John Hancock
Tax-Free Income
Funds
Prospectus
May 1, 2000
- --------------------------------------------------------------------------------
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
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these funds or determined whether the information in
this prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
Contents
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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 for Your account
opening, maintaining and
closing an account in any Choosing a share class 14
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
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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.
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 Financial Services, Inc. and manages more than $30 billion in assets.
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 business career in 1986
Dianne Sales, CFA
- ------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began business career in 1984
Frank A. Lucibella, CFA
- ------------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began business 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 1999
6.69% 11.70% 9.06% 13.60% -9.29% 21.91% 4.48% 10.13% 6.65% -2.84%
2000 total return as of March 31: 2.46%
Best quarter: Q1 '95, 9.23% Worst quarter: Q1 '94, -6.58%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A -7.23% 6.78% 6.40% --
Class B - began 12/31/91 -8.18% 6.66% -- 5.54%
Class C - began 4/1/99 -- -- -- --
Index -2.06% 6.91% 6.89% 6.20%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of 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 1.00%
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 after the
expense reimbursement (first year only) if you invested $10,000 over the time
frames indicated, assuming you reinvested all distributions and that the average
annual return was 5%. The example is for comparison only, and does not represent
the fund's actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $ 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 $ 360 $ 614 $ 992 $2,051
- without redemption $ 261 $ 614 $ 992 $2,051
(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 TSCAX
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 business career in 1986
Frank A. Lucibella, CFA
- -------------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began business career in 1982
Dianne Sales, CFA
- -------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began business 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
- --------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
3.80% 12.30% 8.35% 11.58% -5.70% 18.89% 0.60% 8.81% 4.69% -4.84%
2000 total return as of March 31: 0.31%
Best quarter: Q1 '95, 7.62% Worst quarter: Q1 '94, -4.18%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class A
Class A - began 12/31/93 -8.43% 5.13% -- 3.38%
Class B -9.36% 5.01% 5.59% --
Class C - began 4/1/99 -- -- -- --
Index -2.06% 6.91% 6.89% 4.80%
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 1.00%
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 $ 375 $ 646 $1,039 $2,142
- without redemption $ 276 $ 646 $1,039 $2,142
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- --------------------------------
Ticker JHTFX
CUSIP 41013Y302
Newspaper HiYTxFA
SEC number 811-5968
Class B
- --------------------------------
Ticker TSHTX
CUSIP 41013Y401
Newspaper HiYTxFB
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 business career in 1986
Dianne Sales, CFA
- -------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began business career in 1984
Frank A. Lucibella, CFA
- -------------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began business 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 1999
4.39% 13.56% 9.50% 12.71% -5.51% 16.36% 4.27% 9.34% 7.06% -4.24%
2000 total return as of March 31: 2.83%
Best quarter: Q1 '95, 6.68% Worst quarter: Q1 '94, -6.07%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A -8.53% 5.37% 6.03% --
Class B - began 10/3/96 -9.46% -- -- 2.84%
Class C - began 4/1/99 -- -- -- --
Index -2.06% 6.91% 6.89% 4.88%
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 1.00%
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 after the
expense reimbursement (first year only) if you invested $10,000 over the time
frames indicated, assuming you reinvested all distributions and that the
average annual return was 5%. The example is for comparison only, and does not
represent the fund's actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $ 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 $ 350 $ 621 $1,016 $2,121
- without redemption $ 251 $ 621 $1,016 $2,121
(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 business career in 1986
Frank A. Lucibella, CFA
- ------------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began business career in 1982
Dianne Sales, CFA
- ------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began business 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
- --------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
4.77% 13.63% 9.45% 13.78% -6.48% 17.09% 3.65% 9.50% 6.28% -4.39%
2000 total return as of March 31: 3.37%
Best quarter: Q1 '95, 6.64% Worst quarter: Q1 '94, -5.54%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A -8.70% 5.23% 5.99% --
Class B - began 10/3/96 -9.59% -- -- 2.42%
Class C - began 4/1/99 -- -- -- --
Index -2.06% 6.91% 6.89% 4.88%
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
under-perform 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 1.00%
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 after the
expense reimbursement (first year only) if you invested $10,000 over the time
frames indicated, assuming you reinvested all distributions and that the
average annual return was 5%. The example is for comparison only, and does not
represent the fund's actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $ 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 $ 350 $ 628 $1,029 $2,151
- without redemption $ 251 $ 628 $1,029 $2,151
(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 business career in 1986
Dianne Sales, CFA
- -----------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began business career in 1984
Frank A. Lucibella, CFA
- -----------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began business 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 1999
14.97% 10.95% 15.15% -9.26% 20.22% 4.15% 9.81% 5.50% -3.50%
2000 total return as of March 31: 2.41% Best quarter: Q1 '95, 8.82% Worst
quarter: Q1 '94, -7.06%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Life of Life of
1 year 5 year Class A Class B
Class A - began 1/5/90 -7.88% 5.99% 6.56% --
Class B - began 12/31/91 -8.80% 5.87% -- 5.45%
Class C - began 4/1/99 -- -- -- --
Index -2.06% 6.91% 6.89% 6.20%
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 1.00%
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 after the
expense reimbursement (first year only) if you invested $10,000 over the time
frames indicated, assuming you reinvested all distributions and that the average
annual return was 5%. The example is for comparison only, and does not represent
the fund's actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $ 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 $ 370 $ 632 $1,018 $2,098
- without redemption $ 271 $ 632 $1,018 $2,098
(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 A front-end sales charge, as described at right.
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 A front-end sales charge, as described at right.
o Distribution and service (12b-1) fees of 1.00%.
o A 1.00% contingent deferred sales charge on shares sold within one year of
purchase.
o No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
For actual past expenses of each share class, see the fund-by-fund information
earlier in this prospectus.
Because 12b-1 fees are paid on an ongoing basis, they may cost shareholders more
than other types of sales charges.
Investors purchasing $1 million or more of Class B or Class C shares may want to
consider the lower operating expenses of Class A shares.
Your broker receives a percentage of these sales charges and fees. In addition,
John Hancock Funds may pay significant compensation out of its own resources to
your broker.
Your broker or agent may charge you a fee to effect transactions in fund shares.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A and Class C Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $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
- --------------------------------------------------------------------------------
Class C sales charges
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $1,000,000 1.00% 1.01%
$1,000,000 and over none
Investments of $1 million or more Class A and Class C shares are available with
no front-end sales charge. However, there is a contingent deferred sales charge
(CDSC) on any Class A shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments
- --------------------------------------------------------------------------------
CDSC on shares
Your investment being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the first day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
Class B Shares are offered at their net asset value per share, without any
initial sales charge.
Class B and Class C A CDSC may be charged if you sell Class B or Class C shares
within a certain time after you bought them, as described in the tables below.
There is no CDSC on shares acquired through reinvestment of dividends. The CDSC
is based on the original purchase cost or the current market value of the shares
being sold, whichever is less. The CDSCs are as follows:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after 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.
14 YOUR ACCOUNT
<PAGE>
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
o Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge. Retirement plans investing $1 million in Class
B shares may add that value to Class A purchases to calculate charges.
o Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
o Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Signature Services, or consult the SAI (see the
back cover of this prospectus).
Group Investment Program A group may be treated as a single purchaser under the
accumulation and combination privileges. Each investor has an individual
account, but the group's investments are lumped together for sales charge
purposes, making the investors potentially eligible for reduced sales charges.
There is no charge or obligation to invest (although initial investments must
total at least $250), and individual investors may close their accounts at any
time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify, or consult the SAI (see the back cover of this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for each share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI (see the back
cover of this prospectus).
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)
Class C shares may be offered without front-end sales charges to various
individuals and institutions, including certain retirement plans.
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, investment amount payable
payable to "John Hancock to "John Hancock
Signature Services, Inc." Signature Services, Inc."
o Deliver the check and o Fill out the detachable
your completed investment slip from an
application to your account statement. If no
financial representative, slip is available,
or mail them to Signature include a note specifying
Services (address below). the fund name, your share
class, your account
number and the name(s) in
which the account is
registered.
o Deliver the check and
your investment slip or
note to your financial
representative, or mail
them to Signature
Services (address below).
By exchange
[Clip Art] o Call your financial o Log on to www.jhfunds.com
representative or to process exchanges
Signature Services to between funds.
request an exchange.
o Call EASI-Line for
automated service 24
hours a day using your
touch tone phone at
1-800-338-8080.
o Call your financial
representative or
Signature Services to
request an exchange.
By wire
[Clip Art] o Deliver your completed o Instruct your bank to
application to your wire the amount of your
financial representative, investment to:
or mail it to Signature First Signature Bank
Services. & Trust
Account # 900000260
o Obtain your account Routing # 211475000
number by calling your
financial representative Specify the fund name, your
or Signature Services. share class, your account
number and the name(s) in
o Instruct your bank to which the account is
wire the amount of your registered. Your bank may
investment to: charge a fee to wire funds.
First Signature Bank
& Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the
new account number and the
name(s) in which the account
is registered. Your bank may
charge a fee to wire funds.
By Internet
[Clip Art] See "By exchange" and "By o Verify that your bank or
wire." credit union is a member
of the Automated Clearing
House (ACH) system.
o Complete the "Bank
Information" section on
your account application.
o Log on to www.jhfunds.com
to initiate purchases
using your authorized
bank account.
By phone
[Clip Art] See "By exchange" and "By o Verify that your bank or
wire." credit union is a member
of the Automated Clearing
House (ACH) system.
o Complete the "Bank
Information" section on
your account application.
o Call EASI-Line for
automated service 24
hours a day using your
touch tone phone at
1-800-338-8080.
o Call your financial
representative or
Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most
business days.
- ----------------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative for
instructions and assistance.
- ----------------------------------------------
To open or add to an account using the Monthly Automatic
Accumulation Program, see "Additional investor services."
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 Internet
[Clip Art] o Most accounts. o Log on to www.jhfunds.com
to initiate redemptions
o Sales of up to $100,000. from your funds.
By phone
[Clip Art] o Most accounts. o Call EASI-Line for
automated service 24
o Sales of up to $100,000. hours a day using your
touch tone phone at
1-800-338-8080.
o Call your financial
representative or
Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most
business days.
By wire or electronic funds transfer (EFT)
[Clip Art] o Requests by letter to o To verify that the
sell any amount. Internet or telephone
redemption privilege is
o Requests by Internet or in place on an account,
phone to sell up to or to request the form to
$100,000. add it to an existing
account, call Signature
Services.
o Amounts of $1,000 or more
will be wired on the next
business day. A $4 fee
will be deducted from
your account.
o Amounts of less than
$1,000 may be sent by EFT
or by check. Funds from
EFT transactions are
generally available by
the second business day.
Your bank may charge a
fee for this service.
By exchange
[Clip Art] o Accounts of any type. o Obtain a current
prospectus for the fund
o Sales of any amount. into which you are
exchanging by Internet or
by calling your financial
representative or
Signature Services.
o Log on to www.jhfunds.com
to process exchanges
between your funds.
o Call EASI-Line for
automated service 24
hours a day using your
touch tone phone at
1-800-338-8080.
o Call your financial
representative or
Signature Services to
request an exchange.
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 o Letter of instruction.
accounts.
o On the letter, the signature(s)
of the trustee(s).
o Copy of the trust document
certified within the past 12
months or a John Hancock Funds
trust certification form.
o Signature guarantee if
applicable (see above).
Joint tenancy shareholders with o Letter of instruction signed by
rights of survivorship whose surviving tenant.
co-tenants are deceased.
o Copy of death certificate.
o Signature guarantee if
applicable (see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing
executor, certified within the
past 12 months.
o Signature guarantee if
applicable (see above).
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or instructions.
account types not listed above.
----------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial
representative for instructions and
assistance.
----------------------------------------
To sell shares through a systematic withdrawal plan, see
"Additional investor services."
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, accessing www.jhfunds.com, or
sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. Also for your protection, telephone
redemption transactions are not permitted on accounts whose names or addresses
have changed within the past 30 days. Proceeds from telephone transactions can
only be mailed to the address of record.
Exchanges You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B and Class
C shares will continue to age from the original date and will retain the same
CDSC rate. However, if the new fund's CDSC rate is higher, then the rate will
increase. A CDSC rate that has increased will drop again with a future exchange
into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties 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.
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
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.
- --------------------------------------------------------------------------------
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 the 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 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.85 $9.28 $10.69 $10.36 $10.77 $11.19
Net investment income (loss) 0.58 0.57(3) 0.39(3) 0.57(3) 0.56(3) 0.56(3)
Net realized and unrealized gain (loss) on
investments and financial futures contracts (1.57) 1.41 (0.33) 0.41 0.42 (0.54)
Total from investment operations (0.99) 1.98 0.06 0.98 0.98 0.02
Less distributions:
Dividends from net investment income (0.58) (0.57) (0.39) (0.57) (0.56) (0.56)
Net asset value, end of period $9.28 $10.69 $10.36 $10.77 $11.19 $10.65
Total investment return at net asset value(4) (%) (9.31) 21.88 0.61(5) 9.71 9.32 0.11
Total adjusted investment return at net asset
value(4,6) (%) (9.45) 21.73 0.55(5) 9.64 9.26 0.04
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 241,583 309,305 291,072 291,167 300,483 306,786
Ratio of expenses to average net assets (%) 0.75 0.75 0.76(7,8) 0.75 0.77(8) 0.76(8)
Ratio of adjusted expenses to average net
assets(9) (%) 0.89 0.90 0.84(7) 0.82 0.83 0.82
Ratio of net investment income (loss) to average net
assets (%) 5.85 5.76 5.57(7) 5.42 5.05 5.06
Ratio of adjusted net investment income (loss) to
average net assets(9) (%) 5.71 5.61 5.48(7) 5.35 4.99 4.99
Portfolio turnover rate (%) 62 37(10) 30 15 10 3
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01(3) 0.01(3) 0.01(3)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(1) 12/95 8/96(2) 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.85 $9.28 $10.68 $10.36 $10.77 $11.19
Net investment income (loss) 0.51 0.50(3) 0.33(3) 0.49(3) 0.47(3) 0.48(3)
Net realized and unrealized gain (loss) on
investments and financial futures contracts (1.57) 1.40 (0.31) 0.41 0.42 (0.54)
Total from investment operations (1.06) 1.90 0.02 0.90 0.89 (0.06)
Less distributions:
Dividends from net investment income (0.51) (0.50) (0.34) (0.49) (0.47) (0.48)
Net asset value, end of period $9.28 $10.68 $10.36 $10.77 $11.19 $10.65
Total investment return at net asset value(4) (%) (9.99) 20.87 0.20(5) 8.88 8.50 (0.63)
Total adjusted investment return at net asset
value(4,6) (%) (10.13) 20.72 0.14(5) 8.81 8.44 (0.80)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 77,365 84,673 83,253 89,493 98,572 98,530
Ratio of expenses to average net assets (%) 1.50 1.50 1.52(7,8) 1.50 1.52(8) 1.51(8)
Ratio of adjusted expenses to average net
assets(9) (%) 1.64 1.65 1.59(7) 1.57 1.58 1.67
Ratio of net investment income (loss) to average
net assets (%) 5.10 4.97 4.81(7) 4.66 4.29 4.31
Ratio of adjusted net investment income (loss) to
average net assets(9) (%) 4.96 4.82 4.72(7) 4.59 4.23 4.14
Portfolio turnover rate (%) 62 37(10) 30 15 10 3
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01(3) 0.01(3) 0.01(3)
</TABLE>
22 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Class C - period ended: 8/99(11)
- --------------------------------------------------------------------------------
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 (%) 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
(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 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 $9.65
Net investment income (loss) 0.48(4) 0.57 0.49(4) 0.56(4) 0.54(4) 0.53(4)
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.94) 0.70 (0.30) 0.18 0.31 (0.62)
Total from investment operations (0.46) 1.27 0.19 0.74 0.85 (0.09)
Less distributions:
Dividends from net investment income (0.48) (0.58) (0.50) (0.56) (0.54) (0.53)
Distributions in excess of net investment income (0.09) (0.04) -- -- -- --
Total distributions (0.57) (0.62) (0.50) (0.56) (0.54) (0.53)
Net asset value, end of period $8.82 $9.47 $9.16 $9.34 $9.65 $9.03
Total investment return at net asset value(5) (%) 4.96(6) 14.85 1.96(6) 8.29 9.34 (0.98)
Total adjusted investment return at net asset value(5,10) (%) -- -- -- -- -- (1.00)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 15,401 14,225 23,663 32,199 40,725 48,869
Ratio of expenses to average net assets (%) 1.15(7) 1.06 1.10(7) 1.06 1.00(8) 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 5.65(9)
Portfolio turnover rate (%) 62 64 38 51 35 39
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/94 10/95(2) 8/96(3) 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 $9.65
Net investment income (loss) 0.48 0.51 0.44(4) 0.49(4) 0.47(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 (0.62)
Total from investment operations (0.42) 1.20 0.13 0.67 0.78 (0.15)
Less distributions:
Dividends from net investment income (0.48) (0.51) (0.44) (0.49) (0.47) (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) (0.47)
Net asset value, end of period $8.82 $9.47 $9.16 $9.34 $9.65 $9.03
Total investment return at net asset value(5) (%) (4.44) 13.99 1.36(6) 7.51 8.53 (1.69)
Total adjusted investment return at net asset value(5,10) (%) -- -- -- -- -- (1.71)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 151,069 155,234 147,669 139,385 131,497 112,873
Ratio of expenses to average net assets (%) 1.85 1.79 1.81(7) 1.81 1.75(8) 1.73(8)
Ratio of net investment income to average net assets (%) 5.36 5.61 5.65(7) 5.28 4.92 4.93(9)
Portfolio turnover rate (%) 62 64 38 51 35 39
</TABLE>
24 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Class C - period ended: 8/99(1)
- --------------------------------------------------------------------------------
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
(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(7) 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 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.96 $9.39 $10.67 $10.27 $10.63 $11.01
Net investment income (loss) 0.58 0.57(3) 0.40 0.59 0.56(3) 0.56(3)
Net realized and unrealized gain (loss) on investments (1.58) 1.28 (0.41) 0.36 0.38 (0.65)
Total from investment operations (1.00) 1.85 (0.01) 0.95 0.94 (0.09)
Less distributions:
Dividends from net investment income (0.57) (0.57) (0.39) (0.59) (0.56) (0.56)
Net asset value, end of period $9.39 $10.67 $10.27 $10.63 $11.01 $10.36
Total investment return at net asset value(4) (%) (9.28) 20.20 (0.01)(5) 9.44 9.08 (0.93)
Total adjusted investment return at net asset
value(4,6) (%) (9.39) 20.08 (0.09)(5) 9.38 9.06 (1.04)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 114,539 118,797 560,863 590,185 600,905 564,877
Ratio of expenses to average net assets (%) 0.85 0.85 0.85(7) 0.85 0.85 0.86(10)
Ratio of adjusted expenses to average net assets(8) (%) 0.96 0.97 0.98(7) 0.91 0.87 0.96
Ratio of net investment income (loss) to average net
assets (%) 5.72 5.67 5.75(7) 5.61 5.16 5.14
Ratio of adjusted net investment income (loss) to
average net assets(8) (%) 5.61 5.55 5.62(7) 5.55 5.14 5.03
Portfolio turnover rate (%) 107 113 116(9) 46(9) 24 13
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01 0.01(3) 0.00(11)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(1) 12/95 8/96(2) 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.96 $9.38 $10.67 $10.27 $10.63 $11.01
Net investment income 0.50 0.50(3) 0.34 0.51 0.48(3) 0.48(3)
Net realized and unrealized gain (loss) on investments (1.58) 1.28 (0.40) 0.36 0.38 (0.65)
Total from investment operations (1.08) 1.78 (0.06) 0.87 0.86 (0.17)
Less distributions:
Dividends from net investment income (0.50) (0.49) (0.34) (0.51) (0.48) (0.48)
Net asset value, end of period $9.38 $10.67 $10.27 $10.63 $11.01 $10.36
Total investment return at net asset value(4) (%) (10.05) 19.41 (0.51)(5) 8.63 8.27 (1.67)
Total adjusted investment return at net asset
value(4,6) (%) (10.16) 19.29 (0.59)(5) 8.57 8.25 (1.78)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 70,243 76,824 81,177 204,621 184,085 143,830
Ratio of expenses to average net assets (%) 1.60 1.60 1.60(7) 1.60 1.60 1.61(10)
Ratio of adjusted expenses to average net assets(8) (%) 1.71 1.72 1.73(7) 1.66 1.62 1.71
Ratio of net investment income (loss) to average net
assets (%) 4.97 4.90 4.91(7) 4.85 4.41 4.39
Ratio of adjusted net investment income (loss) to
average net assets(8) (%) 4.86 4.78 4.78(7) 4.79 4.39 4.28
Portfolio turnover rate (%) 107 113 116(9) 46(9) 24 13
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01 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 1-202-942-8090
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-0102
(duplicating fee required)
By electronic request:
[email protected]
(duplicating fee required)
On the Internet: www.sec.gov
[LOGO] JOHN HANCOCK FUNDS John Hancock Funds, Inc.
A Global Investment Management Firm 101 Huntington Avenue
Boston MA 02199-7603
(C)2000 John Hancock Funds, Inc.
TXFPN 5/00
<PAGE>
JOHN HANCOCK MASSACHUSETTS TAX-FREE INCOME FUND
Class A, Class B and Class C Shares
Statement of Additional Information
May 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' current Prospectus (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................................ 27
Distribution Contracts................................................ 29
Sales Compensation.................................................... 31
Net Asset Value....................................................... 33
Initial Sales Charge on Class A and Class C Shares.................... 33
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 Life
Insurance Company (formerly John Hancock Mutual Life Insurance Company) (the
"Life Company"), a Massachusetts life insurance company chartered in 1862, with
national headquarters at John Hancock Place, Boston, Massachusetts. The Life
Company is wholly owned by John Hancock Financial Services, Inc., a Delaware
Corporation, organized in February, 2000.
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:
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.
4
<PAGE>
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.
A-1 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.
6
<PAGE>
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.
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
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exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account with a value at least equal to the Fund's obligation under
the option, (ii) entering into an offsetting forward commitment and/or (iii)
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position. A written call option on securities is typically covered by
maintaining the securities that are subject to the option in a segregated
account. The Fund may cover call options on a securities index by owning
securities whose price changes are expected to be similar to those of the
underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities 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.
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Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If the Fund is unable to
effect a closing purchase transaction with respect to covered options it has
written, the Fund will not be able to sell the underlying securities or dispose
of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates 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.
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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.
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.
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The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish a
segregated account consisting of cash or liquid securities in an amount equal to
the underlying value of such contracts and options.
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.
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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
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
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be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid 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.
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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
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
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in income tax revenues produced sufficient revenues to fully fund the
Stabilization Reserve to $543 million, a threshold set equal to 5% of tax
revenues less debt service, and to establish a tax reduction reserve equal to
$234 million. Monies in the tax reduction reserve were applied as one-time tax
credit for Fiscal Year 1997.
Fiscal 1997. The 1997 budget provided for expenditures of $17.7 billion, an
increase of 4.8% over Fiscal 1996. This budget incorporated an expected decline
in income tax revenues and anticipated using reserves to maintain budget
balance. Tax revenues, however, increased by 6.7% from 1996. On August 29th a
supplemental appropriation bill was enacted, which provided for $195 million in
additional fiscal 1997 appropriations, of which $63.7 million were carried
forward into fiscal 1998.
The Legislature established a Capital Investment Trust Fund to provide for the
transfer of $229.8 million to finance specified expenditures for equipment
purchases, deferred maintenance and repairs, technology upgrades, and capital
purchases and improvements. The spending authorization expires in 1999 when any
unexpended balances in the fund will be transferred to the Stabilization Fund.
In addition to the mandated transfer, the legislature transferred $100 million
to the Stabilization Fund, and $128 million to a Caseload Increase Mitigation
Fund which had been established in fiscal budget 1998.
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.
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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
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.
16
<PAGE>
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.
(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.)
17
<PAGE>
(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.
(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 Life Insurance Company;
P.O. Box 111 Chairman and Director, John Hancock
Boston, MA 02117 Advisers, Inc. (The Adviser), John
July 1937 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,
101 Huntington Avenue Executive Officer John Hancock Life Insurance Company;
Boston, MA 02199 Vice Chairman, Director and Chief
April 1955 Executive Officer, the Adviser, 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 1999); Senior Vice President,
Connecticut Mutual Insurance Co.
(until 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.
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>
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 Life
John Hancock Place Insurance Company; Director, the
P.O. Box 111 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, SAMCorp. and NM Capital;
Senior Vice President, Chief
Financial Officer and Treasurer,
Signature Services; Director
IndoCam Japan Limited; Vice
President and Chief Financial
Officer, John Hancock Life
Insurance Company, Retail Sector
(until 1997).
Susan S. Newton Vice President, Secretary and Chief Vice President, Secretary and Chief
101 Huntington Avenue Legal Officer Legal Officer the Adviser; John
Boston, MA 02199 Hancock Funds, Signature Services,
March 1950 The 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
Thomas H. Connors Vice President and Compliance Vice President and Compliance
101 Huntington Avenue Officer Officer, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds, Inc.
September 1959
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
24
<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, 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 From the
Aggregate Compensation Fund and John Hancock Fund
Independent Trustees from the Fund (1) Complex to Trustees (2)
- -------------------- ----------------- -----------------------
Dennis J. Aronowitz $ 303 $ 72,000
Richard P. Chapman* 309 75,100
William J. Cosgrove* 296 72,000
Douglas Costle** 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.
*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.
** As of December 31, 1999, Mr. Costle retired as Trustee of The Complex.
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers or
Trustees of one or more of the other funds for which the Adviser serves as
investment adviser.
As of 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:
25
<PAGE>
Percentage of Total
Name and Address Class of Outstanding Shares of the
of Shareholder 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.
26
<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.
27
<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.
Personnel of the Adviser and its affiliates may trade securities for their
personal accounts. The Fund also may hold, or may be buying or selling, the same
securities. To prevent the Fund from being disadvantaged, the Adviser and its
affiliates and the Fund have adopted a code of ethics which restricts the
trading activity of those personnel.
Distribution ContractS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class 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.
28
<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 dealers.
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.
29
<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 Interest,
of Prospectuses to Expenses Carrying or
New Compensation to of John Hancock Other Finance
Advertising Shareholders Selling 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.
The two primary sources of compensation payments are )1) 12b-1 fees that are
paid out of the Fund's assets and (2) sales charges paid by investors. The sales
charges and 12b-1 fees are detailed in the prospectus and under "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 a reallowance, 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 fund net assets. This fee is paid quarterly in
arrears by the Fund.
In addition, from time to time, John Hancock Funds, at its expense, may provide
significant additional compensation to financial services firms which sell or
arrange for the sale of shares of the Fund. Such compensation provided by John
Hancock Funds may include, for example, financial assistance to financial
services firms in connection with their conferences or seminars, sales or
training programs for invited registered representatives and other employees,
payment for travel expenses, including lodging, incurred by registered
30
<PAGE>
representatives and other employees for such seminars or training programs,
seminars for the public, advertising and sales campaigns regarding one or more
Funds, and/or other financial services firms-sponsored events or activities.
From time to time, John Hancock Funds may make expense reimbursements for
special training of a financial services firm's registered representatives and
other employees in group meetings or to help pay the expenses of sales contests.
Other compensation, such as asset retention fees, finder's fees and
reimbursement for wire transfer fees, may be offered to the extent not
prohibited by law or any self-regulatory agency, such as the NASD.
31
<PAGE>
Sales charge Maximum First year
paid by investors reallowance Service fee Maximum
(% of offering (% of offering (% of net Total compensation (1)
Class A investments price) price) investment) (% of offering price)
- ------------------- ------ ------ ----------- ---------------------
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 3.00% 2.26% 0.25% 2.50%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments of
$1 million or more
- ------------------
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50% (2)
Next $1 and more above that -- 0.00% 0.25% 0.25% (2)
Maximum First year
reallowance 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 First year
reallowance Service fee Maximum
(% of offering (% of net Total compensation
Class C investments price) investment) (% of offering price)
------ ----------- ---------------------
Amounts purchased at NAV -- 0.75% 0.25% 1.00%
All other amounts 1.00% 1.75% 0.25% 2.00%
</TABLE>
(1) Reallowance 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 AND CLASS C Shares
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). 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 and Class C 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 Existing full service clients of the Life Company who were
group annuity contract holders as of September 1, 1994, and
participant directed retirement plans with at least 100
eligible employees at the inception of the Fund account. Each
of these investors may purchase Class A shares with no initial
sales charge. However, if the shares are redeemed within 12
months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class C shares may be offered without a front-end sales charge to:
o retirement plans for which John Hancock Signature Services
performs employer sponsored plan recordkeeping services. (These
types of plans include 401(k), money purchase pension, profit
sharing and SIMPLE 401k.)
o An investor who buys through a Merrill Lynch omnibus account.
However, a CDSC may apply if the shares are sold within 12 months
of purchase.
Class A and Class C shares may also be purchased without an initial sales charge
in connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account, and (c) groups which qualify for the Group Investment Program (see
below). A company's (not an individual's) qualified and non-qualified retirement
plan investments can be combined to take advantage of this privilege. Further
information about combined purchases, including certain restrictions on combined
group purchases, is available from Signature Services or a Selling Broker's
representative.
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
34
<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 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.
35
<PAGE>
Deferred Sales Charge on Class B AND CLASS C Shares
Investments in Class B shares are purchased at net asset value per share without
the imposition of an initial sales charge so that the Fund will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year, 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.
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 Class B shares at $10 per share. The second year after
your purchase, your investment's net asset value per share has increased by $2
to $12, and you have gained 10 additional shares through dividend reinvestment.
If you redeem 50 shares at this time your CDSC will be calculated as follows:
oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject
to CDSC (dividend reinvestment) (120.00)
-------
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the account not just the shares
being redeemed.
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.
36
<PAGE>
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C shares and of Class A shares that are subject
to a CDSC, unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to Trust
accounts unless Trust is 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.
* Redemptions of Class A shares made after one year from the inception
date of a retirement plan at John Hancock for which John Hancock is
recordkeeper.
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.
37
<PAGE>
* 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.
38
<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.
39
<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.
40
<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).
41
<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.
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<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.
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<PAGE>
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.
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.
44
<PAGE>
Distributions other than exempt-interest dividends from the Fund's current or
accumulated earnings and profits ("E&P") will be taxable under the Code for
investors who are subject to tax. Taxable distributions include distributions
from the Fund that are attributable to (i) taxable income, including but not
limited to taxable bond interest, recognized market discount income, original
issue discount income accrued with respect to taxable bonds, income from
repurchase agreements, income from securities lending, income from dollar rolls,
income from interest rate swaps, caps, floors and collars, and a portion of the
discount from certain stripped tax- exempt obligations or their coupons or (ii)
capital gains from the sale 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.
45
<PAGE>
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
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.
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<PAGE>
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.
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
47
<PAGE>
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.
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.
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<PAGE>
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
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).
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<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 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%.
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.
50
<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 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
51
<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 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.
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.
52
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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.
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.
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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).
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
F-1
<PAGE>
JOHN HANCOCK NEW YORK TAX-FREE INCOME FUND
Class A, Class B and Class C Shares
Statement of Additional Information
May 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' current
Prospectus (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 and Class C 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
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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 Life
Insurance Company (formerly John Hancock Mutual Life Insurance Company) (the
"Life Company"), a Massachusetts life insurance company chartered in 1862, with
national headquarters at John Hancock Place, Boston, Massachusetts. The Life
Company is wholly owned by John Hancock Financial Services, Inc., a Delaware
Corporation organized in February, 2000.
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.
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.
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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.
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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.
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<PAGE>
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.
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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
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.
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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.
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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.
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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.
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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.
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As a result of the City's financial difficulties, certain organizations were
established to provide financial assistance and oversee and review the City's
financing. These organizations continue to exercise various monitoring functions
relating to the City's financial position.
New York City has maintained a balanced budget since 1981, and has retired all
of its federally guaranteed debt. As a result of the City's success in balancing
its budget, certain restrictions imposed on the City by the New York Financial
Control Board (the "Control Board"), which was created in response to the City's
1975 fiscal crises, have been suspended. Those restrictions, including the
Control Board's power to approve or disapprove certain contracts, long-term and
short-term borrowings and the four-year financial plan of the City, will remain
suspended unless and until, among other things, there is a substantial threat of
an actual failure by New York City to pay debt service on its notes and bonds or
to keep its operating deficits below $100 million. Although the City has
maintained a balanced budget in recent years, the ability to balance future
budgets is contingent upon actual versus expected levels of Federal and State
Aid and the effects of the economy on City revenues and services.
The City requires certain amounts of financing for seasonal and capital spending
purposes. The City has issued $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.
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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.
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(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.
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(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 Life Insurance Company;
P.O. Box 111 Chairman and Director, John Hancock
Boston, MA 02117 Advisers, Inc. (The Adviser), John
July 1937 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,
101 Huntington Avenue Executive Officer John Hancock Life Insurance Company;
Boston, MA 02199 Vice Chairman, Director and Chief
April 1955 Executive Officer, the Adviser, 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 1999); Senior Vice President,
Connecticut Mutual Insurance Co.
(until 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.
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>
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 Life
John Hancock Place Insurance Company; Director, the
P.O. Box 111 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, SAMCorp. and NM Capital;
Senior Vice President, Chief
Financial Officer and Treasurer,
Signature Services; Director
IndoCam Japan Limited; Vice
President and Chief Financial
Officer, John Hancock Life
Insurance Company, Retail Sector
(until 1997).
Susan S. Newton Vice President, Secretary and Chief Vice President, Secretary and Chief
101 Huntington Avenue Legal Officer Legal Officer the Adviser; John
Boston, MA 02199 Hancock Funds, Signature Services,
March 1950 The 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
Thomas H. Connors Vice President and Compliance Vice President and Compliance
101 Huntington Avenue Officer Officer, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds, Inc.
September 1959
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
27
<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, 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.
Aggregate Total Compensation From the
Compensation from Fund and John Hancock Fund
Independent Trustees the Fund (1) Complex to Trustees (2)
- -------------------- ------------ -----------------------
Dennis J. Aronowitz $ 271 $ 72,000
Richard P. Chapman* 276 75,100
William J. Cosgrove* 265 72,000
Douglas Costle** 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.
*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.
** As of December 31, 1999, Mr. Costle retired as Trustee of The Complex.
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers or
Trustees of one or more of the other funds for which the Adviser serves as
investment adviser.
As of 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:
28
<PAGE>
Percentage of Total
Outstanding Shares of
Name and Address of Shareholder Class of Shares the 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,
maintaining a committed line of credit, and calculating the net asset value of
29
<PAGE>
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.
30
<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.
Personnel of the Adviser and its affiliates may trade securities for their
personal accounts. The Fund also may hold, or may be buying or selling, the same
securities. To prevent the Fund from being disadvantaged, the Adviser and its
affiliates and the Fund have adopted a code of ethics which restricts the
trading activity of those personnel.
Distribution ContractS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class 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 dealers.
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
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
31
<PAGE>
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.
32
<PAGE>
<TABLE>
<CAPTION>
Expense Items
-------------
Printing and Interest,
Mailing of Carrying or
Prospectuses Compensation to Expenses of Other
to New 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.
The two primary sources of compensation payments are (1) the 12b-1 that are paid
out of the Fund's assets and sales charges paid by the investors. The sales
charges and 12b-1 fees 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 a reallowance, 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 fund net assets. This fee is paid quarterly in
arrears by the Fund.
In addition, from time to time, John Hancock Funds, at its expense, may provide
significant additional compensation to financial services firms which sell or
arrange for the sale of shares of the Fund. Such compensation provided by John
Hancock Funds may include, for example, financial assistance to financial
services firms in connection with their conferences or seminars, sales or
training programs for invited registered representatives and other employees,
payment for travel expenses, including lodging, incurred by registered
representatives and other employees for such seminars or training programs,
seminars for the public, advertising and sales campaigns regarding one or more
Funds, and/or other financial services firms-sponsored events or activities.
From time to time, John Hancock Funds may make expense reimbursements for
special training of a financial services firm's registered representatives and
other employees in group meetings or to help pay the expenses of sales contests.
Other compensation, such as asset retention fees, finder's fees and
reimbursement for wire transfer fees, may be offered to the extent not
prohibited by law or any self-regulatory agency, such as the NASD.
33
<PAGE>
Sales charge Maximum First year
Paid by investors reallowance Service fee Maximum
(% of offering (% of offering (% of net total compensation (1)
Class A investments price) price) investment) (% of offering price)
- ------------------- ------ ------ ----------- ---------------------
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 3.00% 2.26% 0.25% 2.50%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments of
$1 million or more
- ------------------
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50% (2)
Next $1 and more above that -- 0.00% 0.25% 0.25% (2)
Maximum First year
reallowance 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 First year
reallowance service fee Maximum
(% of offering (% of net total compensation
Class C investments price) investment) (% of offering price)
- ------------------- ------ ----------- ---------------------
Amounts purchased at NAV -- 0.75% 0.25% 1.00%
All other amounts 1.00% 1.75% 0.25% 2.00%
</TABLE>
(1) Reallowance 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.
34
<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 AND CLASS C Shares
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). 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 and Class C 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.
35
<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 Existing full service clients of the Life Company who were
group annuity contract holders as of September 1, 1994, and
participant directed retirement plans with at least 100
eligible employees at the inception of the Fund account. Each
of these investors may purchase Class A shares with no initial
sales charge. However, if the shares are redeemed within 12
months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class C shares may be offered without a front-end sales charge to:
o retirement plans for which John Hancock Signature Services
performs employer sponsored plan recordkeeping services. (These
types of plans include 401(k), money purchase pension, profit
sharing and SIMPLE 401k.)
o An investor who buys through a Merrill Lynch omnibus account.
However, a CDSC may apply if the shares are sold within 12 months
of purchase.
Class A and Class C shares may also be purchased without an initial sales charge
in connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account, and (c) groups which qualify for the Group Investment Program (see
below). A company's (not an individual's) qualified and non-qualified retirement
plan investments can be combined to take advantage of this privilege. Further
information about combined purchases, including certain restrictions on combined
group purchases, is available from Signature Services or a Selling Broker's
representative.
36
<PAGE>
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.
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.
37
<PAGE>
Deferred Sales Charge on Class B AND CLASS C Shares
Investments in Class B shares are purchased at net asset value per share without
the imposition of an initial sales charge so that the Fund will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively, will be subject to a
CDSC at the rates set forth in the Prospectus as a percentage of the dollar
amount subject to the CDSC. The charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
Class B or Class C shares being redeemed. No CDSC will be imposed on increases
in account value above the initial purchase 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 Class B shares at $10 per share. The second year after
your purchase, your investment's net asset value per share has increased by $2
to $12, and you have gained 10 additional shares through dividend reinvestment.
If you redeem 50 shares at this time your CDSC will be calculated as follows:
oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject
to CDSC (dividend reinvestment) (120.00)
-------
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the account not just the shares
being redeemed.
38
<PAGE>
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the 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:
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.
* Redemptions of Class A shares made after one year from the inception
date of a retirement plan at John Hancock for which John Hancock is
recordkeeper.
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.
39
<PAGE>
* 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
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.
44
<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.
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
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issue discount income accrued with respect to taxable bonds, income from
repurchase agreements, income from securities lending, income from dollar rolls,
income from interest rate swaps, caps, floors and collars, and a portion of the
discount from certain stripped tax- exempt obligations or their coupons or (ii)
capital gains from the sale 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
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<PAGE>
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of the Fund or another John Hancock Fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to 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.
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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.
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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.
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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).
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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.
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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 of 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
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<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
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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.
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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.
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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).
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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.
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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.
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BB. Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
Notes. Ratings for state and municipal notes and other short-term obligations
will be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance on bond risk are of lesser importance in the short run.
Symbols will be used as follows:
"MIG-1 Notes bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
"MIG-2 Notes bearing this designation are of high quality with margins of
protection ample although not so large as in the preceding group."
Commercial Paper. As described in the Prospectus, the Fund may invest in
commercial paper which is rated A-1 or A-2 by Standard & Poor's, P-1 or P-2 by
Moody's or F-1+ or f1 by Fitch.
Moody's ratings for commercial paper are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's two highest commercial paper rating categories
are as follows:
"P-1 -- "Prime-1" indicates the highest quality repayment capacity of the rated
issues.
"P-2 -- "Prime-2" indicates that the issuer has a strong capacity for repayment
of short-term promissory obligations. Earnings trends and coverage ratios, while
sound, will be more subjective to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained."
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
"A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1."
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
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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+"
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FINANCIAL STATEMENTS
F-1
