exchange; provided that the Custodian shall nevertheless be
held to the standard of care set forth in, and shall be liable
to the Fund in accordance with, the provisions of Section 9.
V. Actions Permitted Without Express Authority The Custodian may in its
discretion, without express authority from the Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Agreement, provided, that all such
payments shall be accounted for by the Custodian to the
Treasurer of the Fund;
25
<PAGE>
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all nondiscretionary details in
connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the securities
and property of the Fund except as otherwise directed by
the Fund.
5. Duties of Bank with Respect to Books of Account and Calculations of Net
Asset Value
The Bank shall as Agent (or as Custodian, as the case may be) keep such books of
account and render as at the close of business on each day a detailed statement
of the amounts received or paid out and of securities received or delivered for
the account of the Fund during said day and such other statements, including a
daily trial balance and inventory of the Fund's portfolio securities; and shall
furnish such other financial information and data as from time to time requested
by the Treasurer or any Authorized Officer of the Fund; and shall compute and
determine, as of the close of regular trading on the New York Stock Exchange, or
at such other time or times as the Board may determine, the net asset value of a
share in the Fund, such computation and determination to be made in accordance
with the governing documents of the Fund and the votes and instructions of the
Board at the time in force and applicable, and promptly notify the Fund and its
investment adviser and such other persons as the Fund may request of the result
of such computation and determination. In computing the net asset value the
Custodian may rely upon security quotations received by telephone or otherwise
from sources or pricing services designated by the Fund by proper instructions,
and may further rely upon information furnished to it by any authorized officer
of the Fund relative (a) to liabilities of the Fund not appearing on its books
of account, (b) to the existence, status and proper treatment of any reserve or
reserves, (c) to any procedures established by the Board regarding the valuation
of portfolio securities, and (d) to the value to be assigned to any bond, note,
debenture, Treasury bill, repurchase agreement, subscription right, security,
participation interest or other asset or property for which market quotations
are not readily available.
6. Records and Miscellaneous Duties
The Bank shall create, maintain and preserve all records relating to its
activities and obligations under this Agreement in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All books of account and
records maintained by the Bank in connection with the performance of its duties
under this Agreement shall be the property of the Fund, shall at all times
during the regular business hours of the Bank be open for inspection by
authorized officers, employees or agents of the Fund, and in the event of
termination of this Agreement shall be delivered to the Fund or to such other
person or persons as shall be designated by the Fund. Disposition of any account
or record after any required period of
26
<PAGE>
preservation shall be only in accordance with specific instructions received
from the Fund. The Bank shall assist generally in the preparation of reports to
shareholders, audits of accounts, and other ministerial matters of like nature;
and, upon request, shall furnish the Fund's auditors with an attested inventory
of securities held with appropriate information as to securities in transit or
in the process of purchase or sale and with such other information as said
auditors may from time to time request. The Custodian shall also maintain
records of all receipts, deliveries and locations of such securities, together
with a current inventory thereof, and shall conduct periodic verifications
(including sampling counts at the Custodian) of certificates representing bonds
and other securities for which it is responsible under this Agreement in such
manner as the Custodian shall determine from time to time to be advisable in
order to verify the accuracy of such inventory. The Bank shall not disclose or
use any books or records it has prepared or maintained by reason of this
Agreement in any manner except as expressly authorized herein or directed by the
Fund, and the Bank shall keep confidential any information obtained by reason of
this Agreement.
7. Opinion of Fund's Independent Public Accountants
The Custodian shall take all reasonable action, as the Fund may from time to
time request, to enable the Fund to obtain from year to year favorable opinions
from the Fund's independent public accountants with respect to its activities
hereunder in connection with the preparation of the Fund's registration
statement and Form N-SAR or other periodic reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
8. Compensation and Expenses of Bank
The Bank shall be entitled to reasonable compensation for its services as
Custodian and Agent, as agreed upon from time to time between the Fund and the
Bank. The Bank shall be entitled to receive from the Fund on demand
reimbursement for its cash disbursements, expenses and charges, including
counsel fees, in connection with its duties as Custodian and Agent hereunder,
but excluding salaries and usual overhead expenses.
9. Responsibility of Bank
So long as and to the extent that it is in the exercise of reasonable care, the
Bank as Custodian and Agent shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties.
The Bank as Custodian and Agent shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
The Bank as Custodian and Agent shall be held to the exercise of reasonable care
in carrying out the provisions of this Agreement but shall be liable only for
its own negligent or bad faith acts or failures to act. Notwithstanding the
foregoing, nothing contained in this paragraph is intended to nor shall it be
construed to modify the standards of care and responsibility set forth in
Section 2 hereof with respect to subcustodians and in subparagraph f of
Paragraph L of Section 3 hereof with respect to Securities Systems and in
subparagraph g of Paragraph M of Section 3 hereof with respect to an Approved
Book-Entry System for Commercial Paper.
27
<PAGE>
The Custodian shall be liable for the acts or omissions of a foreign banking
institution to the same extent as set forth with respect to subcustodians
generally in Section 2 hereof, provided that, regardless of whether assets are
maintained in the custody of a foreign banking institution, a foreign securities
depository or a branch of a U.S. bank, the Custodian shall not be liable for any
loss, damage, cost, expense, liability or claim resulting from, or caused by,
the direction of or authorization by the Fund to maintain custody of any
securities or cash of the Fund in a foreign county including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
acts of war, civil war or terrorism, insurrection, revolution, military or
usurped powers, nuclear fission, fusion or radiation, earthquake, storm or other
disturbance of nature or acts of God.
If the Fund requires the Bank in any capacity to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Bank, result in the Bank or its nominee assigned to the Fund
being liable for the payment of money or incurring liability of some other form,
the Fund, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents, to
advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund assets to
the extent necessary to obtain reimbursement.
Except as may arise from the Custodian's own negligence or bad faith, the
Custodian shall be without liability to any Fund for any loss, liability, claim
or expense resulting from or caused by anything which is (a) part of Country
Risk or (b) part of the "prevailing country risk" of the Fund, as that term is
used in SEC Release Nos. IC-22658; IS-1080 (May 12, 1997) or as that term is now
or in the future interpreted by the U.S. Securities and Exchange Commission or
by the staff of the Division of Investment Management of the Commission.
10. Persons Having Access to Assets of the Fund
(i) No trustee, director, general partner, officer, employee
or agent of the Fund shall have physical access to the
assets of the Fund held by the Custodian or be authorized
or permitted to withdraw any investments of the Fund, nor
shall the Custodian deliver any assets of the Fund to any
such person. No officer or director, employee or agent of
the Custodian who holds any similar position with the Fund
or the investment adviser of the Fund shall have access to
the assets of the Fund.
28
<PAGE>
(ii) Access to assets of the Fund held hereunder shall only be
available to duly Authorized Officers, employees,
representatives or agents of the Custodian or other
persons or entities for whose actions the Custodian shall
be responsible to the extent permitted hereunder, or to
the Fund's independent public accountants in connection
with their auditing duties performed on behalf of the
Fund.
(iii) Nothing in this Section 9 shall prohibit any Authorized
Officer, employee or agent of the Fund or of the
investment adviser of the Fund from giving instructions to
the Custodian or executing a certificate so long as it
does not result in delivery of or access to assets of the
Fund prohibited by paragraph (i) of this Section 9.
11. Effective Period, Termination and Amendment; Successor Custodian
This Agreement shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, that the Fund may at any
time by action of its Board, (i) substitute another bank or trust company for
the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Agreement in the event of the appointment of a
conservator or receiver for the Custodian by the Federal Deposit Insurance
Corporation or by the Banking Commissioner of The Commonwealth of Massachusetts
or upon the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction. Upon termination of the
Agreement, the Fund shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its costs, expenses and disbursements.
Unless the holders of a majority of the outstanding shares of the Fund vote to
have the securities, funds and other properties held hereunder delivered and
paid over to some other bank or trust company, specified in the vote, having not
less than $2,000,000 of aggregate capital, surplus and undivided profits, as
shown by its last published report, and meeting such other qualifications for
custodians set forth in the Investment Company Act of 1940, the Board shall,
forthwith, upon giving or receiving notice of termination of this Agreement,
appoint as successor custodian, a bank or trust company having such
qualifications. The Bank, as Custodian, Agent or otherwise, shall, upon
termination of the Agreement, deliver to such successor custodian, all
securities then held hereunder and all funds or other properties of the Fund
deposited with or held by the Bank hereunder and all books of account and
records kept by the Bank pursuant to this Agreement, and all documents held by
the Bank relative thereto. In the event that no such vote has
29
<PAGE>
been adopted by the shareholders and that no written order designating a
successor custodian shall have been delivered to the Bank on or before the date
when such termination shall become effective, then the Bank shall not deliver
the securities, funds and other properties of the Fund to the Fund but shall
have the right to deliver to a bank or trust company doing business in Boston,
Massachusetts of its own selection, having an aggregate capital, surplus and
undivided profits, as shown by its last published report, of not less than
$2,000,000, all funds, securities and properties of the Fund held by or
deposited with the Bank, and all books of account and records kept by the Bank
pursuant to this Agreement, and all documents held by the Bank relative thereto.
Thereafter such bank or trust company shall be the successor of the Custodian
under this Agreement.
12. Interpretive and Additional Provisions
In connection with the operation of this Agreement, the Custodian and the Fund
may from time to time agree on such provisions interpretive of or in addition to
the provisions of this Agreement as may in their joint opinion be consistent
with the general tenor of this Agreement. Any such interpretive or additional
provisions shall be in a writing signed by both parties and shall be annexed
hereto, provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any provision of the
governing instruments of the Fund. No interpretive or additional provisions made
as provided in the preceding sentence shall be deemed to be an amendment of this
Agreement.
13. Certification as to Authorized Officers
The Secretary of the Fund shall at all times maintain on file with the Bank his
certification to the Bank, in such form as may be acceptable to the Bank, of the
names and signatures of the Authorized Officers of each fund, it being
understood that upon the occurrence of any change in the information set forth
in the most recent certification on file (including without limitation any
person named in the most recent certification who has ceased to hold the office
designated therein), the Secretary of the Fund shall sign a new or amended
certification setting forth the change and the new, additional or omitted names
or signatures. The Bank shall be entitled to rely and act upon instructions from
any officers named in the most recent certification.
14. Notices
Notices and other writings delivered or mailed postage prepaid to the Fund
addressed to Susan S. Newton, John Hancock Advisers, Inc., 101 Huntington
Avenue, Boston, Massachusetts 02199, or to such other address as the Fund may
have designated to the Bank, in writing, or to State Street Bank and Trust
Company, shall be deemed to have been properly delivered or given hereunder to
the respective addressees.
15. Massachusetts Law to Apply; Limitations on Liability
This Agreement shall be construed and the provisions thereof interpreted under
and in accordance with the laws of The Commonwealth of Massachusetts.
30
<PAGE>
If the Fund is a Massachusetts business trust, the Custodian expressly
acknowledges the provision in the Fund's declaration of trust limiting the
personal liability of the trustees and shareholders of the Fund; and the
Custodian agrees that it shall have recourse only to the assets of the Fund for
the payment of claims or obligations as between the Custodian and the Fund
arising out of this Agreement, and the Custodian shall not seek satisfaction of
any such claim or obligation from the trustees or shareholders of the Fund. Each
Fund, and each series or portfolio of a Fund, shall be liable only for its own
obligations to the Custodian under this Agreement and shall not be jointly or
severally liable for the obligations of any other Fund, series or portfolio
hereunder.
16. Adoption of the Agreement by the Fund
The Fund represents that its Board has approved this Agreement and has duly
authorized the Fund to adopt this Agreement. This Agreement shall be deemed to
supersede and terminate, as of the date first written above, all prior
agreements between the Fund and the Bank relating to the custody of the Fund's
assets.
* * * * *
31
<PAGE>
In Witness Whereof, the parties hereto have caused this agreement to be executed
in duplicate as of the date first written above by their respective officers
thereunto duly authorized.
John Hancock Mutual Funds listed on Appendix A
by: /s/ Osbert Hood
---------------
Osbert Hood
Senior Vice President and Chief Financial Officer
Attest: Theresa Apruzzese
_______________________________
State Street Bank and Trust Company
by: /s/ Ronald Logue
----------------
Attest:
/s/ Gen Cioti
- -------------
s:\agrcont\agreement\custodia\state street amended with delegation
32
<PAGE>
APPENDIX B
Additional Information Relating to Mandatory Securities Depositories
The Foreign Custody Manager shall furnish annually to the Board such
information as may be reasonably available relating to the proposed
"safeharbor" criteria with respect to Mandatory Securities Depositories
as set forth below:
(a) whether an Eligible Foreign Custodian or a U.S. bank holding
assets at the depository undertakes to adhere to the rules, practices
and procedures of the depository;
(b) whether a regulatory authority with oversight responsibility for
the depository has issued a public notice that the depository is not in
compliance with any material capital, solvency, insurance, or other
similar financial strength requirements imposed by such authority, or,
in the case of such a notice having been issued, that such notice has
been withdrawn or the remedy of such noncompliance has been publicly
announced by the depository;
(c) whether a regulatory authority with oversight responsibility over
the depository has issued a public notice that the depository is not in
compliance with any material internal controls requirement imposed by
such authority, or, in the case of such notice having been issued, that
such notice has been withdrawn or the remedy of such noncompliance has
been publicly announced by the depository;
(d) whether the depository maintains the assets of the Fund's depositor
under no less favorable safekeeping conditions than those that apply
generally to depositors;
(e) whether the depository maintains records that segregate the
depository's own assets from the assets of depositors;
(f) whether the depository maintains records that identify the assets
of each of its depositors;
(g) whether the depository provides periodic reports to its depositors
with respect to the safekeeping of assets maintained by the depository,
including, but not limited to, notification of any transfer to or from
a depositor's account; and
(h) whether the depository is subject to periodic review, such as
audits by independent accountants or inspections by regulatory
authorities.
B-1
December 27, 1999
John Hancock Tax-Exempt Series
101 Huntington Avenue
Boston, MA 02199
RE: John Hancock Tax-Exempt Series (the "Trust")
John Hancock Massachusetts Tax-Free Income Fund
John Hancock New York Tax-Free Income Fund (the "Funds")
File Nos. 33-12947; 811-5079 (0000811921)
Ladies and Gentlemen:
In connection with the filing of Post Effective Amendment No. 17 under the
Securities Act of 1933, as amended, and Amendment No. 18 under the Investment
Company Act of 1940, as amended, for John Hancock Tax-Exempt Series it is the
opinion of the undersigned that the Trust's shares when sold will be legally
issued, fully paid and nonassessable.
In connection with this opinion it should be noted that each Fund is an entity
of the type generally known as a "Massachusetts business trust." The Trust has
been duly organized and is validly existing under the laws of the Commonwealth
of Massachusetts. Under Massachusetts law, shareholders of a Massachusetts
business trust may be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability for
obligations of the Trust and indemnifies the shareholders of a Fund, with this
indemnification to be paid solely out of the assets of that Fund. Therefore, the
shareholder's risk is limited to circumstances in which the assets of a Fund are
insufficient to meet the obligations asserted against that Fund's assets.
Sincerely,
/s/Theresa Apruzzese
--------------------
Theresa Apruzzese
Attorney and Assistant Secretary
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statements of Additional Information
constituting parts of this Post Effective Amendment No. 17 to the registration
statement on Form N-1A (the "Registration Statement") of our reports dated
October 8, 1999 and October 15, 1999, relating to the financial statements and
financial highlights appearing in the August 31, 1999 Annual Reports to
Shareholders of the John Hancock New York Tax-Free Income Fund and the John
Hancock Massachusetts Tax-Free Income Fund, respectively, which appear in such
Statements of Additional Information, and to the incorporation by reference of
our reports into the Prospectus which constitutes part of this Registration
Statement. We also consent to the references to us under the headings
"Independent Accountants" in such Statements of Additional Information and to
the references to us under the headings "Financial Highlights" in such
Prospectus.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 23, 1999
JOHN HANCOCK TAX-EXEMPT SERIES FUND
- JOHN HANCOCK MASSACHUSETTS TAX-FREE INCOME FUND
Class C Shares
April 1, 1999
Article I. This Plan
This Distribution Plan (the "Plan") sets forth the terms and conditions
on which John Hancock Tax-Exempt Series Fund (the "Trust") on behalf of John
Hancock Massachusetts Tax-Free Income Fund (the "Fund"), a series portfolio of
the Trust, on behalf of its Class C shares, will, after the effective date
hereof, pay certain amounts to John Hancock Funds, Inc. in connection with the
provision by John Hancock Funds, Inc. of certain services to the Fund and its
Class C shareholders, as set forth herein. Certain of such payments by the Fund
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 the Fund
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
John Hancock Funds, Inc. ("JH Funds"), formerly known as John Hancock Broker
Distribution Services, Inc., 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
The Fund 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 C shares of the Fund,
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 or other broker-dealers ("Selling Brokers")
that have entered into an agreement with JH Funds for the sale of Class C shares
of the Fund, (b) direct out-of pocket expenses incurred in connection with the
distribution of Class C shares of the Fund, including expenses related to
printing of prospectuses and reports to other than existing Class C shareholders
of the Fund, and preparation, printing and distribution of sales literature and
advertising materials, (c) an allocation of overhead and other branch office
expenses of JH Funds related to the distribution of Class C shares of the Fund,
(d) interest expenses on unreimbursed distribution expenses related to Class C
shares, as described in Article IV and (e) distribution expenses incurred in
connection with the distribution of a corresponding class of any open-end,
registered investment company which sells all or substantially all its assets to
the Fund or which merges or otherwise combines with the Fund.
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 C shareholders of the Fund.
<PAGE>
Article III. Maximum Expenditures
The expenditures to be made by the Fund pursuant to this Plan, and the
basis upon which such expenditures will be made, shall be determined by the
Fund, and in no event shall such expenditures exceed 1.00% of the average daily
net asset value of the Class C shares of the Fund (determined in accordance with
the Fund'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 C shares of the Fund.
Such expenditures shall be calculated and accrued daily and paid monthly or at
such other intervals as the Trustees shall determine.
Article IV. Unreimbursed Distribution Expenses
In the event that JH Funds is not fully reimbursed for payments made or
expenses incurred by it as contemplated hereunder, in any fiscal year, JH Funds
shall be entitled to carry forward such expenses to subsequent fiscal years for
submission to the Class C shares of the Fund for payment, subject always to the
annual maximum expenditures set forth in Article III hereof; provided, however,
that nothing herein shall prohibit or limit the Trustees from terminating this
Plan and all payments hereunder at any time pursuant to Article IX hereof.
Article V. Expenses Borne by the Fund
Notwithstanding any other provision of this Plan, the Trust, the Fund
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 between them, dated July 1, 1996 as from time to time continued and
amended (the "Management Contract"), and under the Fund's current prospectus as
it is from time to time in effect. Except as otherwise contemplated by this
Plan, the Trust and the Fund 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 Fund.
Article VI. 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 Fund and (b) those Trustees of the Fund who are not "interested persons"
of the Fund, 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 VII. 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 VI.
2
<PAGE>
Article VIII. Information
JH Funds shall furnish the Fund and its Trustees quarterly, or at such
other intervals as the Fund shall specify, a written report of amounts expended
or incurred for Distribution Expenses and Services Expenses pursuant to this
Plan and the purposes for which such expenditures were made and such other
information as the Trustees may request.
Article IX. 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
Fund's outstanding voting Class C shares, or (b) by JH Funds on 60 days' notice
in writing to the Fund.
Article X. 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:
(a) That, with respect to the Fund, 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 Fund's then outstanding Class C shares.
(b) That such agreement shall terminate automatically in the event of
its assignment.
Article XI. Amendments
This Plan may not be amended to increase the maximum amount of the fees
payable by the Fund hereunder without the approval of a majority of the
outstanding voting Class C shares of the Fund. 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 VII.
Article XII. Limitation of Liability
The names "John Hancock Tax-Exempt Series Fund" and "John Hancock
Massachusetts Tax-Free Income Fund" are the designations of the Trustees under
the Amended and Restated Declaration of Trust, dated July 1, 1996, as amended
and restated from time to time. The Amended and Restated Declaration of Trust
has been filed with the Secretary of State of the Commonwealth of Massachusetts.
The obligations of the Trust and the Fund 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 Fund, but only the Fund's
property shall be bound. No series of the Trust shall be responsible for the
obligations of any other series of the Trust.
3
<PAGE>
IN WITNESS WHEREOF, the Fund has executed this Distribution Plan
effective as of the 1st day of April, 1999 in Boston, Massachusetts.
JOHN HANCOCK TAX-EXEMPT SERIES FUND --
JOHN HANCOCK MASSACHUSETTS TAX-FREE
INCOME FUND
By: /s/Anne C. Hodsdon
------------------
President
JOHN HANCOCK FUNDS, INC.
By: /s/James V. Bowhers
--------------------
President
s:\funds\taxseres\ma\12b1plnc.doc
4
JOHN HANCOCK TAX-EXEMPT SERIES FUND
- JOHN HANCOCK NEW YORK TAX-FREE INCOME FUND
Class C Shares
April 1, 1999
Article I. This Plan
This Distribution Plan (the "Plan") sets forth the terms and conditions
on which John Hancock Tax-Exempt Series Fund (the "Trust") on behalf of John
Hancock New York Tax-Free Income Fund (the "Fund"), a series portfolio of the
Trust, on behalf of its Class C shares, will, after the effective date hereof,
pay certain amounts to John Hancock Funds, Inc. in connection with the provision
by John Hancock Funds, Inc. of certain services to the Fund and its Class C
shareholders, as set forth herein. Certain of such payments by the Fund 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 the Fund 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
John Hancock Funds, Inc. ("JH Funds"), formerly known as John Hancock Broker
Distribution Services, Inc., 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
The Fund 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 C shares of the Fund,
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 or other broker-dealers ("Selling Brokers")
that have entered into an agreement with JH Funds for the sale of Class C shares
of the Fund, (b) direct out-of pocket expenses incurred in connection with the
distribution of Class C shares of the Fund, including expenses related to
printing of prospectuses and reports to other than existing Class C shareholders
of the Fund, and preparation, printing and distribution of sales literature and
advertising materials, (c) an allocation of overhead and other branch office
expenses of JH Funds related to the distribution of Class C shares of the Fund,
(d) interest expenses on unreimbursed distribution expenses related to Class C
shares, as described in Article IV and (e) distribution expenses incurred in
connection with the distribution of a corresponding class of any open-end,
registered investment company which sells all or substantially all its assets to
the Fund or which merges or otherwise combines with the Fund.
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 C shareholders of the Fund.
<PAGE>
Article III. Maximum Expenditures
The expenditures to be made by the Fund pursuant to this Plan, and the
basis upon which such expenditures will be made, shall be determined by the
Fund, and in no event shall such expenditures exceed 1.00% of the average daily
net asset value of the Class C shares of the Fund (determined in accordance with
the Fund'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 C shares of the Fund.
Such expenditures shall be calculated and accrued daily and paid monthly or at
such other intervals as the Trustees shall determine.
Article IV. Unreimbursed Distribution Expenses
In the event that JH Funds is not fully reimbursed for payments made or
expenses incurred by it as contemplated hereunder, in any fiscal year, JH Funds
shall be entitled to carry forward such expenses to subsequent fiscal years for
submission to the Class C shares of the Fund for payment, subject always to the
annual maximum expenditures set forth in Article III hereof; provided, however,
that nothing herein shall prohibit or limit the Trustees from terminating this
Plan and all payments hereunder at any time pursuant to Article IX hereof.
Article V. Expenses Borne by the Fund
Notwithstanding any other provision of this Plan, the Trust, the Fund
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 between them, dated July 1, 1996 as from time to time continued and
amended (the "Management Contract"), and under the Fund's current prospectus as
it is from time to time in effect. Except as otherwise contemplated by this
Plan, the Trust and the Fund 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 Fund.
Article VI. 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 Fund and (b) those Trustees of the Fund who are not "interested persons"
of the Fund, 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 VII. 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 VI.
2
<PAGE>
Article VIII. Information
JH Funds shall furnish the Fund and its Trustees quarterly, or at such
other intervals as the Fund shall specify, a written report of amounts expended
or incurred for Distribution Expenses and Services Expenses pursuant to this
Plan and the purposes for which such expenditures were made and such other
information as the Trustees may request.
Article IX. 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
Fund's outstanding voting Class C shares, or (b) by JH Funds on 60 days' notice
in writing to the Fund.
Article X. 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:
(a) That, with respect to the Fund, 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 Fund's then outstanding Class C shares.
(b) That such agreement shall terminate automatically in the event of
its assignment.
Article XI. Amendments
This Plan may not be amended to increase the maximum amount of the fees
payable by the Fund hereunder without the approval of a majority of the
outstanding voting Class C shares of the Fund. 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 VII.
Article XII. Limitation of Liability
The names "John Hancock Tax-Exempt Series Fund" and "John Hancock New
York Tax-Free Income Fund" are the designations of the Trustees under the
Amended and Restated Declaration of Trust, dated July 1, 1996, as amended and
restated from time to time. The Amended and Restated Declaration of Trust has
been filed with the Secretary of State of the Commonwealth of Massachusetts. The
obligations of the Trust and the Fund 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 Fund, but only the Fund's property shall be
bound. No series of the Trust shall be responsible for the obligations of any
other series of the Trust.
3
<PAGE>
IN WITNESS WHEREOF, the Fund has executed this Distribution Plan
effective as of the 1st day of April, 1999 in Boston, Massachusetts.
JOHN HANCOCK TAX-EXEMPT SERIES FUND --
JOHN HANCOCK NEW YORK TAX-FREE INCOME FUND
By: /s/Anne C. Hodsdon
----------------------
President
JOHN HANCOCK FUNDS, INC.
By: /s/James V. Bowhers
-----------------------
President
s:\funds\taxseres\ny\12b1plnc.doc
4
