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JOHN HANCOCK
CALIFORNIA TAX-FREE
INCOME FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1995
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TABLE OF CONTENTS
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PAGE
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Expense Information................................................................... 2
The Fund's Financial Highlights....................................................... 3
Investment Objective and Policies..................................................... 4
Organization and Management of the Fund............................................... 10
Alternative Purchase Arrangements..................................................... 11
The Fund's Expenses................................................................... 12
Dividends and Taxes................................................................... 13
Performance........................................................................... 15
How to Buy Shares..................................................................... 16
Share Price........................................................................... 17
How to Redeem Shares.................................................................. 23
Additional Services and Programs...................................................... 24
Investments, Techniques and Risk Factors.............................................. 28
Appendix A............................................................................ A-1
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This Prospectus sets forth the information about John Hancock California
Tax-Free Income Fund (the "Fund"), a diversified fund, that you should know
before investing. Please read and retain it for future reference.
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the "SEC"). You can obtain a copy of the Fund's Statement
of Additional Information, dated May 1, 1995 and incorporated by reference into
this Prospectus, free of charge by writing or telephoning: John Hancock Investor
Services Corporation, P.O. Box 9116, Boston, Massachusetts 02205-9116,
1-800-225-5291 (1-800-554-6713 TDD).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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EXPENSE INFORMATION
The purpose of the following information is to help you to understand the
various fees and expenses you will bear, directly or indirectly, when you
purchase Fund shares. The operating expenses included in the table and
hypothetical example below are based on fees and expenses for the Fund's fiscal
year ended December 31, 1994 adjusted to reflect certain current expenses.
Actual fees and expenses in the future of Class A and Class B Shares may be
greater or less than those indicated.
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CLASS A CLASS B
SHARES SHARES
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SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as a percentage of offering price)............. 4.50% None
Maximum sales charge imposed on reinvested dividends...................................... None None
Maximum deferred sales charge............................................................. None* 5.00%
Redemption fee+........................................................................... None None
Exchange fee.............................................................................. None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fee............................................................................ 0.55% 0.55%
12b-1 fee (net of limitation, Class B Shares)***.......................................... 0.15% 0.90%
Other expenses**.......................................................................... 0.19% 0.19%
Less fee waiver and expense limitation by Adviser......................................... (0.14)% (0.14)%
Total Fund operating expenses (net of limitation)****..................................... 0.75% 1.50%
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* No sales charge is payable at the time of purchase on investments of $1
million or more, but for these investments a contingent deferred sales
charge may be imposed, as described below under the caption "Share Price,"
in the event of certain redemption transactions within one year of
purchase.
** Other Expenses include transfer agent, legal, audit, custody and other
expenses.
*** The amount of the 12b-1 fee for Class B Shares used to cover service
expenses will be up to 0.25% of the Fund's average net assets, and the
remaining portion will be used to cover distribution expenses.
**** Total Fund operating expenses in the table reflect voluntary and temporary
limitations by the Fund's investment adviser and distributor. Without these
limitations, the Total Fund operating expenses of Class A shares and Class
B shares would be 0.89% and 1.74%, respectively.
+ Redemption by wire fee (currently $4.00) not included.
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1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
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You would pay the following expenses for the indicated period of years on a
hypothetical $1,000 investment, assuming 5% annual return
Class A Shares...................................................................... $ 52 $68 $ 85 $134
Class B Shares
-- Assuming complete redemption at end of period.................................. $ 65 $77 $ 102 $159
-- Assuming no redemption......................................................... $ 15 $47 $ 82 $159
(This example should not be considered a representation of past or future expenses. Actual expenses may be greater or lesser than
those shown.)
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The Fund's payment of a distribution fee may result in a long-term shareholder
indirectly paying more than the economic equivalent of the maximum front-end
sales charge permitted under the National Association of Securities Dealers,
Inc.'s Rules of Fair Practice.
The management and 12b-1 fees referred to above are more fully explained in
this Prospectus under the caption "The Fund's Expenses" and in the Statement of
Additional Information under the captions "Investment Advisory and Other
Services" and "Distribution Contract."
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THE FUND'S FINANCIAL HIGHLIGHTS
The following table of financial highlights has been audited by Ernst & Young
LLP, the Fund's independent auditors, whose unqualified report is included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's Annual Report to Shareholders
which may be obtained free of charge by writing or telephoning John Hancock
Investor Services Corporation ("Investor Services") at the address or telephone
number listed on the front page of this Prospectus.
Selected data for each class of shares outstanding throughout each period is
as follows:
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CLASS A SHARES CLASS B SHARES
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YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
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1994 1993 1992(1) 1991 1990 1994 1993 1992(1)
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PER SHARE INCOME AND CAPITAL CHANGES
FOR A SHARE OUTSTANDING DURING EACH
YEAR:
Net asset value, beginning of year... $10.85 $10.41 $10.32 $ 9.91 $10.00 $10.85 $10.41 $10.32
INCOME FROM INVESTMENT OPERATIONS
Net investment income................ 0.58 0.62 0.66 0.69 0.74 0.51 0.54 0.58
Net realized and unrealized gain
(loss) on investments.............. (1.57) 0.76 0.25 0.47 (0.16) (1.57) 0.76 0.25
-------- -------- -------- -------- ------- ------- ------- -------
Total from Investment Operations..... (0.99) 1.38 0.91 1.16 0.58 (1.06) 1.30 0.83
LESS DISTRIBUTIONS
Dividends from net investment
income............................. (0.58) (0.62) (0.67) (0.70) (0.67) (0.51) (0.54) (0.59)
Distributions from realized gains.... -- (0.32) (0.15) (0.05) -- -- (0.32) (0.15)
-------- -------- -------- -------- ------- ------- ------- -------
Total Distributions.............. (0.58) (0.94) (0.82) (0.75) (0.67) (0.51) (0.86) (0.74)
-------- -------- -------- -------- ------- ------- ------- -------
Net asset value, end of year......... $ 9.28 $10.85 $10.41 $10.32 $ 9.91 $ 9.28 $10.85 $10.41
======== ======== ======== ======== ======= ======= ======= =======
TOTAL RETURN(2)...................... (9.31)% 13.60% 9.15% 12.26% 6.13% (9.99)% 12.76% 8.35%
======== ======== ======== ======== ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net
assets............................. 0.89% 0.87% 0.83% 0.80% 0.84% 1.64% 1.62% 1.60%
Ratio of expense limitation to
average net assets................. (0.14)% (0.18)% (0.25)% (0.40)% (0.84)% (0.14)% (0.18)% (0.25)%
-------- -------- -------- -------- ------- ------- ------- -------
Ratio of net expenses to average net
assets............................. 0.75% 0.69% 0.58% 0.40% 0.00% 1.50% 1.44% 1.35%
======== ======== ======== ======== ======= ======= ======= =======
Ratio of net investment income to
average net assets................. 5.85% 5.69% 6.36% 6.75% 7.11% 5.10% 4.82% 5.43%
Portfolio turnover................... 62% 51% 34% 45% 62% 62% 51% 34%
Net Assets, end of year (in
thousands)......................... $241,583 $279,692 $217,014 $163,693 $80,200 $77,365 $65,437 $26,595
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(1) Per share information has been calculated using the average number of shares
outstanding.
(2) Total return does not include the effect of the initial sales charge for
Class A Shares or the contingent deferred sales charge for Class B Shares.
Total return does include the benefit of a voluntary expense reimbursement
by the Adviser. Without such benefit, total return would be lower.
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide as high a level of current income
exempt from both federal income taxes and California personal income taxes as is
consistent with preservation of capital. This objective may not be changed
without a vote of shareholders. The Fund pursues its objective by normally
investing substantially all of its assets in the following debt obligations
issued by or on behalf of the state of California, its political subdivisions,
municipalities, agencies, instrumentalities or public authorities and
obligations issued by other governmental entities (for example, certain U.S.
territories or possessions) the interest on which is excluded from gross income
for federal income tax purposes and is exempt from California personal income
taxes (collectively referred to as "California Tax Exempt Securities") subject
to the following quality standards:
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THE FUND SEEKS TO PROVIDE INCOME THAT IS
EXCLUDABLE FROM FEDERAL AND CALIFORNIA
TAXES.
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(1) Bonds which at the time of purchase are rated within one of the four highest
ratings (AAA, AA, A or BBB) by Standard and Poor's Ratings Group ("S&P") ,
Moody's Investor Services ("Moody's") (Aaa, Aa, A or Baa), or Fitch Investor
Services ("Fitch") (AAA, AA, A, BBB).
(2) Notes which at the time of purchase are rated within one of the two highest
ratings by S&P (SP-1 and SP-2), Moody's (MIG-1 and MIG-2) or Fitch (FIN-1
and FIN-2).
(3) Commercial paper which at the time of purchase is rated A-2 or higher by
S&P, P-2 or higher by Moody's, or F-2 or higher by Fitch.
(4) Participation interests, which are, at the time of purchase, rated A or
better by S&P, Moody's or Fitch or which are issued by an issuer whose
outstanding bonds are rated A or better.
(5) Unrated bonds, notes and commercial paper that in the opinion of the Adviser
are at the time of purchase comparable in quality to the rated obligations
of the same types described above, except that bonds must be comparable in
quality to those rated A or better provided that the Fund may not purchase
an unrated obligation which would cause more than 25% of its total assets to
be invested in unrated debt obligations.
(6) Other types of California Tax Exempt Securities, including variable and
floating rate obligations, which at the time of purchase, are rated within
the categories set forth above for bonds, notes or commercial paper or, if
unrated, are of the quality described in paragraph (5) above.
For a description of the tax exempt ratings described above, see Appendix A in
the Statement of Additional Information. Bonds rated BBB by S&P or Fitch, or Baa
by Moody's, are considered to have some speculative characteristics and, to
varying degrees, can pose special risks generally involving the ability of the
issuer to make payment of principal and interest to a greater extent than higher
rated securities. In addition, because the ratings and quality limitations on
the Fund's investments apply at the time of purchase, a subsequent change in the
rating or quality of a security held by the Fund would not require the Fund to
sell the security. John Hancock Advisers, Inc. (the "Adviser") will purchase
bonds rated BBB or
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Baa where, based upon price, yield and its assessment of quality, investment in
these bonds is determined to be consistent with the Fund's objective of
preservation of capital. They will evaluate and monitor the quality of all
investments, including bonds rated BBB or Baa, and will dispose of these bonds
as determined to be necessary to assure that the Fund's overall portfolio is
constituted in a manner consistent with the goal of preservation of capital. To
the extent that the Fund's investments in bonds rated BBB or Baa will emphasize
obligations believed to be consistent with the goal of preserving capital, these
obligations may not provide yields as high as those of other obligations having
these ratings, and the differential in yields between these bonds and
obligations with higher quality ratings may not be as significant as might
otherwise be generally available. Many issuers of securities choose not to have
their obligations rated. Although unrated securities eligible for purchase by
the Fund must be determined to be comparable in quality to securities having
certain specified ratings, the market for unrated securities may not be as broad
as for rated securities since many investors rely on rating organizations for
credit appraisal.
The Fund may invest in any combination of California Tax Exempt Securities;
however, it is expected that during normal investment conditions, a substantial
portion of the Fund's assets will be invested in municipal bonds (without regard
to maturities) and other longer-term obligations. When determined to be
appropriate, based upon market conditions, a substantial portion of the Fund's
holdings of California Tax Exempt Securities will consist of notes and
commercial paper and other shorter-term obligations. The Fund may invest up to
20% of its total assets in "private activity bonds" (meeting the quality
standards noted above), the interest on which may constitute a preference item
for purposes of determining the alternative minimum tax.
While as a fundamental investment policy, the Fund invests at least 80% of its
total assets in California Tax Exempt Securities (except during adverse market
conditions), the balance of its assets may be invested in the following
short-term investments: (1) obligations issued by or on behalf of states (other
than California), or the District of Columbia and their political subdivisions,
agencies or instrumentalities which meet the quality standards described above
but the interest on which is subject to California personal income tax ("Other
Tax Exempt Obligations"); (2) obligations issued or guaranteed by the U.S.
government, or one of its agencies or instrumentalities, the interest on which
is not exempt from federal income tax ("U.S. Government Securities"); (3)
corporate commercial paper meeting the quality standards noted above; (4)
certificates of deposit and bankers acceptances of domestic banks with assets of
$1 billion or more; and (5) repurchase agreements with respect to securities of
the type and quality in which the Fund may invest. The income from the foregoing
short-term investments may be subject to California and/or federal income taxes.
As a result, distributions of the Fund which are attributable to income from
investments in Other Tax Exempt Obligations will be subject to California
personal income tax; distributions attributable to U.S. Government Securities
will be subject to federal income tax; and distributions attributable to income
from repurchase agreements, corporate commercial paper, and certificates of
deposit will be subject to federal
5
<PAGE> 6
and California income taxes. The circumstances in which the Fund will normally
invest in these short-term investments are (1) pending the investment of
California Tax Exempt Securities or reinvestment of the proceeds of sales of
such securities or (2) to maintain liquidity and avoid the necessity of
liquidating portfolio investments at a disadvantageous time in order to meet
redemption requests.
As a defensive measure during times of adverse market conditions including when
sufficient California Tax Exempt Securities appropriate for investment by the
Fund are not available, the Fund may temporarily invest more than 20% of its
total assets in short term investments (previously described as Other Tax Exempt
Obligations, U.S. Government Securities, certificates of deposit and corporate
commercial paper) including investment grade corporate debt securities (which
meet the previously described quality standards), as long as at the end of each
quarter of its taxable year, these investments do not exceed 50% of the Fund's
total assets. The Fund will not be pursuing its objective of obtaining
tax-exempt income to the extent it invests in taxable securities. There can be
no assurance that the Fund will achieve its investment objective.
TAX EXEMPT SECURITIES. "Tax Exempt Securities" are debt obligations generally
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their political subdivisions, agencies or
instrumentalities the interest on which, in the opinion of the bond issuer's
counsel (not the Fund's counsel), is excluded from gross income for federal
income tax purposes and (in the case of California Tax Exempt Securities) exempt
from California personal income taxes. (See Discussion on Taxes.) These
securities consist of municipal bonds, municipal notes and municipal commercial
paper (see "Investment Objective and Policies" in the Statement of Additional
Information) as well as variable or floating rate obligations and participation
interests.
The two principal classifications of municipal obligations are general
obligations and revenue obligations. General obligations are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or in some cases from
the proceeds of a special excise or other tax. For example, industrial
development and pollution control bonds are in most cases revenue obligations
since payment of principal and interest is dependent solely on the ability of
the user of the facilities financed or the guarantor to meet its financial
obligations, and in certain cases, the pledge of real and personal property as
security for payment. The payment of principal and interest by issuers of
certain obligations purchased by the Fund may be guaranteed by a letter of
credit, note, repurchase agreement, insurance or other credit facility agreement
offered by a bank or other financial institution. These guarantees and the
creditworthiness of guarantors will be considered by the Adviser in determining
whether a municipal obligation meets the Fund's investment quality requirements.
No assurance can be given that a municipality or guarantor will be able to
satisfy the payment of principal or interest on a municipal obligation.
6
<PAGE> 7
The interest on bonds issued to finance essential state and local government
operations is fully tax-exempt under the Internal Revenue Code of 1986, as
amended (the "Code"). Interest on certain nonessential or private activity bonds
(including those for housing and student loans) issued after August 7, 1986,
while still tax-exempt, constitutes a tax preference item for taxpayers in
determining their alternative minimum tax: as a result, the Fund's distributions
attributable to such interest also constitute tax preference items. The Code
also imposes certain limitations and restrictions on the use of tax-exempt bond
financing for non-governmental business activities, such as industrial
development bonds.
FUND CHARACTERISTICS. Because the Fund will ordinarily invest at least 80% of
its assets in California Tax Exempt Securities, its portfolio is more
susceptible to factors affecting these securities than is a tax-exempt mutual
fund not investing primarily in the obligations of a single state. (See "Risk
Factors" and "Investments, Techniques and Risk Factors".)
The Fund may write (sell) covered call and put options on debt securities in
which it may invest and on indices composed of debt securities in which it may
invest. It may purchase call and put options on these securities and indices. It
may also write straddles, which are combinations of put and call options on the
same security. The Fund may buy and sell interest rate and municipal bond index
futures contracts, and options on these futures contracts, to hedge against
changes in securities prices and interest rates. The Fund may invest in variable
rate and floating rate obligations, including inverse floating rate obligations,
on which the interest rate is adjusted at predesignated periodic intervals or
when there is a change in the market rate of interest on which the interest rate
payable on the obligation is met is based. Options, futures contracts and
variable and floating rate instruments are generally considered to be
"derivative" instruments, because they derive their value from the performance
of an underlying asset, index or other economic benchmark. See "Investments,
Techniques and Risk Factors" for additional discussion of derivative
instruments.
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THE FUND MAY EMPLOY CERTAIN INVESTMENT
STRATEGIES TO HELP ACHIEVE ITS INVESTMENT
OBJECTIVE.
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The Fund will not concentrate in any one industry (governmental issuers are not
considered to be part of any "industry"). While the Fund may invest more than
25% of its total assets in industrial development or pollution control bonds, it
may not invest more than 25% of its assets in industrial development or
pollution control bonds which are dependent, directly or indirectly, on the
revenues or credit of private entities in any one industry.
The Fund may purchase tax exempt participation interests and municipal lease
obligations, may lend its portfolio securities, enter into repurchase
agreements, purchase restricted and illiquid securities and purchase securities
on a when-issued or forward commitment basis.
See "Investments, Techniques and Risk Factors" for more information about the
Fund's investments.
7
<PAGE> 8
The Fund has adopted certain investment restrictions which are enumerated in
detail in the Statement of Additional Information, where they are classified as
fundamental or nonfundamental. Those restrictions designated as fundamental may
not be changed without shareholder approval. The Fund's investment objective and
its policy to invest (under normal market conditions) 80% of its total assets in
California Tax-Exempt securities are fundamental and may not be changed without
the approval of the Fund's shareholders. The Fund's other investment policies
and its nonfundamental restrictions, however, may be changed by a vote of the
Trustees without shareholder approval. Notwithstanding the Fund's fundamental
investment restriction prohibiting investments in other investment companies,
the Fund may, pursuant to an order granted by the SEC, invest in other
investment companies in connection with a deferred compensation plan for the
non-interested trustees of the John Hancock Group of Funds. There can be no
assurance that the Fund will achieve its investment objective.
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THE FUND FOLLOWS CERTAIN POLICIES THAT MAY
HELP TO REDUCE INVESTMENT RISK.
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RISK FACTORS. An investment in the Fund is intended for long-term investors who
can accept the risks associated with investing primarily in fixed-income
securities. The Fund's investments will be subject to market fluctuation and
other risks inherent in all securities. The Fund's yield, return and price
volatility depend on the type and quality of its investments as well as market
and other factors. In addition, the Fund's potential investments and management
techniques may entail specific risks. For additional information about risks
associated with an investment in the Fund, see "Investments, Techniques and Risk
Factors."
The following information as to certain California risk factors is given in view
of the fact that the Fund's ability to achieve its investment objective depends
upon the ability of the issuers of California Tax Exempt Securities to meet
their continuing obligations for the payment of principal and interest. For a
more complete discussion, you may refer to the Statement of Additional
Information.
In 1978, California passed Proposition 13, limiting the level of property taxes.
This and subsequent legislation limiting taxation and spending may affect the
creditworthiness of the state or local agencies in the future. If either
California or any of its local governmental entities is unable to meet its
financial obligations, the income derived by the Fund, its net asset value, its
ability to preserve or realize capital appreciation or its liquidity could be
adversely affected.
On December 6, 1994, Orange County, California (the "County"), together with its
pooled investment funds (the "O.C. Pools"), filed for protection under Chapter 9
of the federal Bankruptcy Code. This filing occurred after reports that the O.C.
Pools had suffered significant market losses in their investments caused a
liquidity crisis for the O.C. Pools and the County. Approximately 180 other
public entities, most but not all located in the County, were also depositors in
the O.C. Pools. As of mid-January, 1995, after the O.C. Pools were restructured
to reduce their risk exposure, the County estimated that the O.C. Pools had lost
about $1.7 billion or 22% of their initial deposits of around $7.5 billion. Many
of the entities that kept moneys in the O.C. Pools, including the County, are
facing cash flow difficulties because of the bankruptcy filing and may be
required to reduce programs or capital projects. The County and some of these
entities have defaulted, and others may
8
<PAGE> 9
default in the future, in payment of their obligations. Moody's and S&P have
suspended, reduced to below investment grade levels, or placed on "Credit Watch"
various securities of the County and the entities participating in the Fund. As
of April 6, 1995, 1.08% of the Fund's total net assets was invested in
obligations arising from the O.C. Pools.
The State of California has no existing obligation with respect to any
obligations or securities of the County or any of the other participating
entities. However, the State may be obligated to intervene to ensure that school
districts have sufficient funds to operate, or maintain certain
county-administered State programs.
The recession starting in mid-1990 was the deepest and longest in California
since the 1930's and caused a sharp drop in State revenues. As a result, the
State accumulated a budget deficit of almost $3 billion at its peak at June 30,
1992. Each budget in the last four years has required the Governor and
Legislature to undertake multibillion dollar cuts in program expenditures,
transfers of fiscal responsibilities to local governments, various one-time
adjustments, accounting changes and tax increases in an effort to balance
revenues and expenditures. The difficulties in reaching a consensus approach to
this persistent imbalance produced a two-month delay in passing the June 1992
budget, which forced the State to issue registered warrants to pay its bills. In
July 1994, the State passed a budget which proposed eliminating the accumulated
budget deficit of about $1.8 billion by the end of the Fiscal Year 1995-96.
The persistent budget deficits, combined with about $1.7 billion of off-budget
payments made to schools and reductions of internally borrowable funds, severely
depleted the State's cash resources, so that it has had to resort to repeated
external borrowing to meet its cash needs since 1992. In order to meet cash flow
requirements for the 1994-95 fiscal year and to defer payment of part of the
budget deficit, the State issued $7 billion of short-term securities in July and
August 1994, of which $4 billion mature in April 1996. To assure repayment of
this borrowing, the State enacted legislation which can lead to automatic,
across-the-board cuts in certain General Fund expenditures in the 1995-96 fiscal
year if cash flow projections made in October 1995 show deterioration from
projections made in July 1994 when the borrowings were made. This plan places
the burden upon the Legislature to maintain ongoing control over the annual
budget, and could place additional financial pressure on local governments'
reliance on program expenditures. The State will continue to have to rely on
access to the short-term debt markets to meet its cash flow requirements in the
foreseeable future.
The California economy has shown steady growth since the start of 1994. After
four consecutive years of on-going job losses, company relocations out of state,
and unemployment rates exceeding 9% at times, the State has registered net job
growth. Over the next two years, modest growth is expected to continue with the
economy generating momentum going into 1996. After recovering from the losses
inflicted by the January 1994 Los Angeles earthquake, personal income is
expected to rebound in 1995. Any setbacks to this recovery could lead to weaker
than expected collections of State and local revenues and continued budget
pressures.
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<PAGE> 10
As a result of the ongoing budget imbalance, growing deficits and sluggish
recovery, the State credit ratings have been recently downgraded. In July, 1994,
both Moody's and S&P lowered their credit ratings on California General
Obligation debts. Moody's dropped its Aa ratings to A1 and Standard & Poor's
reduced A+ ratings to A. Fitch Investors Service also lowered the State's rating
from Aa to A. Continued financial stress and failure by the State to directly
address its deficit could lead to further downgrades.
The primary consideration in choosing brokerage firms to carry out the Fund's
transactions is execution at the most favorable prices, taking into account the
broker's professional ability and quality of service. Consideration may also be
given to the broker's sales of Fund shares. Pursuant to procedures determined by
the Trustees, John Hancock Advisers, Inc. (the "Adviser") may place securities
transactions with brokers affiliated with the Adviser. The brokers include
Tucker Anthony Incorporated, Sutro and Company, Inc. and John Hancock
Distributors, Inc., which are indirectly owned by the John Hancock Mutual Life
Insurance Company (the "Life Company"), which in turn indirectly owns the
Adviser.
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BROKERS ARE CHOSEN ON BEST PRICE AND
EXECUTION.
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ORGANIZATION AND MANAGEMENT OF THE FUND
The Fund is a diversified open-end management investment company organized as a
Massachusetts business trust in 1990. The Fund reserves the right to create and
issue a number of series of shares, or funds or classes thereof, which are
separately managed and have different investment objectives. The Fund is not
required to and does not intend to hold annual meetings of shareholders,
although special meetings may be held for such purposes as electing or removing
Trustees, changing fundamental policies or approving a management contract. The
Fund, under certain circumstances, will assist in shareholder communications
with other shareholders.
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THE TRUSTEES ELECT OFFICERS AND RETAIN THE
INVESTMENT ADVISER WHO IS RESPONSIBLE FOR
THE DAY-TO-DAY OPERATIONS OF THE FUND,
SUBJECT TO THE TRUSTEES' POLICIES AND
SUPERVISION.
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The Adviser was organized in 1968 and is a wholly-owned indirect subsidiary of
the John Hancock Mutual Life Insurance Company, a financial services company.
The Adviser provides the Fund, and other investment companies in the John
Hancock group of funds, with investment research and portfolio management
services. John Hancock Funds Inc., ("John Hancock Funds") distributes shares for
all of the John Hancock mutual funds through Selling Brokers. Certain Fund
officers are also officers of the Adviser and John Hancock Funds. Pursuant to an
order of the SEC, the Fund has adopted a deferred compensation plan for its
independent Trustees which allows Trustees' fees to be invested by the Fund in
other John Hancock funds.
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JOHN HANCOCK ADVISERS, INC. ADVISES
INVESTMENT COMPANIES HAVING A TOTAL ASSET
VALUE OF APPROXIMATELY $13 BILLION.
- -------------------------------------------------------------------------------
All investment decisions are made by the Adviser's fixed-income portfolio
management team and no single person is primarily responsible for making
recommendations to the team.
In order to avoid any conflict with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
preclearance for all personal trades and a ban on the purchase of initial public
10
<PAGE> 11
offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
ALTERNATIVE PURCHASE ARRANGEMENTS
You can purchase shares of the Fund at a price equal to their net asset value
per share plus a sales charge. At your election, this charge may be imposed
either at the time of the purchase (see "Initial Sales Charge Alternative,"
Class A shares) or on a contingent deferred basis (the "Contingent Deferred
Sales Charge Alternative," Class B shares). If you do not specify on your
account application the class of shares you are purchasing, it will be assumed
that you are investing in Class A shares.
CLASS A SHARES. If you elect to purchase Class A shares, you will incur an
initial sales charge unless the amount of your purchase is $1 million or more.
If you purchase $1 million or more of Class A shares, you will not be subject to
an initial sales charge, but you will incur a sales charge if you redeem your
shares within one year of purchase. Class A shares are subject to ongoing
distribution and service fees at a combined annual rate of up to 0.15% of the
Fund's average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Share Price -- Qualifying for a Reduced Sales Charge."
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS A SHARES ARE SUBJECT
TO AN INITIAL SALES CHARGE.
- -------------------------------------------------------------------------------
CLASS B SHARES. You will not incur a sales charge when you purchase Class B
shares, but the shares are subject to a sales charge if you redeem them within
six years of purchase (the "contingent deferred sales charge" or the "CDSC").
Class B shares are subject to ongoing distribution and service fees at a
combined annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class B shares. Investing in Class B shares permits all of
your dollars to work from the time you make your investment, but the higher
ongoing distribution fee will cause these shares to have higher expenses than
those of Class A shares. To the extent that any dividends are paid by the Fund,
these higher expenses will also result in lower dividends than those paid on
Class A shares.
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS B SHARES ARE SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE.
- -------------------------------------------------------------------------------
Class B shares are not available for full-service defined contribution plans
administered by Investor Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
FACTORS TO CONSIDER IN CHOOSING AN ALTERNATIVE
The alternative purchase arrangement allows you to choose the most beneficial
way to buy shares, given the amount of your purchase, the length of time you
expect to hold your shares and other circumstances. You should consider whether,
during the anticipated life of your Fund investment, the CDSC and accumulated
fees on Class B shares would be less than the initial sales charge and
accumulated fees on Class A shares purchased at the same time, and to what
extent this differential would be offset by the Class A shares' lower expenses.
To help you make this determination, the table under the caption "Expense
Information" on the
- -------------------------------------------------------------------------------
YOU SHOULD CONSIDER WHICH CLASS OF SHARES
WOULD BE MORE BENEFICIAL TO YOU.
- -------------------------------------------------------------------------------
11
<PAGE> 12
inside cover page of this Prospectus shows examples of the charges applicable
to each class of shares. Class A shares will normally be more beneficial if you
qualify for reduced sales charges. See "Share price -- Qualifying for a
Reduced Sales Charge."
Class A shares are subject to lower distribution fees and, accordingly, pay
correspondingly higher dividends per share, to the extent any dividends are
paid. However, because initial sales charges are deducted at the time of
purchase, you would not have all of your funds invested initially and,
therefore, would initially own fewer shares. If you do not qualify for reduced
initial sales charges and expect to maintain your investment for an extended
period of time, you might consider purchasing Class A shares. This is because
the accumulated distribution and service charges on Class B shares may exceed
the initial sales charge and accumulated distribution and service charges on
Class A shares during the life of your investment.
Alternatively, you might determine that it is more advantageous to purchase
Class B shares to have all of your funds invested initially. However, you will
be subject to higher distribution and service fees and, for a six-year period, a
CDSC.
In the case of Class A shares, the distribution expenses that John Hancock
Funds, incurs in connection with the sale of the shares will be paid from the
proceeds of the initial sales charge and ongoing distribution and service fees.
In the case of Class B shares, the expenses will be paid from the proceeds of
the ongoing distribution and service fees, as well as from the CDSC incurred
upon redemption within six years of purchase. The purpose and function of the
Class B shares' CDSC and ongoing distribution and service fees are the same as
those of the Class A shares' initial sales charge and ongoing distribution and
service fees. Sales personnel distributing the Fund's shares may receive
different compensation for selling each class of shares.
Dividends, if any, on Class A and Class B shares will be calculated in the same
manner, at the same time and on the same day. They also will be in the same
amount, except for differences resulting from each class bearing only its own
distribution and service fees, shareholder meeting expenses and any incremental
transfer agency costs. See "Dividends and Taxes."
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a monthly fee to
the Adviser. During the Fund's most recent fiscal year, the advisory fee was
.55% of the Fund's average daily net assets. The Adviser has voluntarily and
temporarily agreed to continue to limit the Fund's operating expenses to 0.75%
and 1.50% of the average net assets attributable to Class A and Class B shares,
respectively.
The Class A and Class B shareholders have adopted distribution plans (each a
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"). Under these Plans, the Fund will pay distribution and service fees
at an aggregate annual rate of up to 0.15% of the Class A shares' average daily
net assets and an aggregate annual rate of 1.00% of the Class B shares' average
daily
- -------------------------------------------------------------------------------
THE FUND PAYS DISTRIBUTION AND SERVICE
FEES FOR MARKET-
ING AND SALES-RELATED
SHAREHOLDER SERVICING.
- -------------------------------------------------------------------------------
12
<PAGE> 13
net assets. John Hancock Funds has temporarily agreed to limit the
distribution and services fees pursuant to the Class B Plan to 0.90% of average
daily net assets. Up to 0.25% for Class B shares and 0.15% for Class A shares is
for service expenses and the remaining amount is for distribution expenses. 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; (iii) unreimbursed distribution expenses under the Fund's prior
distribution plans; (iv) distribution expenses incurred by other investment
companies which sell all or substantially all of their assets to, merge or
otherwise engage in a reorganization transaction with the Fund; and (v) with
respect to Class B shares only, interest expenses on unreimbursed distribution
expenses. The service fees will be used to compensate Selling Brokers for
providing personal and account maintenance services to shareholders.
In the event John Hancock Funds is not fully reimbursed for payments it makes or
expenses it incurs under the Class A Plan, these expenses will not be carried
beyond one year from the date they were incurred. Unreimbursed expenses under
the Class B Plan will be carried forward together with interest on the balance
of these unreimbursed expenses. For the fiscal year ended December 31, 1994, an
aggregate of $3,602,288 of distribution expenses or 4.66% 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.
Information on the Fund's total expenses is in the Fund Financial Highlights
section of this Prospectus.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund generally declares dividends daily and distributes them
monthly, representing all or substantially all of its net investment income. The
Fund will distribute net realized long-term and short-term capital gains, if
any, annually before the close of the calendar year.
- -------------------------------------------------------------------------------
THE FUND GENERALLY DECLARES DIVIDENDS
DAILY AND DISTRIBUTES THEM MONTHLY.
- -------------------------------------------------------------------------------
Dividends are reinvested in additional shares of your class unless you elect the
option to receive them in cash. If you elect the cash option and the U.S. Postal
Service cannot deliver your checks, your election will be converted to the
reinvestment option. Because of the higher expenses associated with Class B
shares, any dividends on these shares will be lower than those on the Class A
shares. See "Share Price."
TAXATION. The Fund intends to meet certain federal tax requirements so that its
distributions of the tax-exempt interest it earns may be treated as
"exempt-interest dividends," which you are entitled to treat as tax-exempt
interest. That portion of exempt-interest dividends, if any, attributable to
interest on certain tax-exempt obligations that are "private activity bonds" may
increase certain shareholders'
13
<PAGE> 14
alternative minimum tax. Any exempt-interest dividend may increase a corporate
shareholder's alternative minimum tax.
Shareholders receiving social security benefits and certain railroad retirement
benefits may be subject to Federal income tax on up to 85 percent of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Fund. Shares
of the Fund may not be an appropriate investment for persons who are
"substantial users" of facilities financed by industrial development or private
activity bonds, or persons related to "substantial users." Consult your tax
adviser if you think this may apply to you.
Dividends from the Fund's net taxable income, if any, including any market
discount included in the Fund's income, and from the Fund's net short-term
capital gains are taxable to you as ordinary income. Dividends from the Fund's
net long-term capital gains are taxable as long-term capital gain. These
dividends are taxable, whether received in cash or reinvested in additional
shares. Certain dividends may be paid by the Fund in January of a given year but
may be treated as if you received them the previous December.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, the Fund will not be
subject to Federal income tax on any net investment income or net realized
capital gains distributed to its shareholders within the time period prescribed
by the Code. When you redeem (sell) or exchange shares, you may realize a
taxable gain or loss.
On the account application you must certify that the social security or other
tax payer identification number you provide is your correct number and that you
are not subject to backup withholding of Federal income tax. If you do not
provide this information or are otherwise subject to this withholding, the Fund
may be required to withhold 31% of your taxable dividends and the proceeds of
redemptions or exchanges.
The Fund intends to comply with certain California tax requirements so that
dividends paid by the Fund which are derived from interest on obligations, the
interest on which is exempt from California income tax, will be exempt from
California personal income tax in the hands of shareholders of the Fund.
Dividends from other sources, including capital gain dividends, if any, will not
be exempt from California personal income tax. Dividends paid by the Fund are
not exempt from California franchise or corporate income taxes. California does
not treat tax-exempt interest (or dividends paid by the Fund attributable to
such interest) as a tax preference item for purposes of its alternative minimum
tax.
The foregoing relates to federal income taxation and to California personal
income taxation as in effect as of the date of this Prospectus. Distributions
from investment income and capital gains, including exempt-interest dividends,
may be subject to California franchise taxes if received by a corporation doing
business in California, to state taxes in states other than California and to
local taxes. You should consult your tax adviser for specific advice.
14
<PAGE> 15
PERFORMANCE
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30-day period by the maximum
offering price per share on the last day of that period. Yield is also
calculated according to accounting methods that are standardized for all stock
and bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the Fund's yield may not equal the income paid on
shares or the income reported in the Fund's financial statements.
- -------------------------------------------------------------------------------
THE FUND MAY ADVERTISE ITS YIELD, TAX
EQUIVALENT YIELD AND TOTAL RETURN.
- -------------------------------------------------------------------------------
Tax-equivalent yield 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 then adding
the product to any portion of the Fund's yield that is not tax-exempt.
Total return is based on the overall change in value of a hypothetical
investment in the Fund. Both total return and yield calculations for Class A
shares generally include the effect of paying the maximum sales charge of 4.5%.
Investments at a lower sales charge would achieve higher returns than those
advertised. The value of Fund shares, when redeemed, may be more or less than
their original cost. Both yield and total return are historical calculations,
and are not an indication of future performance.
The Fund's total return shows the overall dollar or percentage change in value
of a hypothetical investment in the Fund, assuming the reinvestment of all
dividends. Cumulative total return shows the Fund's performance over a period of
time. Average annual total return shows the cumulative return divided over the
number of years included in the period. Because average annual total return
tends to smooth out variations in the Fund's performance, you should recognize
that it is not the same as actual year-to-year results.
15
<PAGE> 16
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
The minimum initial investment in Class A and Class B Shares is $1,000
($250 fo group investments and retirement plans). Complete the Account
Application attached to this Prospectus. Indicate whether you are
purchasing Class A or Class B shares. If you do not specify which class of
shares you are purchasing, Investor Services will assume that you are
investing in Class A shares.
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------
BY CHECK 1. Make your check payable to John Hancock Investor Services
Corporation ("Investor Services") P.O. Box 9115, Boston, MA
02205-9115.
2. Deliver the completed application and check to your registered
representative or a broker with an agreement with John Hancock
Funds ("Selling Broker") or mail it directly to Investor
Services.
- ---------------------------------------------------------------------------------
BY WIRE 1. Obtain an account number by contacting your registered
representative or Selling Broker, or by calling 1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock California Tax-Free Income Fund
Class A or Class B shares
Your Account Number
Name(s) under which account is registered
3. Deliver the completed application to your registered
representative or Selling Broker or mail it directly to
Investor Services.
- ---------------------------------------------------------------------------------
1. Complete the "Automatic Investing" and "Bank Information" sections on
MONTHLY the Account Privileges Application, designating a bank account from
AUTOMATIC which funds may be drawn.
ACCUMULATION 2. The amount you elect to invest will be automatically withdrawn from
PROGRAM your bank or credit union account.
(MAAP)
</TABLE>
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A
AND CLASS B SHARES.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
BY TELEPHONE 1. Complete the "Invest-by-Phone" and "Bank Information" sections
on the Account Privileges Application, designating a bank
account from which your funds may be drawn. Note that in order
to invest by phone, you must be in a bank or credit union that
is a member of the Automated Clearing House system (ACH).
2. After your authorization form has been processed, you may
purchase additional Class A and Class B shares by calling
Investor Services toll-free at 1-800-225-5291.
3. Give the Investor Services representative the name in which
your account is registered, the Fund name, the class of shares
you own, your account number, and the amount you wish to
invest.
4. Your investment normally will be credited to your account the
business day following your phone request.
- ---------------------------------------------------------------------------------
BY CHECK 1. Either complete the detachable stub included in your account
statement or include a note with your investment listing the
name of the Fund, the class of shares you own, your account
number and the name(s) in which the account is registered.
2. Make your check payable to John Hancock Investor Services
Corporation.
3. Mail the account information and check to:
John Hancock Investor Services Corporation
P.O. Box 9115
Boston, MA 02205-9115
or deliver it to your registered representative or Selling
Broker.
- ---------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE Instruct your bank to wire funds to:
</TABLE>
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A AND CLASS B
SHARES.
(CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock California Tax-Free Income Fund
(Class A or Class B shares)
Your Account Number
Name(s) under which account is registered
- -------------------------------------------------------------------------------
</TABLE>
Other Requirements. All purchases must be made in U.S. dollars. Checks
written on foreign banks will delay purchases until U.S. funds are received,
and a collection charge may be imposed. Shares of the Fund are priced at the
offering price based on the net asset value computed after Investor Services
receives notification of the dollar equivalent from the Fund's custodian bank.
Wire purchases normally take two or more hours to complete and, to be accepted
the same day, must be received by 4:00 p.m., New York time. Your bank may
charge a fee to wire funds. Telephone transactions are recorded to verify
information. Certificates are not issued unless a request is made in writing to
Investor Services.
- -------------------------------------------------------------------------------
You will receive a statement of your account after any transaction that affects
your share balance or registration (statements related to reinvestment of
dividends and automatic investment/withdrawal plans will be sent to you
quarterly). A tax information statement will be mailed to you by January 31 of
each year.
- -------------------------------------------------------------------------------
YOU WILL RECEIVE ACCOUNT STATEMENTS, THAT
YOU SHOULD KEEP TO HELP WITH YOUR
PERSONAL RECORDKEEPING.
- -------------------------------------------------------------------------------
SHARE PRICE
The net asset value per share ("NAV") is the value of one share. The NAV is
calculated by dividing the net assets of each class by the number of outstanding
shares of that class. The NAV of each class can differ in value. Securities in
the Fund's portfolio are valued on the basis of market quotations, valuations
provided by independent pricing services or, at fair value as determined in good
faith according to procedures approved by the Trustees. Short-term debt
investments maturing within 60 days are valued at amortized cost which the
Trustees have determined approximates market value. If quotations are not
readily available, assets are valued by a method that the Trustees believe
accurately reflects fair value. The NAV is calculated once daily as of the close
of regular trading on the New York Stock Exchange (the "Exchange") (generally at
4:00 P.M., New York time) on each day that the Exchange is open.
- -------------------------------------------------------------------------------
THE OFFERING PRICE OF YOUR SHARES IS THEIR
NET ASSET VALUE PLUS A SALES CHARGE,
IF APPLICABLE, WHICH WILL
VARY WITH THE PURCHASE
ALTERNATIVE YOU CHOOSE.
- -------------------------------------------------------------------------------
Shares of the Fund are sold at the offering price based on the NAV computed
after your investment request is received in good order by John Hancock Funds.
If you buy shares of the Fund through a Selling Broker, the Selling Broker must
receive your investment before the close of regular trading on the Exchange and
transmit it to John Hancock Funds before its close of business to receive that
day's offering price.
17
<PAGE> 18
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The offering price you pay
for Class A shares of the Fund equals the NAV plus a sales charge as follows:
<TABLE>
<CAPTION>
COMBINED REALLOWANCE
REALLOWANCE TO SELLING
AND SERVICE BROKERS AS A
FEE AS A PERCENTAGE
SALES CHARGE AS SALES CHARGE AS PERCENTAGE OF THE
AMOUNT INVESTED A PERCENTAGE OF A PERCENTAGE OF OF OFFERING OFFERING
(INCLUDING SALES CHARGE) OFFERING PRICE THE AMOUNT INVESTED PRICE(+) PRICE(*)
- ----------------------------------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C>
Less than $100,000........ 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999...... 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999...... 2.75% 2.83% 2.30% 2.06%
$500,000 to $999,999...... 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over....... 0.00%(**) 0.00%(**) (***) 0.00%(***)
</TABLE>
(*) Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales
charge. In addition to the reallowance allowed to all selling Brokers,
John Hancock Funds will pay the following: round trip airfare to a resort
will be offered to each registered representative of a Selling Broker (if
the Selling Broker has agreed to participate) who sells certain amounts of
shares of John Hancock funds. John Hancock Funds will make these incentive
payments out of its own resources. Other than distribution and service
fees, the Fund does not bear distribution expenses. A Selling Broker to
whom substantially the entire sales charge is reallowed or who receives
these incentives may be deemed to be an underwriter under the Securities
Act of 1933.
(**) No sales charge is payable at the time of purchase in Class A shares of $1
million or more, but a CDSC may be imposed in the event of certain
redemption transactions within one year of purchase.
(***) John Hancock Funds may pay a commission and the first year's service fee
(as described in (+) below) to Selling Brokers who initiate and are
responsible for purchases of $1 million or more in the aggregate as
follows: 1% on sales to $4,999,999, 0.50% on the next $5 million and 0.25%
on amounts of $10 million and over.
(+) At the time of sale, John Hancock Funds pays to Selling Brokers the first
year's service fee in advance in an amount equal to 0.25% of the net
assets invested in the Fund. Thereafter, it pays the service fee
periodically in arrears in an amount up to 0.25% of the Fund's average
annual net assets. Selling Brokers receive the fee as compensation for
providing personal and account maintenance services to shareholders.
Sales charges ARE NOT APPLIED to any dividends that are reinvested in additional
Class A shares of the Fund.
John Hancock Funds will pay certain affiliated Selling Brokers at an annual rate
of up to 0.05% of the daily net assets of accounts attributable to these
brokers.
Under certain circumstances described below, investors in Class A shares may be
entitled to pay reduced sales charges. See "Qualifying for a Reduced Sales
Charge" below.
CONTINGENT DEFERRED SALES CHARGE -- INVESTMENTS OF $1 MILLION OR MORE IN CLASS A
SHARES. Purchases of $1 million or more of Class A shares will be made at net
asset value with no initial sales charge, but if the shares are redeemed within
18
<PAGE> 19
12 months after the end of the calendar month in which the purchase was made
(the CDSC period), a CDSC will be imposed. The rate of the CDSC will depend on
the amount invested as follows:
<TABLE>
<CAPTION>
AMOUNT INVESTED CDSC RATE
- ---------------------------------------------------------------------- ---------
<S> <C>
$1 million to $4,999,999.............................................. 1.00%
Next $5 million to $9,999,999......................................... 0.50%
Amounts of $10 million and over....................................... 0.25%
</TABLE>
Existing full-service clients of the Life Company who were group annuity
contract holders as of September 1, 1994 and participant-directed defined
contribution plans with at least 100 eligible employees at the inception of the
Fund account may purchase Class A shares with no initial sales charge. However,
if the shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the above rate .
The CDSC will be assessed on an amount equal to the lesser of the current market
value or the original purchase cost of the Class A shares that have been
redeemed. Accordingly, no CDSC will be imposed on increases in account value
above the initial purchase price, including any distributions which have been
reinvested in additional Class A shares.
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.
Therefore, it will be assumed that the redemption is first made from any shares
in your account that are not subject to the CDSC. The CDSC is waived on
redemptions in certain circumstances. See "Waiver of Contingent Deferred Sales
Charge" below.
QUALIFYING FOR A REDUCED SALES CHARGE. If you invest more than $100,000 in
Class A shares of the Fund or a combination of funds within the John Hancock
family of funds (except money market funds), you may qualify for a reduced sales
charge on your investments in Class A shares through a LETTER OF INTENTION. You
may also be able to use the ACCUMULATION PRIVILEGE and the COMBINATION PRIVILEGE
to take advantage of the value of your previous investments in Class A shares of
the John Hancock funds in meeting the breakpoints for a reduced sales charge.
For the ACCUMULATION PRIVILEGE and COMBINATION PRIVILEGE, the applicable sales
charge will be based on the total of:
- -------------------------------------------------------------------------------
YOU MAY QUALIFY FOR A
REDUCED SALES CHARGE ON
YOUR INVESTMENT IN CLASS A SHARES.
- -------------------------------------------------------------------------------
1. Your current purchase of Class A shares of the Fund.
2. The net asset value (at the close of business on the previous day) of (a) all
Class A shares of the Fund you hold, and (b) all Class A shares of any other
John Hancock funds you hold; and
3. The net asset value of all shares held by another shareholder eligible to
combine his or her holdings with you into a single "purchase."
19
<PAGE> 20
EXAMPLE:
If you hold Class A shares of a John Hancock fund with a net asset value of
$80,000 and subsequently invest $20,000 in Class A shares of the Fund, the sales
charge on this subsequent investment would be 3.75% and not 4.50% (the rate that
would otherwise be applicable to investments of less than $100,000.) See
"Initial Sales Charge alternative -- Class A Shares."
If you are in one of the following categories, you may purchase Class A shares
of the Fund without paying a sales charge:
- - A Trustee/Director or officer of the Fund; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family of any of
the foregoing; or any Fund, pension, profit sharing or other benefit plan for
the individuals described above.
- - Any state, county, city or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any registered
investment management company.*
- - A bank, trust company, credit union, savings institution or other type of
depository institution, its trust departments or common trust funds if it is
purchasing $1 million or more for non-discretionary customers or accounts.*
- - A broker, dealer or registered investment adviser that has entered into an
agreement with John Hancock Funds providing specifically for the use of Fund
shares in fee-based investment products made available to their clients.
- - A former participant in an employee benefit plan with John Hancock Funds, when
he/she withdraws from his/her plan and transfers any or all of his/her plan
distributions directly to the Fund.
- ---------------
* For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Class A Shares of the Fund may be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES. Class B shares
are offered at net asset value per share without a sales charge so that your
entire initial investment will go to work at the time of purchase. However,
Class B shares redeemed within six years of purchase will be subject to a CDSC
at the rates set forth below. This charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
shares being redeemed. Accordingly, you will not be assessed a CDSC on increases
in account value above the initial purchase price, including shares derived from
dividend reinvestment.
20
<PAGE> 21
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
reinvestment of dividends and next from the shares you have held the longest
during the six-year period. The CDSC is waived on redemptions in certain
circumstances. See the discussion "Waiver of Contingent Deferred Sales Charge"
below.
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time, your CDSC will be calculated as follows:
<TABLE>
<S> <C>
- - Proceeds of 50 shares redeemed at $12 per share $600
- - Minus proceeds of 10 shares not subject to CDSC because they were -120
acquired through dividend reinvestment (10 X $12)
- - Minus appreciation on remaining shares, also not subject to CDSC -80
(40 X $2)
-----
- - Amount subject to CDSC $400
</TABLE>
Proceeds from the CDSC are paid to John Hancock Funds. John Hancock Funds uses
all or part of them to defray its expenses related to providing the Fund with
distribution services connected to the sale of Class B shares, such as
compensating Selling Brokers for selling these shares. The combination of the
CDSC and the distribution and service fees makes it possible for the Fund to
sell Class B shares without deducting a sales charge at the time of the
purchase.
The amount of the CDSC, if any, will vary depending on the number of years from
the time you purchase your Class B shares until the time you redeem them. Solely
for the purposes of determining the holding period, any payments you make during
the month will be aggregated and deemed to have been made on the last day of the
month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR IN WHICH CLASS B SHARES DOLLAR AMOUNT SUBJECT TO
REDEEMED FOLLOWING PURCHASE CDSC
- ---------------------------------------------------- ---------------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
A commission equal to 3.75% of the amount invested and a first year's service
fee equal to 0.25% of the amount invested are paid to Selling Brokers. The
initial service fee is paid in advance at the time of sale for the provision of
personal and account maintenance services to shareholders during the twelve
months following the sale, and thereafter the service fee is paid in arrears.
21
<PAGE> 22
WAIVER OF CONTINGENT DEFERRED SALES CHARGES. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in these circumstances:
- - Redemptions of Class B shares made under Systematic Withdrawal Plan (see "How
to Redeem Shares"), as long as your annual redemptions do not exceed 10% of
your account value at the time you established your Systematic Withdrawal
Plan, and 10% of the value of your subsequent investments (less redemptions)
in that account at the time you notify Investor Services. This waiver does not
apply to Systematic Withdrawal Plan redemptions of Class A shares that are
subject to a CDSC.
- -------------------------------------------------------------------------------
UNDER CERTAIN CIRCUMSTANCES, THE CDSC ON
CLASS B AND CERTAIN CLASS A SHARE
REDEMPTIONS WILL BE WAIVED.
- -------------------------------------------------------------------------------
- - Redemptions made to effect distributions from an Individual Retirement Account
either before or after age 59 1/2, as long as the distributions are based on
the life expectancy of the joint-and-last survivor life expectancy of you and
your beneficiary. These distributions must be free from penalty under the
Code.
- - Redemptions made to effect mandatory distributions under the Code after age
70 1/2 from a tax-deferred retirement plan.
- - Redemptions made to effect distributions to participants or beneficiaries from
certain employer-sponsored retirement plans including those qualified under
Section 401(a) of the Code, custodial accounts under Section 403(b)(7) of the
Code and deferred compensation plans under Section 457 of the Code. The waiver
also applies to certain returns of excess contributions made to these plans.
In all cases, the distributions must be free from penalty under the Code.
- - Redemptions due to death or disability.
- - Redemptions made under the Reinvestment Privilege, as described in "Additional
Services and Programs" of this Prospectus.
- - Redemptions made pursuant to the Fund's right to liquidate your account if you
have less than $100 invested in the Fund.
- - Redemptions made in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
- - Redemptions from certain IRA and retirement plans that purchased shares prior
to October 1, 1992.
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to it.
CONVERSION OF CLASS A SHARES. Your Class B shares and an appropriate portion of
reinvested dividends on those shares will be converted into Class A shares
automatically. This will occur no later than the month following eight years
after the shares were purchased, and will result in lower annual distribution
fees. If you exchanged Class B shares into the Fund from another John Hancock
fund, the calculation will be based on the time you purchased the shares in the
original fund. The Fund has been advised that the conversion of Class B Shares
to Class A Shares should not be taxable for Federal income tax purposes and
should not change a shareholder's tax basis or tax holding period for the
converted shares.
22
<PAGE> 23
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services, less any applicable CDSC. The Fund
may hold payment until it is reasonably satisfied that investments recently made
by check or Invest-by-Phone have been collected (which may take up to 10
calendar days).
- -------------------------------------------------------------------------------
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION
REQUEST, PLEASE FOLLOW THESE PROCEDURES.
- -------------------------------------------------------------------------------
Once your shares are redeemed, the Fund generally sends you payment on the next
business day. When you redeem your shares, you may realize a taxable gain or
loss depending usually on the difference between what you paid for them and what
you receive for them, subject to certain tax rules. Under unusual circumstances,
the Fund may suspend redemptions or postpone payment for up to seven days or
longer, as permitted by Federal securities laws.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELEPHONE All Fund shareholders are automatically eligible for the
telephone redemption privilege. Call 1-800-225-5291, from
8:00 A.M. to 4:00 P.M. (New York Time), Monday through
Friday, excluding days on which the Exchange is closed.
Investor Services employs the following procedures to
confirm that instructions received by telephone are
genuine. Your name, the account number, taxpayer
identification number applicable to the account and other
relevant information may be requested. In addition,
telephone instructions are recorded.
You may redeem up to $100,000 by telephone, but the address
on the account must not have changed for the last thirty
days. A check will be mailed to the exact name(s) and
address shown on the account.
If reasonable procedures, such as those described above,
are not followed, the Fund may be liable for any loss due
to unauthorized or fraudulent telephone instructions. In
all other cases, neither the Fund nor Investor Services
will be liable for any loss or expense for acting upon
telephone instructions made in accordance with the
telephone transaction procedures mentioned above.
Telephone redemption is not available for IRAs, other
tax-qualified retirement plans or Fund shares that are in
certificated form.
During periods of extreme economic conditions or market
changes, telephone requests may be difficult to implement
due to a large volume of calls. During these times you
should consider placing redemption requests in writing or
using EASI-Line. EASI-Line's telephone number is
1-800-338-8080.
- ---------------------------------------------------------------------------------
BY WIRE If you have a telephone redemption form on file with the
Fund, redemption proceeds of $1,000 or more can be wired on
the next business day to your designated bank account and a
fee (currently $4.00) will be deducted. You may also use
electronic fund transfer to your assigned bank account and
the funds are usually collectible after two business days.
Your bank may or may not charge for this service.
Redemptions of less than $1,000 will be sent by check or
electronic funds transfer.
This feature may be elected by completing the "Telephone
Redemption" section on the Account Privileges Application
included with this Prospectus.
- ---------------------------------------------------------------------------------
IN WRITING Send a stock power or "letter of instruction" specifying
the name of the Fund, the dollar amount or the number of
shares to be redeemed, your name, class of shares, your
account number, and the additional requirements listed
below that apply to your particular account.
- ---------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
TYPE OF REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Sole A letter of instruction signed (with titles,
Proprietorship, Custodial where applicable) by all persons authorized
(Uniform Gifts or Transfer to to sign for the account, exactly as it is
Minors Act), General Partners registered with the signature(s) guaran-
teed.
Corporation, Association A letter of instruction and a corporate
resolution, signed by person(s) authorized
to act on the account with the signatures
guaranteed.
Trusts A letter of instruction signed by the
Trustee(s), with the signature(s)
guaranteed. (If the Trustee's name is not
registered on your account, also provide a
copy of the trust document, certified within
the last 60 days.)
If you do not fall into any of these registration categories, please call
1-800-225-5291 for further instructions.
</TABLE>
- --------------------------------------------------------------------------------
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the signature on your request. It may not be provided by a notary
public. If the net asset value of the shares redeemed is $100,000 or less,
John Hancock Funds may guarantee the signature. The following institutions may
provide you with a signature guarantee, provided that any such institution
meets credit standards established by Investor Services: (i) a bank; (ii) a
securities broker or dealer, including a government or municipal securities
broker or dealer, that is a member of a clearing corporation or meets certain
net capital requirements; (iii) a credit union having authority to issue
signature guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association; or (v)
a national securities exchange, a registered securities exchange or a clearing
agency.
------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
WHO MAY GUARANTEE YOUR
SIGNATURE.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
THROUGH YOUR BROKER. Your broker may be able to initiate the redemption.
Contact your broker for instructions.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT
REDEMPTIONS.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
If you have certificates for your shares, you must submit them with your stock
power or a letter of instruction. Unless you specify to the contrary, any
outstanding Class A shares will be redeemed before Class B shares. You may not
redeem certificated shares by telephone.
Due to the proportionately high cost of maintaining small accounts, the Fund
reserves the right to redeem at net asset value all shares in an account which
holds less than $100 and to mail the proceeds to the shareholder, or the
transfer agent may impose an annual fee of $10.00. No account will be
involuntarily redeemed or additional fee imposed if the value of the account
falls below the required minimum as a result of market action. No CDSC will be
imposed on involuntary redemption of shares.
Shareholders will be notified before these redemptions are to be made or this
fee is imposed, and will have 30 days to purchase additional shares to bring
their account balance up to the required minimum. Unless the number of shares
acquired by further purchases and dividend reinvestments, if any, exceeds the
number of shares redeemed, repeated redemptions from a smaller account may
eventually trigger this policy.
- -------------------------------------------------------------------------------
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
If your investment objective changes, or you wish to achieve further
diversification, John Hancock offers other funds with a wide range of investment
goals. Contact your registered representative or Selling Broker and request a
prospectus for the John Hancock funds that interest you. Read the prospectus
carefully before exchanging your shares. You can exchange shares of each class
of the Fund only for shares of the same class of another John Hancock fund. For
this purpose, John Hancock funds with only one class of shares will be treated
as Class A, whether or not they have been so designated.
- -------------------------------------------------------------------------------
YOU MAY EXCHANGE SHARES OF THE FUND ONLY
FOR SHARES OF THE SAME CLASS OF ANOTHER
JOHN HANCOCK FUND.
- -------------------------------------------------------------------------------
24
<PAGE> 25
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Class B shares of the Fund which are subject to a CDSC may be exchanged
into Class B shares of another John Hancock fund without incurring the CDSC;
however, these shares will be subject to the CDSC schedule of the shares
acquired (except that exchanges into John Hancock Short-Term Strategic Income
Fund, John Hancock Limited-Term Government Fund and John Hancock Adjustable U.S.
Government Trust which will be subject to the initial fund's CDSC). 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. However, if you exchange Class B shares
purchased prior to January 1, 1994 for Class B shares of any other John Hancock
Fund, you will be subject to the CDSC schedule in effect on your initial
purchase date.
You may exchange Class B shares of the Fund into shares of a John Hancock money
market fund at net asset value; however, you will continue to be subject to the
same CDSC upon redemption.
The Fund reserves the right to require you to keep previously exchanged shares
(and reinvested dividends) in the Fund for 90 days before you are permitted to
execute a new exchange. The Fund may also terminate or alter the terms of the
exchange privilege, upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares in another for Federal income tax purposes. An exchange may
result in a taxable gain or loss.
When you make an exchange, your account registration in both the existing and
new account must be identical. The exchange privilege is available only in
states where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
Because Fund performance and shareholders can be hurt by excessive trading, the
Fund reserves the right to terminate the exchange privilege for any person or
group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely. The
Fund may also temporarily or permanently terminate the exchange privilege for
any person who makes seven or more exchanges out of the Fund per calendar year.
Accounts under common control or ownership will be aggregated for this purpose.
Although
25
<PAGE> 26
the Fund will attempt to give you prior notice whenever it is reasonably able to
do so, it may impose these restrictions at any time.
BY TELEPHONE
1. When you complete the application for your initial purchase of Fund shares,
you automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to authorize telephone exchanges.
2. Call 1-800-225-5291. Have the account number of your current Fund and the
exact name in which it is registered available to give to the telephone
representative.
3. Your name, the account number, taxpayer identification number applicable to
the account and other relevant information may be requested. In addition,
telephone instructions are recorded.
IN WRITING
1. In a letter, request an exchange and list the following:
--the name and class of the Fund whose shares you currently own
--your account number
--the name(s) in which the account is registered
--the name of the fund in which you wish your exchange to be invested
--the number of shares, all shares or dollar amount you wish to exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
REINVESTMENT PRIVILEGE
1. You will not be subject to a sales charge on Class A shares reinvested in
shares of any John Hancock fund that is otherwise subject to a sales charge
as long as you reinvest within 120 days from the redemption date. If you paid
a CDSC upon a redemption, you may reinvest at net asset value in the same
class of shares from which you redeemed within 120 days. Your account will be
credited with the amount of the CDSC previously charged, and the reinvested
shares will continue to be subject to a CDSC. For purposes of computing the
CDSC payable upon a subsequent redemption, the holding period of the shares
acquired through reinvestment will include the holding period of the redeemed
shares.
- -------------------------------------------------------------------------------
IF YOU REDEEM SHARES OF THE
FUND, YOU MAY BE ABLE TO
REINVEST ALL OR PART OF THE
PROCEEDS IN SHARES OF THIS
FUND OR ANOTHER JOHN
HANCOCK FUND WITHOUT
PAYING AN ADDITIONAL
SALES CHARGE.
- -------------------------------------------------------------------------------
2. Any portion of your redemption may be reinvested in Fund shares or in shares
of any of the other John Hancock funds, subject to the minimum investment
limit of that fund.
26
<PAGE> 27
3. To reinvest, you must notify Investor Services in writing. Include the Fund's
name, the account number and class from which your shares were originally
redeemed.
SYSTEMATIC WITHDRAWAL PLAN
1. You can elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
also obtain this application by calling your registered representative or by
calling 1-800-225-5291.
2. To be eligible, you must have at least $5,000 in your account.
3. Payments from your account can be made monthly, quarterly, semi-annually or
annually or on a selected monthly basis to yourself or any other designated
payee.
- -------------------------------------------------------------------------------
YOU CAN PAY ROUTINE BILLS FROM YOUR
ACCOUNT, OR MAKE PERIODIC DISBURSEMENTS OF
FUNDS FROM YOUR RETIREMENT ACCOUNT TO
COMPLY WITH IRS REGULATIONS.
- -------------------------------------------------------------------------------
4. There is no limit on the number of payees you may authorize, but all payments
must be made at the same time or intervals.
5. It is not advantageous to maintain a Systematic Withdrawal Plan concurrently
with purchases of additional Class A or Class B shares, because you may be
subject to initial sales charges on your purchases of Class A shares or to a
CDSC on your redemptions of Class B shares. In addition, your redemptions are
taxable events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks or if deposits to a bank account are returned for any reason.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP)
1. You can authorize an investment to be automatically withdrawn each month from
your bank, for investment in Fund shares under the "Automatic Investing" and
"Bank Information" sections of the Account Privileges Application.
- -------------------------------------------------------------------------------
YOU CAN MAKE AUTOMATIC INVESTMENTS AND
SIMPLIFY YOUR INVESTING.
- -------------------------------------------------------------------------------
2. You can also authorize automatic investment through payroll deduction by
completing the "Direct Deposit Investing" section of the Account Privileges
Application.
3. You can terminate your Monthly Automatic Accumulation Program plan at any
time.
4. There is no charge to you for this program, and there is no cost to the Fund.
5. If you have payments being withdrawn from a bank account and we are notified
that the account has been closed, your withdrawals will be discontinued.
GROUP INVESTMENT PROGRAM
1. An individual account will be established for each participant, but the
initial sales charge for Class A shares will be based on the aggregate dollar
amount of all participants' investments. To determine how to qualify for this
program, contact your registered representative or call 1-800-225-5291.
- -------------------------------------------------------------------------------
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS
MAY ESTABLISH ACCOUNTS.
- -------------------------------------------------------------------------------
2. The initial aggregate investment of all participants in the group must be at
least $250.
27
<PAGE> 28
3. There is no additional charge for this program. There is no obligation to
make investments beyond the minimum, and you may terminate the program at any
time.
INVESTMENTS, TECHNIQUES AND RISK FACTORS
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in illiquid investments, which include repurchase agreements maturing in
more than seven days, restricted securities and securities not readily
marketable. The Fund may also invest up to 10% of its assets in restricted
securities eligible for resale to certain institutional investors pursuant to
Rule 144A under the Securities Act of 1933. To the extent that the Fund's
holdings of participation interests, COPs and inverse floaters are determined to
be illiquid, such holdings will be subject to the 10% restriction on illiquid
investments.
LENDING OF SECURITIES AND REPURCHASE AGREEMENTS. For the purpose of realizing
additional (taxable) income, the Fund may lend to broker-dealers portfolio
securities amounting to not more than 33 1/3% of its total assets taken at
current value or may enter into repurchase agreements. In a repurchase
agreement, the Fund buys a security subject to the right and obligation to sell
it back to the issuer at the same price plus accrued interest. These
transactions must be fully collateralized at all times. The Fund may reinvest
any cash collateral in short-term highly liquid debt securities. However, they
may involve some credit risk to the Fund if the other party should default on
its obligation and the Fund is delayed in or prevented from recovering the
collateral. Securities loaned by the Fund will remain subject to fluctuations of
market value.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Fund may purchase securities
on a forward or "when-issued" basis and may purchase or sell securities on a
forward commitment basis to hedge against anticipated changes in interest rates
and prices. When the Fund engages in these transactions, it relies on the seller
or the buyer, as the case may be, to consummate the transaction. Failure to
consummate the transaction may result in the Fund's losing the opportunity to
obtain an advantageous price and yield. If the Fund chooses to dispose of the
right to acquire a when-issued security prior to its acquisition or dispose of
its right to deliver or receive against a forward commitment, it can incur a
taxable gain or a loss.
SHORT TERM TRADING AND PORTFOLIO TURNOVER. Short-term trading means the
purchase and subsequent sale of a security after it has been held for a
relatively brief period of time. Short-term trading may have the effect of
increasing portfolio turnover and may increase net short-term capital gains,
distributions from which would be taxable to shareholders as ordinary income.
The Fund's portfolio securities may be changed without regard to the holding
period of these securities (subject to certain tax restrictions), when the
Adviser deems that this action will help achieve the Fund's objective given a
change in an issuer's operations or changes in general market conditions. The
Fund's portfolio turnover rate is set forth in the table under the caption
"Financial Highlights."
28
<PAGE> 29
OPTIONS AND FUTURES TRANSACTIONS. The Fund may buy and sell options contracts
on securities and debt security indices, interest rate and municipal bond index
futures contracts and options on such futures contracts. Options and futures
contracts are bought and sold to manage the Fund's exposure to changing interest
rates and security prices. Some options and futures strategies, including
selling futures, buying puts and writing calls, tend to hedge a Fund's
investment against price fluctuations. Other strategies, including buying
futures, writing puts, and buying calls, tend to increase market exposure.
Options and futures may be combined with each other or with forward contracts in
order to adjust the risk and return characteristics of the overall strategy. The
Fund may invest in options and futures based on debt securities and municipal
bond indices (securities indices).
Options and futures can be volatile investments and involve certain risks. If
the Adviser applies a hedge at an inappropriate time or judges market conditions
incorrectly, options and futures strategies may lower the Fund's return. The
Fund could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. Options and
futures do not pay interest, but may produce capital gains or losses,
distributions of which will be taxable to shareholders.
The Fund will not engage in a transaction in futures or options on futures if,
immediately thereafter, the sum of initial margin deposits and premiums required
to establish positions in futures contracts and options on futures would exceed
5% of the Fund's net assets. The loss incurred by the Fund investing in futures
contracts and in writing options on futures is potentially unlimited and may
exceed the amount of any premium received. The Fund's transactions in options
and futures contracts may be limited by the requirements of the Code for
qualification as a regulated investment company. See the Statement of Additional
Information for further discussion of options and futures transactions,
including tax effects and investment risks.
MUNICIPAL LEASE OBLIGATIONS. The Fund may purchase participation interests
which give the Fund an undivided pro rata interest in the tax exempt security.
For certain participation interests, the Fund will have the right to demand
payment, on a specified number of days' notice for all or any part of the Fund's
participation interest in the tax exempt security plus accrued interest.
Participation interests that are determined to be not readily marketable, will
be considered illiquid for purposes of the Fund's 10% restriction on investment
in securities.
The Fund may also invest in Certificates of Participation ("COP's") which
provide participation interests in lease revenues. Each COP represents a
proportionate interest in or right to the lease-purchase payment made under
municipal lease obligations or installment sales contracts. Municipal lease
obligations are issued by a state or municipal financing authority to provide
funds for the construction of facilities (e.g., schools, dormitories, office
buildings or prisons) or the acquisition of equipment. In certain states, such
as California, COP's constitute a majority of new municipal financing issues.
Certain municipal lease obligations may trade infrequently. Accordingly, COPs
will be purchased and monitored pursuant to
29
<PAGE> 30
analysis by the Adviser and reviewed according to procedures by the Board of
Trustees which consider various factors in determining the liquidity risk. COPs
will not be considered illiquid for purposes of the Fund's 10% limitation on
illiquid securities provided the Adviser determines that there is a readily
available market for such securities. An investment in COPs is subject to the
risk that a municipality may not appropriate sufficient funds to meet payments
on the underlying lease obligation. See the Statement of Additional Information
for additional discussion of participation interests and municipal lease
obligations.
DERIVATIVE INSTRUMENTS. The Fund may purchase or enter into derivative
instruments to enhance return, to hedge against fluctuations in interest rates
or securities prices, to change the duration of the Fund's fixed income
portfolio or as a substitute for the purchase or sale of securities. The Fund's
investments in derivative securities may include certain floating rate and
indexed securities. The Fund's transactions in derivative contracts may include
the purchase or sale of futures contracts on securities or indices; options on
futures contracts; and options on securities or indices and forward contracts to
purchase or sell securities.
All of the Funds' transactions in derivative instruments involve a risk of loss
or depreciation due to unanticipated adverse changes in interest rates or
securities prices. The loss on derivative contracts may exceed the Fund's
initial investment in these contracts. In addition, the Fund may lose the entire
premium paid for purchased options that expire before they can be profitably
exercised by the Fund.
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 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 changes in interest rates or other reference prices.
Risks Associated With Derivative Securities and Contracts. The risks associated
with the Fund's transactions in derivative securities and contracts may include
some or all of the following:
Market Risk. Investments in floating rate and indexed securities are subject to
the interest rate and other market risks described above. Entering into a
derivative contract involves a risk that the applicable market will move against
the Fund's position and that the Fund will incur a loss. For derivative
contracts other than purchased options, this loss may exceed the amount of the
initial investment made or the premium received by the Fund.
Leverage and Volatility Risk. Derivative instruments may sometimes increase or
leverage the Fund's exposure to a particular market risk. Leverage enhances the
price volatility of derivative instruments held by the Fund. The Fund may
partially
30
<PAGE> 31
offset the leverage inherent in derivative contracts by maintaining a segregated
account consisting of cash and liquid, high grade debt securities, by holding
offsetting portfolio securities or contracts or by covering written options.
Correlation Risk. A Fund's success in using derivative instruments to hedge
portfolio assets depends on the degree of price correlation between the
derivative instrument and the hedged asset. Imperfect correlation may be caused
by several factors, including temporary price disparities among the trading
markets for the derivative instrument, the assets underlying the derivative
instrument and the Fund's portfolio assets.
Credit Risk. Derivative securities and over-the-counter derivative contracts
involve a risk that the issuer or counterparty will fail to perform its
contractual obligations.
Liquidity and Valuation Risk. Some derivative securities are not readily
marketable or may become illiquid under adverse market conditions. In addition,
during periods of extreme market volatility, a commodity or exchange may suspend
or limit trading in an exchange-traded derivative contract, which may make the
contract temporarily illiquid and difficult to price. The staff of the SEC takes
the position that certain over-the-counter options are subject to the Fund's 10%
limit on illiquid investments. The Fund's ability to terminate over-the-counter
derivative contracts may depend on the cooperation of the counterparties to such
contracts. For thinly traded derivative securities and contracts, the only
source of price quotations may be the selling dealer or counterparty.
31
<PAGE> 32
APPENDIX A
EQUIVALENT YIELDS:
TAX EXEMPT VERSUS TAXABLE INCOME FOR 1994
The table below shows the effect of the tax status of California Tax Exempt
Securities on the yield received by their holders under the regular federal
income tax and California personal income tax laws. It gives the approximate
yield a taxable security must earn at various income brackets to produce
after-tax yields equivalent to those of California Tax Exempt Securities
yielding from 4.0% to 7.0%.
<TABLE>
<CAPTION>
MARGINAL
COMBINED
CALIFORNIA IN CALIFORNIA, A TAX-EXEMPT YIELD OF:
SINGLE RETURN JOINT RETURN AND FEDERAL ----------------------------------------------------------------------
- ---------------- ---------------- INCOME TAX 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
(TAXABLE INCOME) BRACKET* ----------------------------------------------------------------------
- ------------------------------------- ----------- IS EQUIVALENT TO A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-4,552 $ 0-9,104 15.85% 4.75% 5.35% 5.94% 6.54% 7.13% 7.72% 8.32%
$ 4,553-10,789 $ 9,105-21,578 16.70% 4.80% 5.40% 6.00% 6.60% 7.20% 7.80% 8.40%
$ 10,790-17,027 $ 21,579-34,054 18.40% 4.90% 5.51% 6.13% 6.74% 7.35% 7.97% 8.58%
$ 17,028-22,100 $ 34,055-36,900 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$ 22,101-23,637 $ 36,901-47,274 32.32% 5.91% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
$ 23,638-29,873 $ 47,275-59,746 33.76% 6.04% 6.79% 7.55% 8.30% 9.06% 9.81% 10.57%
$ 29,874-53,500 $ 59,747-89,150 34.70% 6.13% 6.89% 7.66% 8.42% 9.19% 9.95% 10.72%
$ 53,501-103,600 $ 89,151-140,000 37.42% 6.39% 7.19% 7.99% 8.79% 9.59% 10.39% 11.19%
$103,601-115,000 $140,001-207,200 41.95% 6.89% 7.75% 8.61% 9.47% 10.34% 11.20% 12.06%
$115,001-207,200 $207,201-250,000 42.40% 6.94% 7.81% 8.68% 9.55% 10.42% 11.28% 12.15%
$207,201-250,000 $250,001-414,400 45.64% 7.36% 8.28% 9.20% 10.12% 11.04% 11.96% 12.88%
$ 250,001 and up $ 414,401 and up 46.24% 7.44% 8.37% 9.30% 10.23% 11.16% 12.09% 13.02%
</TABLE>
- ---------------
* The marginal combined bracket includes the effect of deducting state taxes
on your federal tax return.
The Chart is for illustrative purposes only and is not intended to project
performance of the Fund.
While the Fund principally invests in obligations exempt from federal and
California state income taxes, a portion of the Fund's distributions may be
subject to these taxes or to the alternative minimum tax.
California state income tax rates and brackets have not yet been set for 1995.
This may result in higher or lower actual rates. The above chart is intended for
estimation only.
A-1
<PAGE> 33
(NOTES)
<PAGE> 34
(NOTES)
<PAGE> 35
(NOTES)
<PAGE> 36
JOHN HANCOCK CALIFORNIA TAX-FREE
INCOME FUND JOHN HANCOCK
CALIFORNIA
INVESTMENT ADVISOR TAX-FREE INCOME
John Hancock Advisers, Inc. FUND
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc. CLASS A AND CLASS B SHARES
101 Huntington Avenue PROSPECTUS
Boston, Massachusetts 02199-7603 MAY 1, 1995
CUSTODIAN A MUTUAL FUND SEEKING TO OBTAIN AS
Investors Bank & Trust Company HIGH A LEVEL OF CURRENT INCOME EX-
24 Federal Street EMPT FROM BOTH FEDERAL INCOME
Boston, Massachusetts 02110 TAXES AND CALIFORNIA PERSONAL IN-
COME TAXES AS IS CONSISTENT WITH
TRANSFER AGENT PRESERVATION OF CAPITAL.
John Hancock Investor Services
Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For Service Information
For Telephone Exchange
For Investment-by-Phone call 1-800-225-5291
For Telephone Redemption
For TDD call 1-800-554-6713
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
T280P 5/95 TELEPHONE 1-800-225-5291
(LOGO) Printed
on Recycled Paper
<PAGE> 37
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995
This Statement of Additional Information provides information about John
Hancock California Tax-Free Income Fund (the "Fund") in addition to the
information that is contained in the Fund's Class A and Class B Prospectus (the
"Prospectus"), dated May 1, 1995.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-5291
1-800-225-5291
TABLE OF CONTENTS
<TABLE>
<S> <C>
Organization of the Fund............................................... 2
Investment Objective and Policies...................................... 2
Certain Investment Practices........................................... 11
Investment Restrictions................................................ 17
Those Responsible for Management....................................... 20
Investment Advisory and other Services................................. 26
Initial Sales Charge on Class A Shares................................. 29
Distribution Contract.................................................. 31
Deferred Sales Charge on Class B Shares................................ 34
Special Redemptions.................................................... 34
Additional Services and Programs....................................... 35
Net Asset Value........................................................ 36
Tax Status............................................................. 37
Brokerage Allocation................................................... 42
Transfer Agent Services................................................ 44
Independent Auditors................................................... 44
Custody of Portfolio................................................... 45
Description of the Fund's Shares....................................... 45
Calculation of Performance............................................. 47
Appendix A............................................................. 51
Financial Statements................................................... F1
</TABLE>
-1-
<PAGE> 38
ORGANIZATION OF THE FUND
The Fund is a diversified open-end management investment company organized
as a business trust under the laws of The Commonwealth of Massachusetts pursuant
to a Declaration of Trust dated October 17, 1989. Prior to the approval of John
Hancock Advisers, Inc. (the "Investment Adviser") as the Fund's adviser
effective December 22, 1994, the Fund was known as Transamerica California
Tax-Free Income Fund.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE. As discussed under "Investment Objective and
Policies" in the Prospectus, the investment objective of the Fund is to provide
as high a level of current income exempt from both federal income taxes and
California personal income taxes, as is consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in debt
obligations issued by or on behalf of the state of California and its political
subdivisions, agencies and instrumentalities and other obligations the interest
on which is excluded from gross income for federal income tax purposes and
exempt from California personal income taxes ("California Tax Exempt
Securities") which are rated within the four highest ratings assigned by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P") or
Fitch Investors Service, Inc. ("Fitch"); if unrated, are determined to be of
comparable quality by the Investment Adviser. Securities in which the Fund may
invest may not earn as high a level of current income as lower quality
securities which have greater market risk and more fluctuation in market value.
DESCRIPTION OF TAX-EXEMPT SECURITIES. As described under "Investment
Objective and Policies" in the Prospectus, in seeking to achieve its investment
objective, the Fund invests in a variety of Tax-Exempt Securities.
Municipal Bonds. Municipal bonds at the time of issuance are generally
long-term securities with maturities of as much as twenty years or more but may
have remaining maturities of shorter duration at the time of purchase by the
Fund. Municipal bonds are issued to obtain funds for various public purposes
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which Municipal
Bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses and obtaining funds to lend to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds for many types of local, privately operated facilities. Such debt
instruments are considered municipal obligations if the interest paid on them is
excluded from gross income for federal income tax purposes.
-2-
<PAGE> 39
Municipal Notes. Municipal Notes are short-term obligations of
municipalities, generally with a maturity ranging from six months to three
years. The principal types of such Notes include tax, bond and revenue
anticipation notes and project notes.
Municipal Commercial Paper. Municipal Commercial Paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued to meet seasonal working
capital needs of a municipality or interim construction financing. Municipal
Commercial Paper is backed in many cases by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks and other institutions. The yields of Municipal Bonds depend
upon, among other things, general money market conditions, general conditions of
the Municipal Bond market, size of a particular offering, the maturity of the
obligation and rating of the issue.
VARIABLE OR FLOATING RATE OBLIGATIONS. As discussed under "Investment
Objective and Policies" in the Prospectus, certain of the obligations in which
the Fund may invest may be variable or floating rate obligations on which the
interest rate is adjusted at predesignated periodic intervals (variable rate) or
when there is a change in the market rate of interest on which the interest rate
payable on the obligation is met is based (floating rate). Variable or floating
rate obligations may include a demand feature which entitles the purchaser to
demand prepayment of the principal amount prior to stated maturity. Also, the
issuer may have a corresponding right to prepay the principal amount prior to
maturity. As with any other type of debt security, the marketability of
variable or floating rate instruments may vary depending upon a number of
factors, including the type of issuer and the terms of the instruments. The
Fund may also invest in more recently developed floating rate instruments which
are created by dividing a municipal security's interest rate into two or more
different components. Typically, one component ("floating rate component" or
"FRC") pays an interest rate that is reset periodically through an auction
process or by reference to an interest rate index. A second component ("inverse
floating rate component" or "IFRC") pays an interest rate that varies inversely
with changes to market rates of interest, because the interest paid to the IFRC
holders is generally determined by subtracting a variable or floating rate from
a predetermined amount (i.e., the difference between the total interest paid by
the municipal se- curity and that paid by the FRC). The Fund may purchase FRC's
without limitation. Up to 10% of the Fund's total assets may be invested in
IFRC's in an attempt to protect against a reduction in the income earned on the
Fund's other investments due to a decline in interest rates. The extent of
increases and decreases in the value of an IFRC generally will be greater than
comparable changes in the value of an equal principal amount of a fixed-rate
municipal security having similar credit quality, redemption provisions and
maturity. To the extent that such instruments are not readily marketable, as
determined by the Investment Adviser
-3-
<PAGE> 40
pursuant to guidelines adopted by the Board of Trustees, they will be considered
illiquid for purposes of the Fund's 10% investment restriction on investment in
non-readily marketable securities.
PARTICIPATION INTERESTS. The Fund may purchase from financial institutions
tax exempt participation interests in tax exempt securities. A participation
interest gives the Fund an undivided interest in the tax exempt security in the
proportion that the Fund's participation interest bears to the total amount of
the tax exempt security. For certain participation interests, the Fund will
have the right to demand payment, on a specified number of days' notice, for all
or any part of the Fund's participation interest in the tax exempt security plus
accrued interest. Participation interests that are determined to be not readily
marketable will be considered as such for purposes of the Fund's 10% investment
restriction on investment in non-readily marketable illiquid securities. The
Fund may also invest in Certificates of Participation (COP's) which provide
participation interests in lease revenues. Each Certificate represents a
proportionate interest in or right to the lease-purchase payment made under
municipal lease obligations or installment sales contracts. Typically,
municipal lease obligations are issued by a state or municipal financing
authority to provide funds for the construction of facilities (e.g., schools,
dormitories, office buildings or prisons) or the acquisition of equipment. The
facilities are typically used by the state or municipality pursuant to a lease
with a financing authority. Certain municipal lease obligations may trade
infrequently. Participation interests in municipal lease obligations will not
be considered illiquid for purposes of the Fund's 10% limitation on illiquid
securities provided the Investment Adviser determines that there is a readily
available market for such securities. In reaching liquidity decisions, the
Investment 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
Investment 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 cancelled; (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
-4-
<PAGE> 41
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 Investment Adviser.
CALLABLE BONDS. The Fund may purchase and hold callable municipal bonds
which contain a provision in the indenture permitting the issuer to redeem the
bonds prior to their maturity dates at a specified price which typically
reflects a premium over the bonds' original issue price. These bonds generally
have call-protection (a period of time during which the bonds may not be called)
which usually lasts for 7 to 10 years, after which time such bonds may be called
away. An issuer may generally be expected to call its bonds, or a portion of
them during periods of relatively declining interest rates, when borrowings may
be replaced at lower rates than those obtained in prior years. If the proceeds
of a bond called under such circumstances are reinvested, the result may be a
lower overall yield due to lower current interest rates. If the purchase price
of such bonds included a premium related to the appreciated value of the bonds,
some or all of that premium may not be recovered by bondholders, such as the
Fund, depending on the price at which such bonds were redeemed.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA TAX-EXEMPT SECURITIES. Since
the Fund concentrates its investments in California Tax-Exempt Securities, the
Fund will be affected by any political, economic or regulatory developments
affecting the ability of California issuers to pay interest or repay principal.
GENERAL. From mid-1990 until late 1993, California has endured a prolonged
economic recession coupled with deteriorating fiscal and budget conditions.
During this period, the state has also contended with natural disasters
including fires, a prolonged drought and a major earthquake in the Los Angeles
area (January 1994), rapidly growing population, and increasing social service
requirements. Unlike the early 1980's the diverse California economy has not
yet staged a major rebound to quickly carry the State out of this downturn.
The California economy has begun to show encouraging signs of growth since
the start of 1994. After two years of unemployment rates over 9%, ongoing job
losses and company relocation's out-of-state, California has begun to register
net job growth. Sectors exhibiting employment growth have been the construction
and related manufacturing, wholesale, and retail trade industries,
transportation, and recreation, business, and management consulting services.
This growth has offset the slowing losses in the aerospace industry and
restructuring of the finance and utility sectors. Over the next two years,
nonfarm employment is projected to remain stable in 1994 but expand by 6.1% in
1995.
-5-
<PAGE> 42
These trends are expected to continue and allow the State's recovery to gain
momentum over the next two years.
The prolonged recession has seriously impacted California tax revenues and
produced the need for additional expenditures on health and welfare services.
Since the late 1980's, the State's Administrations have recognized that its
budget problems stem in part from a structural imbalance. The largest General
Fund programs - K-12 schools and community colleges, health and welfare, and
corrections - have been increasing faster than the revenue base, driven by the
State's rapid population growth. General Fund expenditures exceeded revenues for
four of the five fiscal years ended 1991-92. These structural concerns will be
exacerbated in coming years by the expected need to substantially increase
capital and operating funds for corrections as a result of a "Three Strikes" law
enacted in 1994.
The principal sources of the State's General Fund revenues are the
California personal income tax (44% of total revenues) sales and use tax (35%)
and bank and corporation taxes (12%). The State maintains a Special Fund for
Economic Uncertainties (the "SFEU") derived from General Fund revenues as a
reserve to meet cash needs of the General Fund but which is required to be
replenished as soon as sufficient revenues are available. Because of the
recession, the SFEU has had a negative balance since 1991; the Administration
projects a positive balance of about $92 million in the SFEU by June 30, 1996.
RECENT BUDGETS. The State failed to enact its 1992-93 budget by July 1,
1992. Although the State had no legal authority to pay many of its vendors,
certain obligations (such as debt service, school apportionments, welfare
payments, and employee salaries) were payable because of continuing or special
appropriations, or court orders. However, the State Controller did not have
enough cash to pay as they came due all of these ongoing obligations, as well as
valid obligations incurred in the prior fiscal year. Starting on July 1, 1992,
the Controller was required to issue "registered warrants' in lieu of normal
warrants backed by cash to pay many State obligations. Available cash was used
to pay constitutionally mandated and priority obligations. Between July 1 and
September 3, 1992, the Controller issued an aggregate of approximately $3.8
billion of registered warrants all of which were called for redemption by
September 4, 1992 following enactment of the 1992-93 Budget Act and issuance by
the State of short-term notes.
The 1992-93 Budget Act, when finally adopted, was projected to eliminate
the State's accumulated deficit, with additional expenditure cuts and a $1.3
billion transfer of State education funding costs to local governments by
shifting local property taxes to school districts. However, as the recession
continued longer and deeper than expected, revenues once again were far below
projections, and only reached a level just equal to the
-6-
<PAGE> 43
amount of expenditures, so the State continued to carry its $2.8 billion budget
deficit as of June 30, 1993.
The 1993-94 Budget Act was similar to the prior year, in reliance on
expenditure cuts and an additional $2.6 billion transfer of costs to local
government, particularly counties. A major feature of the budget was a two-year
plan to eliminate the accumulated deficit by borrowing into the 1994-95 fiscal
year. With the recession still continuing longer than expected, the General Fund
had $800 million less revenue and $800 million higher expenditures than
budgeted. As a result, revenues only exceed expenditures by about $500 million.
However, this was the first operating surplus in four years and reduced the
accumulated deficit to $2.0 billion, after taking into account certain other
accounting reserves.
CURRENT BUDGET. The 1994-95 Budget Act was passed on July 8, 1994, and
provides for an estimated $41.9 billion of General Fund revenues, and $40.9
billion of expenditures. The budget assumed receipt of about $750 million of
new federal assistance for the costs of incarceration, education, health and
welfare related to undocumented immigrants. Other major components of the
budget include further reductions in health and welfare costs, some additional
transfers of funds from local government, and a plan to defer retirement of $1
billion of the accumulated budget deficit until the 1995-96 fiscal year. The
Federal government has apparently budgeted only $33 million of this immigration
aid. However, this shortfall is expected to be almost fully offset by higher
than projected revenues, and lower than projected caseload growth as the economy
improves.
Because of the accumulated budget deficit over the past several years, the
payment of certain unbudgeted expenditures to schools to maintain constant
per-pupil aid levels, and a reduction of the level of available internal
borrowing, the State's cash resources have been significantly depleted. This
has required the State to rely on a series of external borrowings for the past
several years to pay its normal expenses, including borrowings which have gone
past the end of the fiscal year. In February 1994, the State borrowed $3.2
billion, maturing by December, 1994. In July 1994, the State borrowed a total of
$7.0 billion to meet its cash flow requirements for the 1994-95 fiscal year and
to fund part of its deficit into the 1995-96 fiscal year. A total of $4.0
billion of this borrowing matures in April, 1996. The State will continue to
have to rely on external borrowing to meet its cash needs to the foreseeable
future.
In order to assure repayment of the $4 billion, 22-month borrowing, the
State enacted legislation (the "Trigger Law") which can lead to automatic,
across-the-board cuts in General Fund expenditures in either the 1994-95 or
1995-96 fiscal years if cash flow projections made at certain times during those
years show deterioration from the projections made in July 1994, when the
borrowings were made. On November 15, 1994, the State Controller
-7-
<PAGE> 44
as part of the Trigger Law reported that the cash position of the General Fund
on June 30, 1995 would be about $580 million better than earlier projected, so
no automatic budget adjustments were required in 1994-95. The Controller's
report showed that loss of federal funds was offset by higher revenues, lower
expenditures, and certain other increases in cash resources.
The proposed Governor's Budget for the 1995-96 Fiscal Year projects General
Fund revenues of $42.5 billion and expenditures of $41.7 billion. The
Governor's Budget projects that all the accumulated budget deficits will be
repaid by June 30, 1996, with a small balance ($92 million) in the Special Fund
for Economic Uncertainties, the budget reserve. The proposed budget assumes
receipt of about $830 million of new federal aid for undocumented aliens' costs
and also assumes success in certain ongoing litigation concerning previous
budget actions. The Governor has proposed a 15% cut in personal income and
corporate taxes, to be phased in over three years starting in 1996.
RATING AGENCIES. The ongoing structural imbalances, growing accumulated
deficits, and sluggish recovery of the California economy have placed the State
under ongoing scrutiny from the municipal credit rating agencies. In July 1994,
both Moody's and S&P's lowered their ratings on the State's general obligation
debt. Moody's dropped the State from a rating of Aa to A1 and S&P reduced the
rating from A+ to A. Fitch lowered its rating from Aa to A. Despite the
progress in producing break-even financial operations, the agencies concluded
that the State still confronts a continuing fiscal challenge. The major
concerns cited by the agencies included the failure to directly address most of
the accumulated deficit, the potential for the untried budget triggers to
produce fraconian cuts in program expenditures, high short-term debt and
optimistic revenue forecasts.
CONSTITUTIONAL CONSIDERATIONS. Changes in California laws during the last
two decades have limited the ability of California State and municipal issuers
to obtain sufficient revenue to pay their bond obligations.
In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13. Proposition 13 limits ad valorem
(according to value) taxes on real property and restricts the ability of taxing
entities to increase real property taxes and assessments, and limits the ability
of local governments to raise other taxes.
Article XIII B of the California Constitution (the "Appropriation Limit")
imposes a limit on annual appropriations. Originally adopted in 1979, Article
XIII B was modified by Proposition 98 in 1988 and Proposition 111 in 1990. The
appropriations subject to the Article consist of tax proceeds which include tax
revenues and certain other funds. Excluded from the Appropriation Limits are
prior (pre 1979) debt service and subsequent debt incurred as the result of
voter authorizations,
-8-
<PAGE> 45
court mandates, qualified capital outlay projects and certain increases in
gasoline taxes and motor vehicle weight fees. Certain civil disturbance
emergencies declared by the Governor and appropriations approved by a two-thirds
vote of the legislature are excluded from the determination of excess
appropriations, and the appropriations limit may be overridden by local voter
approval for up to a four-year period.
On November 8, 1988, California voters approved Proposition 98, a combined
initiative constitutional amendment and statute called "the Classroom
Instruction Improvement and Accountability Act." This amendment changed school
funding below the University level by guaranteeing K-14 schools a minimum share
of General Fund Revenues. Suspension of the Proposition 98 funding formula
requires a two-thirds vote of Legislature and the Governor's concurrence.
Proposition 98 also contains provisions transferring certain funds in excess of
the Article III B limit to K-14 schools.
As amended by Proposition 111, the Appropriation Limit recalculated
annually by taking the actual Fiscal Year 1986-1987 limit and applying the
Proposition 111 cost of living and population adjustments as if that limit had
been in effect. The Appropriations Limit is tested over consecutive two-year
periods under this amendment. Any excess "proceeds of taxes" received over such
two-year period above the Appropriation Limits for the two-year period is
divided equally between transfers to K-14 and taxpayers.
Throughout the next few fiscal years, the State's financial difficulties
are expected to remain serious. As more operational and fiscal responsibilities
are shifted to local governments, there will be additional pressure exerted upon
local governments, especially counties and school districts which rely upon
State aid.
Certain debt obligations held by the Fund may be payable solely from lease
payments on real property leased to the State, counties, cities or various
public entities structured in such a way as to not constitute a debt to the
leasing entity. To ensure that a debt is not technically created, California
law requires that the lessor can proportionally reduce its lease payments equal
to its loss of beneficial use and occupancy. Moreover, the lessor does not
agree to pay lease payments beyond the current period; it only agrees to include
lease payments in its annual budget every year. In the event of a default, the
only remedy available against the lessor is that of reletting the property or
suing annually for the rents due; no acceleration of lease payments is
permitted.
The Fund also holds debt obligations payable solely from the revenues of
health care institutions. Certain provisions under California state law may
adversely affect these revenues and, consequently, payment of those debt
obligations.
-9-
<PAGE> 46
The Federally sponsored Medicaid program for health care services to
eligible welfare recipients is known as the Medi-Cal program. In the past, the
Medi-Cal program has provided a cost-based system of reimbursement for impatient
care furnished to Medi-Cal beneficiaries by any eligible hospital. The State
now selectively contracts by county with California hospitals to provide
reimbursement for non-emergency inpatient services to Medi-Cal beneficiaries,
generally on a flat per-diem payment basis regardless of cost. California law
also permits private health plans and insurers to contract selectively with
hospitals for services to beneficiaries on negotiated terms, generally at rates
lower than standard charges.
Debt obligations payable solely from revenues of health care institutions
may also be insured by the state pursuant to an insurance program operated by
the Office of Statewide Health Planning and Development (the "Office"). Most of
such debt obligations are secured by a mortgage of real property in favor of the
Office and the holders. If a default occurs on such insured debt obligations,
the Office has the option of either continuing to meet debt service obligations
of foreclosing the mortgage and requesting the State Treasurer to issue
debentures payable from a reserve fund established under the insurance fund or
payable from appropriated state funds.
Security for certain debt obligations held by the Fund may be in form of a
mortgage or deed of trust on real property. California has statutory provisions
which limit the remedies of a creditor secured by a mortgage or deed of trust.
Principally, the provisions establish conditions governing the limits of a
creditor's right to a deficiency judgment. In the case of a default, the
creditor's rights under the mortgage or deed of trust are subject to constraints
imposed by California real property law upon transfers of title to real property
by private power of sale. These laws require that the loan must have been in
arrears for at least seven months before foreclosure proceedings can begin.
Under California's anti-deficiency legislation, there is no personal recourse
against a mortgagor of single-family residence regardless of whether the
creditor chooses judicial or non-judicial foreclosure. These disruptions could
disrupt the stream of revenues available to the issuer for paying debt service.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment changes on such
mortgage loans may be imposed only with respect to voluntary payments made
during the first five years of the mortgage loan, and cannot in any event exceed
six months advance interest on the amount prepaid in excess of 20% of the
original principal amount of the mortgage loan. This limitation could affect
the flow of revenues available to the issuer for debt service on these
outstanding debt obligations.
-10-
<PAGE> 47
Substantially all of California is located within an active geologic region
subject to major seismic activity. Any California municipal obligation in the
Fund could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (1) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (2) an issuer to perform on its contract
of insurance in the event of widespread losses; or (3) the Federal or State
government to appropriate sufficient funds within their respective budget
limitations.
The January 1994 major earthquake in greater Los Angeles (Northridge) was
estimated to have resulted in up to $20 billion in property damage. Significant
damage was incurred by public and private facilities in four counties. Los
Angeles, Ventura, Orange and San Bernadino Counties were declared State and
Federal disasters. The Federal government approved a total of $9.5 billion in
earthquake relief funds for assistance to homeowners and small businesses, as
well as repair of damaged public facilities.
As described in the summary above, the Fund's investments are susceptible
to possible adverse effects of the complex political, economic and regulatory
matters affecting California issuers. As stated in the Prospectus, in the view
of the Investment Adviser, it is impossible to determine the impact of any
legislation, voter initiatives or other similar measures which have been or may
be introduced to limit or increase the taxing or spending authority of state and
local governments or to predict such governments' abilities to pay the interest
on, or repay the principal of, its obligations.
CERTAIN INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income,
the Fund may, from time to time, lend securities from its portfolios to brokers,
dealers and financial institutions such as banks and trust companies. Such
loans will be secured by collateral consisting of cash or U.S. Government
securities which will be maintained in an amount equal to at least 100% of the
current market value of the loaned securities. During the period of the loan,
the Fund will receive the income on both the loaned securities and the
collateral and thereby increase its return. Cash collateral will be invested in
short-term high quality debt securities, which will increase the current income
of the Fund. The loans will be terminable by the Fund at any time and by the
borrower on one day's notice. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as rights to
interest or other distributions or voting rights on important issues. The Fund
may pay reasonable fees to persons unaffiliated with the Fund for services in
arranging such loans. Lending of portfolio securities
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involves a risk of failure by the borrower to return the loaned securities, in
which event the Fund may incur a loss.
WHEN-ISSUED AND FORWARD COMMITMENT 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 losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when-issued and forward
commitment basis also involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash or
securities will be segregated in a separate account to the extent that the total
value of the assets in the account declines below the amount of the when-issued
commitments. Alternatively, the Fund may enter into offsetting contracts for
the forward sale of other securities that it owns.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. A
repurchase agreement is a contract under which the Fund would acquire a security
for a relatively short period (generally not more than 7 days) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). The Fund will
enter into repurchase agreements only with member banks of the Federal Reserve
System and with securities dealers. The Investment 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 and could experience losses,
including the possible
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decline in the value of the underlying securities during the period which the
Fund seeks to enforce its rights thereto, possible subnormal levels of income
and lack of access to income during this period, and the expense of enforcing
its rights.
The Fund is permitted to engage in certain hedging techniques involving
options and futures transactions in order to reduce the effect of interest rate
movements affecting the market values of the investments held, or intended to be
purchased, by the Fund.
OPTIONS ON DEBT SECURITIES. The Fund may purchase and write put and call
options on debt securities which are traded on a national securities exchange
(an "Exchange") to protect its holdings in municipal bonds against a substantial
decline in market value. Securities are considered related if their price
movements generally correlate to one another. The purchase of put options on
debt securities which are related to securities held in its portfolio will
enable the Fund to protect, at least partially, unrealized gains in an
appreciated security in its portfolio without actually selling the security. In
addition, the Fund may continue to receive tax-exempt interest income on the
security. However, under certain circumstances the Fund may not be treated as
the tax owner of a security held subject to a put option, in which case interest
with respect to such security would not be tax-exempt for the Fund. The
purchase of call options on debt securities may help to protect against
substantial increases in prices of securities the Fund intends to purchase
pending its ability to invest in such securities in an orderly manner.
The Fund may sell put and call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid in
connection with the option which is sold.
In order to protect partially against declines in the value of its
portfolio securities, the Fund may sell (write) call options on debt securities.
A call option gives the purchaser of such option in return for a premium paid,
the right to buy, and the seller has the obligation to sell, the underlying
security at the exercise price if the option is exercised during the option
period. The writer of the call option who receives the premium has the
obligation to sell the underlying security to the purchaser at the exercise
price during the option period if assigned an exercise notice. The Fund will
write call options only on a covered basis, which means that it will own the
underlying security subject to a call option at all times during the option
period. The exercise price of a call option may be below, equal to or above the
current market value of the underlying security at the time the option is
written.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the
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underlying security against payment of the exercise price. This obligation is
terminated upon the expiration of the option period or at such earlier point in
time when the writer effects a closing purchase transaction.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, in conjunction with the sale of the underlying security or to
enable the Fund to write another call option on the underlying security with a
different exercise price or different expiration date or both.
The Fund will write cash secured put options in order to facilitate its
ability to purchase a security at a price lower than the current market price of
such security. The Fund will write put options only on a "cash secured" basis
which means that if the Fund writes a "put" it will segregate cash obligations
in the event the "put" is exercised. "Puts" will only be written in furtherance
of the basic investment objectives of the Fund relating to the acquisition of
tax exempt securities and will not be written with the primary intent of
generating income from premiums paid to the Fund in connection with the sale of
the "put."
The purchase and writing of put and call options involves certain risks.
During the option period, the covered call writer has, in return for the premium
on the option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss in the event the price of
the underlying security declines. A secured put writer assumes the risk that
the underlying security will fall below the exercise price in which case the
writer could be required to purchase the security at a higher price than the
then current market price of the security. In either instance, the writer has
no control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities, in the
case of a call, or acquire the contract securities, in the case of a put, at the
exercise price. If a put or call option purchased by the Fund is not sold when
it has remaining value, and if the market price of the underlying security
remains equal to or greater than the exercise price, in the case of a put, or
equal to or less than the exercise price, in the case of a call, the Fund will
lose its entire investment in the option. Also, where a put or a call option on
a particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security.
The Fund will not invest in a put or a call option if as a result the
amount of premiums paid for such options then
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outstanding, when added to the premiums paid for financial and index futures and
put and call options on such futures, would exceed 10% of the Fund's total
assets.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may engage in the purchase
and sale of interest rate futures contracts ("financial futures") and tax-exempt
bond index futures contracts ("index futures") and the purchase and writing of
put and call options thereon, as well as put and call options on tax-exempt bond
indexes (if and when they are traded) only as a hedge against changes in the
general level of interest rates in accordance with strategies more specifically
described below.
The purchase of a financial futures contract obligates the buyer to accept
and pay for the specific type of debt security called for in the contract at a
specified future time and at a specified price. The Fund would purchase a
financial futures contract when it is not fully invested in long-term debt
securities but wishes to defer its purchases for a time until it can invest in
such securities in an orderly manner or because short-term yields are higher
than long-term yields. Such purchases would enable the Fund to earn the income
on a short-term security while at the same time minimizing the effect of all or
part of an increase in the market price of the long-term debt security which the
Fund intends to purchase in the future. A rise in the price of the long-term
debt security prior to its purchase either would generally be offset by an
increase in the value of the futures contract purchased by the Fund or avoided
by taking delivery of the debt securities under the futures contract.
The sale of a financial futures contract obligates the seller to deliver
the specific type of debt security called for in the contract at a specified
future time and at a specified price. The Fund would sell a financial futures
contract in order to continue to receive the income from a long-term debt
security, while endeavoring to avoid part or all of the decline in market value
of that security which would accompany an increase in interest rates. If
interest rates did rise, a decline in the value of the debt security held by the
Fund would be substantially offset by an increase in the value of the futures
contract sold by the Fund. While the Fund could sell a long-term debt security
and invest in a short-term security, ordinarily the Fund would give up income on
its investment, since long-term rates normally exceed short-term rates.
In addition, the Fund may purchase and write put and call options on
financial futures contracts which are traded on an Exchange or a Board of Trade
and enter into closing transactions with respect to such options to terminate an
existing position. Options on financial futures contracts are similar to options
on securities except that a put option on a financial futures contract gives the
purchaser the right in return for the premium paid to assume a short position in
a financial futures contract and a call option on a financial futures contract
gives the
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purchaser the right in return for the premium paid to assume a long position in
a financial futures contract.
The Fund anticipates purchasing and selling tax-exempt bond index futures
as a hedge against changes in the market value of the tax exempt bonds which it
holds. A tax-exempt bond index fluctuates with changes in the market values of
the tax-exempt bonds included in the index. An index future has similar
characteristics to a financial future except that settlement is made through
delivery of cash rather than the underlying securities. The sale of an index
future obligates the seller to deliver at settlement an amount of cash equal to
a specified dollar amount multiplied by the difference between the value of the
index at the close of the last trading day of the contract and the price at
which the future was originally written.
The Fund may also purchase and write put and call options on tax-exempt
bond indexes (if and when such options are traded) and enter into closing
transactions with respect to such options. An option on an index future is
similar to an option on a debt security except that an option on an index future
gives the holder the right to assume a position in an index future. The Fund
will use options on futures contracts and options on tax-exempt bond indexes (if
and when they are traded) in connection with hedging strategies. Generally,
these strategies would be employed under the same market conditions in which the
Fund would use put and call options on debt securities.
The Fund may hedge up to the full value of its portfolio through the use of
options and futures. At the time the Fund purchases a futures contract, an
amount of cash or U.S. Government securities at least equal to the market value
of the futures contract will be deposited in a segregated account with the
Fund's Custodian to collateralize the position and thereby insure that such
futures contract is unleveraged. The Fund may not purchase or sell futures
contracts or purchase or write related put or call options if immediately
thereafter the sum of the amount of margin deposits on the Fund's existing
futures and related options positions and the amount of premiums paid for
related options (measured at the time of investment) would exceed 5% of the
Fund's total assets.
While the Fund's hedging transactions may protect the Fund against adverse
movements in the general level of interest rates, such transactions could also
preclude the opportunity to benefit from favorable movements in the level of
interest rates. Due to the imperfect correlation between movements in the
prices of futures contracts and movements in the prices of the related
securities being hedged, the price of a futures contract may move more than or
less than the price of the securities being hedged. There is an increased
likelihood that this will occur when a tax-exempt security is hedged by a
futures contract on a taxable security. Options on futures contracts are
generally subject to the same risks applicable to all option transactions. In
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addition, the Fund's ability to use this technique will depend in part on the
development and maintenance of a liquid secondary market for such options. For
a discussion of the inherent risks involved with futures contracts and options
thereon, see "Risks Relating to Transactions in Futures Contracts and Related
Options" below.
The Fund's policies permitting the purchase and sale of futures contracts
and the purchase and writing of related put or call options for hedging purposes
only may not be changed without the approval of shareholders holding a majority
of the Fund's outstanding voting securities. The Trustees may authorize
procedures, including numerical limitations, with regard to such transactions in
furtherance of the Fund investment objectives. Such procedures are not deemed to
be fundamental and may be changed by the Trustees without the vote of the Fund's
shareholders.
RISKS RELATING TO TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS.
Positions in futures contracts may be closed out only on an exchange or board of
trade which provides a market for such futures. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract or at
any particular time. In the event a liquid market does not exist, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
maintenance margin. In addition, limitations imposed by an exchange or board of
trade on which futures contracts are traded may compel or prevent the Fund from
closing out a contract which may result in reduced gain or increased loss to the
Fund. The absence of a liquid market in futures contracts might cause the Fund
to make or take delivery of the underlying securities at a time when it may be
disadvantageous to do so. The purchase of put options on futures contracts
involves less potential dollar risk to the Fund than an investment of equal
amount in futures contracts, since the premium is the maximum amount of risk the
purchaser of the option assumes. The entire amount of the premium paid for an
option can be lost by the purchaser, but no more than that amount.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions upon its
investments set forth below which may not be changed without the approval by the
holders of a majority of the outstanding shares of the Fund. A majority for
this purpose means: (a) more than 50% of the outstanding shares of the Fund or
(b) 67% or more of the shares represented at a meeting where more than 50% of
the outstanding shares of the Fund are represented, whichever is less. Under
these restrictions, the Fund may not:
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1. Borrow money except from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
that might otherwise require the untimely disposition of securities,
in an amount up to 15% of the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was
made. While borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not purchase any additional securities.
Interest paid on borrowings will reduce the Fund's net investment
income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 10% of the value of its total assets but
only to secure borrowings for temporary or emergency purposes or as
may be necessary in connection with maintaining collateral in
connection with writing put and call options or making initial margin
deposits in connection with the purchase or sale of financial
futures, index futures contracts and related options.
3. With respect to 75% of its total assets, purchase securities (other
than obligations issued or guaranteed by the United States
government, its agencies or instrumentalities and shares of other
investment companies) of any issuer if the purchase would cause
immediately thereafter more than 5% of the value of the Fund's total
assets invested in the securities of such issuer or the Fund would
own more than 10% of the outstanding voting securities of such
issuer.
4. Make loans to others, except through the purchase of obligations in
which the Fund is authorized to invest, entering in repurchase
agreements and lending portfolio securities in an amount not
exceeding one third of its total assets.
5. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 or securities which are not readily marketable
if such purchase would cause the Fund to have more than 10% of its
net assets invested in such types of securities.
6. Purchase or retain the securities of any issuer, if those officers and
Trustees of the Fund or the Investment Adviser who own beneficially
more than of 1% of the securities of such issuer, together own more
than 5% of the securities of such issuer.
7. Write, purchase or sell puts, calls or combinations thereof, except
put and call options on debt securities, futures contracts based on
debt securities, indices of
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debt securities and futures contracts based on indices of debt
securities, sell securities on margin or make short sales of
securities or maintain a short position, unless at all times when a
short position is open it owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any
further consideration, for securities of the same issue as, and equal
in amount to, the securities sold short, and unless not more than 10%
of the Fund's net assets (taken at current value) is held as
collateral for such sales at any one time.
8. Underwrite the securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
9. Invest more than 25% of its assets in the securities of "issuers" in
any single industry; provided that there shall be no limitation on
the purchase of obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities or by any state or
political subdivision thereof. For purposes of this limitation when
the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government
creating the issuing entity and a security is backed only by the
assets and revenues of the entity, the entity would be deemed to be
the sole issuer of the security. Similarly, in the case of an
industrial development or pollution control bond, if that bond is
backed only by the assets and revenues of the nongovernmental user,
then such nongovernmental user would be deemed to be the sole issuer.
If, however, in either case, the creating government or some other
entity guarantees a security, such a guarantee would be considered a
separate security and would be treated as an issue of such government
or other entity unless all securities issued or guaranteed by the
government or other entity owned by the Fund does not exceed 10% of
the Fund's total assets.
10. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, except commodities and
commodities contracts which are necessary to enable the Fund to
engage in permitted futures and options transactions necessary to
implement hedging strategies, or oil and gas interests. This
limitation shall not prevent the Fund from investing in municipal
securities secured by real estate or interests in real estate or
holding real estate acquired as a result of owning such municipal
securities.
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11. Invest in common stock or in securities of other investment companies,
except that securities of investment companies may be acquired as part
of a merger, consolidation or acquisition of assets and units of
registered unit investment trusts whose assets consist substantially
of tax-exempt securities may be acquired to the extent permitted by
Section 12 of the Act or applicable rules.
12. Invest more than 5% of the value of its total assets in securities of
issuers having a record, including predecessors, of fewer than three
years of continuous operation, except obligations issued or guaranteed
by the United State Government, its agencies or instrumentalities,
unless the securities are rated by a nationally recognized rating
service.
13. Issue any senior securities, except insofar as the Fund may be deemed
to have issued a senior security by: entering into a repurchase
agreement; purchasing securities in a when-issued or delayed delivery
basis; purchasing or selling any options or financial futures
contract; borrowing money or lending securities in accordance with
applicable investment restrictions.
In order to comply with certain state regulatory policies, the Fund has
adopted a non-fundamental policy prohibiting the purchase of warrants. The
Fund's Trustees have approved the following non-fundamental investment policy
pursuant to an order of the SEC: Notwithstanding any investment restriction to
the contrary, 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
provided that, as a result, (i) no more than 10% of the Fund's assets would be
invested in securities of all other investment companies, (ii) such purchase
would not result in more than 3% of the total outstanding voting securities of
any one such investment company being held by the Fund and (iii) no more than 5%
of the Fund's assets would be invested in any one such investment company.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers who
are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of
the Fund are also officers and directors of John Hancock Adviser's Inc, (the
"Investment Adviser") or officers and directors of the Fund's distributor, John
Hancock Funds, Inc. (the "Distributor").
Set forth below is information with respect to each of the Fund's officers
and Trustees. The officers and Trustees may be contacted at 101 Huntington
Avenue, Boston, MA 02199-7603. Their
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affiliations represent their principal occupations during the past five years.
EDWARD J. BOUDREAU, JR.,* Trustee, Chairman and Chief Executive Officer.
Chairman and Chief Executive Officer, the Investment Adviser and The
Berkeley Financial Group ("The Berkeley Group"); Chairman, NM Capital
Management, Inc. ("NM Capital"); John Hancock Advisers International
Limited ("Advisers International"); John Hancock Funds, Inc; John Hancock
Investor Services Corporation ("Investor Services"); and Sovereign Asset
Management Corporation ("SAMCorp"); (hereinafter the Investment Adviser,
the Berkeley Group, NM Capital, Advisers International, John Hancock Funds,
Inc., Investor Services and SAMCorp are collectively referred to as the
"Affiliated Companies"); Chairman, First Signature Bank & Trust; Director,
John Hancock Freedom Securities Corporation, John Hancock Capital
Corporation, New England/ Canada Business Council; Member, Investment
Company Institute Board of Governors; Trustee, Museum of Science;
President, the Investment Adviser (until July 1992); Trustee or Director of
other investment companies managed by the Investment Adviser; and Chairman,
John Hancock Distributors, Inc. (until April, 1994).
JAMES F. CARLIN, Trustee. Chairman and CEO, Carlin Consolidated, Inc.
(insurance); Director, Arbella Mutual Insurance Company (insurance),
Consolidated Group Trust (group health plan), Carlin Insurance Agency, Inc.
and West Insurance Agency, Inc.; Receiver, the City of Chelsea (until
August 1992); and Trustee or Director of other investment companies managed
by the Investment Adviser.
WILLIAM H. CUNNINGHAM, Trustee. Chancellor, University of Texas System and
former President of the University of Texas, Austin, Texas; Regents Chair
in Higher Education Leadership; James L. Bayless Chair for Free Enterprise;
Director, LaQuinta Motor Inns, Inc. (hotel management company); Director,
Jefferson-Pilot Corporation (diversified life insurance company); Director,
Freeport-McMoran Inc. (oil and gas company); Director, Barton Creek
Properties, Inc. (1988-1990) (real estate development) and Director LBJ
Foundation Board (education foundation); Advisory Director, Texas Commerce
Bank - Austin; and Trustee or Director of other investment companies
managed by the Investment Adviser.
CHARLES L. LADNER, Trustee. Director, Energy North, Inc. (public utility
holding company); Senior Vice President, Finance UGI Corp (public utility
holding company) (until 1992); and
- ----------------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act").
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Trustee or Director of other investment companies managed by the Investment
Adviser.
LEO E. LINBECK, JR., Trustee. Chairman, President, Chief Executive Officer and
Director, Linbeck Corporation (a holding company engaged in various phases
of the construction industry and warehousing interests); Director and
Chairman, Federal Reserve Bank of Dallas; Chairman of the Board and Chief
Executive Officer, Linbeck Construction Corporation; Director, Panhandle
Eastern Corporation (a diversified energy company); Director, Daniel
Industries, Inc. (manufacturer of gas measuring products and energy related
equipment); Director, GeoQuest International, Inc. (a geophysical
consulting firm); Director, Greater Houston Partnership; and Trustee or
Director of other investment companies managed by the Investment Adviser.
PATRICIA P. MCCARTER, Trustee. Director and Secretary, the McCarter Corp.
(machine manufacturer); and Trustee or Director of other investment
companies managed by the Investment Adviser.
STEVEN R. PRUCHANSKY, Trustee. Director and Treasurer, Mast Holdings, Inc.;
Director, First Signature Bank & Trust Company (until August 1991); General
Partner, Mast Realty Trust; President, Maxwell Building Corp. (until 1991);
and Trustee or Director of other investment companies managed by the
Investment Adviser.
NORMAN H. SMITH, Trustee. Lieutenant General, USMC, Deputy Chief of Staff for
Manpower and Reserve Affairs, Headquarters Marine Corps; Commanding General
III Marine Expeditionary Force/3rd Marine Division (retired 1991); and
Trustee or Director of other investment companies managed by the Investment
Adviser.
JOHN P. TOOLAN, Trustee. Director, The Smith Barney Muni Bond Funds, The Smith
Barney Tax-Free Money Fund, Inc., Vantage Money Market Funds (mutual
funds), The Inefficient-Market Fund, Inc. (closed-end investment company)
and Smith Barney Trust Company of Florida; Chairman, Smith Barney Trust
Company (retired December, 1991); Director, Smith Barney, Inc., Mutual
Management Company and Smith, Barney Advisers, Inc. (investment advisers)
(retired 1991); and Senior Executive Vice President, Director and member of
the Executive Committee, Smith Barney, Harris Upham & Co, Incorporated
(investment bankers) (until 1991); and Trustee or Director of other
investment companies managed by the Investment Adviser.
ROBERT G. FREEDMAN,* Vice Chairman and Chief Investment Officer. Vice President
and Chief Investment Officer, the Investment Adviser; President, the
Investment Adviser (until December 1994).
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ANNE C. HODSDON,* President. President and Chief Operations Officer, the
Investment Adviser; Executive Vice President, the Investment Adviser (until
December 1994).
JAMES B. LITTLE,* Senior Vice President and Chief Financial Officer. Senior
Vice President, the Investment Adviser.
THOMAS H. DROHAN,* Senior Vice President and Secretary. Senior Vice President
and Secretary, the Investment Adviser.
MICHAEL P. DICARLO,* Senior Vice President. Senior Vice President, the
Investment Adviser.
EDGAR LARSEN,* Senior Vice President. Formerly Senior Portfolio Manager,
Transamerica Fund Management Company.
B.J. WILLINGHAM,* Senior Vice President. Senior Vice President, the Investment
Adviser. Formerly, Director and Chief Investment Officer of Transamerica
Fund Management Company.
JAMES J. STOKOWSKI,* Vice President and Treasurer. Vice President, the
Investment Adviser.
SUSAN S. NEWTON,* Vice President and Compliance Officer. Vice President and
Assistant Secretary, the Investment Adviser.
JOHN A. MORIN,* Vice President. Vice President, the Investment Adviser.
THOMAS J. PRESS,* Vice President and Assistant Secretary. Vice President, the
Investment Adviser. Formerly, General Counsel and Secretary, Transamerica
Management Company; Secretary and Treasurer, Transamerica Asset Management
Group, Inc.; and Secretary, Transamerica Fund Distributors, Inc.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which the
Investment Adviser serves as investment adviser.
As of April 6, 1995, there were 33,684,734 shares of the Fund outstanding
and officers and trustees of the Fund as a group beneficially owned less than 1%
of these outstanding shares. As of April 6, 1995, Merrill Lynch Pierce Fenner &
Smith, 4800 Deerlake Dr. East, Jacksonville, FL held 2,775,039 shares
representing 8.24% of the Fund's outstanding Class A and Class B Shares (such
ownership is as nominee only and does not represent beneficial ownership). At
such date, no other person owned of record or was known by the Fund to own
beneficially as much as 5% of the outstanding shares of the Fund.
- --------------
*An interested person as defined in the Investment Company Act.
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<PAGE> 60
As of December 22, 1994, the Trustees have established an Advisory Board
which acts to facilitate a smooth transition of management over a two-year
period (between Transamerica Fund Management Company ("TFMC"), the prior
investment adviser, and the Investment Adviser). The members of the Advisory
Board are distinct from the Board of Trustees, do not serve the Fund in any
other capacity and are persons who have no power to determine what securities
are purchased or sold and behalf of the Fund. Each member of the Advisory Board
may be contacted at 101 Huntington Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal occupations
during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management services);
former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from Texas;
co-founder, Houston Parents' League; former board member of various civic
and cultural organizations in Houston, including the Houston Symphony,
Museum of Fine Arts and YWCA. Mrs. Bentsen is presently active in various
civic and cultural activities in the Washington, D.C. area, including
membership on the Area Board for The March of Dimes and is a National
Trustee for the Botanic Gardens of Washington, D.C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief Executive
Officer, TFMC; Director, West Central Advisory Board, Texas Commerce Bank;
Trustee, Memorial Hospital System; Chairman of the Board of Regents of
Baylor University; Member, Board of Governors, National Association of
Securities Dealers, Inc.; Formerly, Chairman, Investment Company Institute;
formerly, President, Houston Chapter of Financial Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company; Director,
Houston Industries and Houston Lighting and Power Company; Director,
TransAmerican Companies (natural gas producer and transportation); Member,
Board of Managers, Harris County Hospital District; Advisory Director,
Commercial State Bank, El Campo; Advisory Director, First National Bank of
Bryan; Advisory Director, Sterling Bancshares; Former Director and Vice
Chairman, Texas Commerce Bancshares; and Vice Chairman, Texas Commerce
Bank.
COMPENSATION OF THE TRUSTEES AND ADVISORY BOARD. The following table
provides information regarding the compensation paid by the Fund and the other
investment companies in the John Hancock Fund Complex to the Independent
Trustees and the Advisory Board members for their services. Mr. Boudreau, a
non-Independent Trustee, and each of the officers of the Funds are interested
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<PAGE> 61
persons of the Investment Adviser, are compensated by the Investment Adviser and
received no compensation from the Funds for their services.
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from all Funds
Aggregate Accrued as in John Hancock
Compensation Part of the Fund Complex
Trustees from the Fund Fund's Expenses to Trustees**
- -------- ------------- --------------- ---------------
<S> <C> <C> <C>
James F. Carlin $ 0 $0 $ 60,450
William H. Cunningham $ 4,000 * $0 $ 0
Charles L. Ladner $ 0 $0 $ 60,450
Leo E. Linbeck, Jr. $ 5,400 * $0 $ 0
Patricia P. McCarter $ 0 $0 $ 60,200
Steven R. Pruchansky $ 0 $0 $ 62,450
Norman H. Smith $ 0 $0 $ 62,450
John P. Toolan $ 0 $0 $ 60,450
</TABLE>
* Compensation made pursuant to different compensation arrangements then in
effect.
** The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is $366,450 as of the calendar year ended December 31,
1994. All Trustees/Directors except Messrs. Cunningham and Linbeck are
Trustees/Directors of 39 funds in the John Hancock Fund Complex. Messrs.
Cunningham and Linbeck are Trustees of 21 funds. (The Fund was not part of
the John Hancock Fund Complex until December 22, 1994 and Messrs.
Cunningham and Linbeck were not trustees or directors of any funds in the
John Hancock Fund Complex prior to December 22, 1994.)
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from Certain
Benefits Funds in John
Aggregate Accrued as Hancock Fund
Advisory Compensation Part of the Complex to
Board*** from the Fund Fund's Expenses Advisory Board***
--------- ------------- --------------- -----------------
<S> <C> <C> <C>
R. Trent Campbell $ 3,176 $0 $ 54,000
Mrs. Lloyd Bentsen $ 3,176 $0 $ 54,000
Thomas R. Powers $ 3,176 $0 $ 54,000
Thomas B. McDade $ 3,176 $0 $ 54,000
TOTAL $ 112,704 $0 $ 216,000
</TABLE>
*** Estimated for the Fund's current fiscal year ending December 31, 1995.
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<PAGE> 62
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Fund receives its investment advice
from the Investment Adviser. Investors should refer to the Prospectus for a
description of certain information concerning the investment management
contract. Each of the Trustees and principal officers of the Fund who is also
an affiliated person of the Investment Adviser is named above, together with the
capacity in which such person is affiliated with the Fund and the Investment
Adviser.
The Investment Adviser, located at 101 Huntington Avenue, Boston,
Massachusetts 02199-7603, was organized in 1968 and more than $13 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,000,000 shareholders.
The Investment Adviser is a wholly-owned subsidiary of The Berkeley Financial
Group, which is in turn a wholly-owned subsidiary of John Hancock Subsidiaries,
Inc., which is in turn a wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), one of the nation's oldest and largest
financial services companies. With total assets under management of over $80
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries Standard & Poor's and A.M. Best's highest
ratings. Founded in 1862, the Life Company has been serving clients for over
130 years.
The Fund has entered into an investment management contract with the
Investment Adviser. Under the investment management contract, the Investment
Adviser provides the Fund with (i) a continuous investment program, consistent
with the Fund's stated investment objective and policies, (ii) supervision of
all aspects of the Fund's operations except those that are delegated to a
custodian, transfer agent or other agent and (iii) such executive,
administrative and clerical personnel, officers and equipment as are necessary
for the conduct of its business. See "Organization and Management of the Fund"
and "The Fund's Expenses" in the Prospectus for a description of certain
information concerning the Fund's investment management contract. The
Investment Adviser is responsible for the management of the Fund's portfolio
assets.
No person other than the Investment Adviser and its directors and employees
regularly furnishes advice to the Fund with respect to the desirability of the
Fund investing in, purchasing or selling securities. The Investment Adviser may
from time to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life Company
and its affiliates.
Under the terms of the investment management contract with the Fund, the
Investment Adviser provides the Fund with office space, equipment and supplies
and other facilities and personnel required for the business of the Fund. The
Investment Adviser
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<PAGE> 63
pays the compensation of all officers and employees of the Fund and Trustees of
the Fund affiliated with the Investment Adviser, the office expenses of the
Fund, including those of the Fund's Treasurer and Secretary, and other expenses
incurred by the Investment Adviser in connection with the performance of its
duties. All expenses which are not specifically paid by the Investment Adviser
and which are incurred in the operation of the Fund including, but not limited
to, (i) the fees of the Trustees of the Fund who are not "interested persons,"
as such term is defined in the 1940 Act (the "Independent Trustees"), (ii) the
fees of the members of the Fund's Advisory Board (described above) and (iii) the
continuous public offering of the shares of the Fund are borne by the Fund.
As provided by the investment management contract, the Fund pays the
Investment Adviser an investment management fee, which is accrued daily and paid
monthly in arrears, equal on an annual basis to a 0.55% of the Fund's average
daily net asset value. See "Organization and Management of the Fund" in the
Prospectus.
The Investment Adviser may voluntarily and temporarily reduce its advisory
fee or make other arrangements to limit the Fund's expenses to a specified
percentage of average daily net assets. The Investment Adviser retains the right
to re-impose the advisory 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.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of any state limit where the
Fund is registered to sell shares of beneficial interest, the fee payable to the
Investment Adviser will be reduced to the extent required by law. At this time,
the most restrictive limit on expenses imposed by a state requires that expenses
charged to the Fund in any fiscal year not exceed 2.5% of the first $30,000,000
of the Fund's average daily net asset value, 2% of the next $70,000,000 and 1.5%
of the remaining average daily net asset value. When calculating the limit
above, the Fund may exclude interest, brokerage commissions and extraordinary
expenses.
Pursuant to the investment management contract, the Investment Adviser is
not liable to the Fund or its shareholders for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the matters to
which its contract relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Investment Adviser in the
performance of its duties or from its reckless disregard of the obligations and
duties under the contract.
The investment management contract initially expires on December 22, 1996
and will continue in effect from year to year thereafter if approved annually by
a vote of a majority of the
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<PAGE> 64
Trustees of the Fund who are not interested persons of one of the parties to the
contract, cast in person at a meeting called for the purpose of voting on such
approval, and by either a majority of the Trustees or the holders of a majority
of the Fund's outstanding voting securities. The management contract may, on 60
days' written notice, be terminated at any time without the payment of any
penalty by the Fund by vote of a majority of the outstanding voting securities
of the Fund, by the Trustees or by the Investment Adviser. The management
contract terminates automatically in the event of its assignment.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Investment 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 Investment Adviser or for other funds or clients for which the
Investment 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 Investment 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.
Under the investment management contract, the Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If the Fund's investment management contract 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 Investment Adviser. In addition, the Investment 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.
For the fiscal years ended December 31, 1992, 1993 and 1994 advisory fees
payable by the Fund to TFMC, the Fund's former investment adviser, amounted to
$1,120,887, $1,633,853 and $1,919,101, respectively; however, a portion of such
fees were not imposed pursuant to the voluntary fee and expense limitation
arrangements then in effect (see "The Fund's Expenses" in the Prospectus). For
the period from December 22, 1994 to December 31, 1994, advisory fees payable by
the Fund were paid to the Investment Adviser.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund was a party to an
administrative services agreement with TFMC (the "Services
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<PAGE> 65
Agreement"), pursuant to which TFMC performed bookkeeping and accounting
services and functions, including preparing and maintaining various accounting
books, records and other documents and keeping such general ledgers and
portfolio accounts as are reasonably necessary for the operation of the Fund.
Other administrative services included communications in response to shareholder
inquiries and certain printing expenses of various financial reports. In
addition, such staff and office space, facilities and equipment were provided as
necessary to provide administrative services to the Fund. The Services
Agreement was amended in connection with the appointment of the Investment
Adviser as adviser to the Fund to permit services under the Agreement to be
provided to the Fund by the Investment Adviser and its affiliates. The Services
Agreement was terminated during the current fiscal year.
For the fiscal years ended December 31, 1992, 1993 and 1994, the Fund paid
to TFMC (pursuant to the Services Agreement) $91,596, $128,984 and $158,594,
respectively, of which $51,731, $83,291 and $109,540, respectively, was paid to
TFMC and $39,865, $45,693 and $49,054, respectively, were paid for certain data
processing and pricing information services.
INITIAL SALES CHARGE ON CLASS A SHARES
The sales charges applicable to purchases of Class A Shares of the Fund are
described in the Fund's Class A and Class B Prospectus. Methods of obtaining
reduced sales charges referred to generally in the Prospectus are described in
detail below. In calculating the sales charge applicable to current purchases
of Class A Shares, the investor is entitled to cumulate current purchases with
the greater of the current value (at offering price) of the Class A Shares of
the Fund, or if Investor Services is notified by the investor's dealer or the
investor at the time of the purchase, the cost of the Class A Shares owned.
COMBINED PURCHASES. In calculating the sales charge applicable to
purchases of Class A Shares made at one time, the purchases will be combined if
made by (a) an individual, his or her spouse and their children under the age of
21 purchasing securities for his or her own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
WITHOUT SALES CHARGE. As described in the Class A and Class B Prospectus,
Class A Shares of the Fund may be sold without a sales charge to certain persons
described in the Prospectus.
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<PAGE> 66
ACCUMULATION PRIVILEGE. Investors (including investors combining
purchases) who are already Class A Shareholders may also obtain the benefit of
the reduced sales charge by taking into account not only the amount then being
invested but also the purchase price or value of the Class A Shares already held
by such person.
COMBINATION PRIVILEGE. Reduced sales charges (according to the schedule
set forth in the Class A and Class B Prospectus) also are available to an
investor based on the aggregate amount of his concurrent and prior investments
in Class A Shares of the Fund and shares of all other John Hancock funds which
carry a sales charge.
LETTER OF INTENTION. The reduced sales loads are also applicable to
investments made over a specified period pursuant to a Letter of Intention
("LOI"), which should be read carefully prior to its execution by an investor.
Thy 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 qualified retirement plan, however, may opt to
make the necessary investments called for by the LOI over a forty-eight (48)
month period. These qualified retirement plans include IRA's, SEP, SARSEP, TSA,
401(k) plans, TSA plans and 457 plans. Such an investment (including
accumulations and combinations) must aggregate $50,000 or more invested during
the specified period from the date of the LOI or from a date within ninety (90)
days prior thereto, upon written request to Investor Services. The sales charge
applicable to all amounts invested under the LOI is computed as if the aggregate
amount intended to be invested had been invested immediately. If such aggregate
amount is not actually invested, the difference in the sales charge actually
paid and the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made with the specified period
(either 13 or 48 months), the sales charge applicable will not be higher than
that which would have been applied (including accumulations and combinations)
had the LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the
LOI is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing
the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrowed shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by the Fund to sell, any additional shares and may be terminated at
any time.
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<PAGE> 67
DISTRIBUTION CONTRACT
As discussed in the Prospectus, the Fund's shares are sold on a continuous
basis at the public offering price. The Distributor, a wholly-owned subsidiary
of the Investment Adviser, has the exclusive right, pursuant to the distribution
contract dated December 22, 1994 (the "Distribution Contract"), to purchase
shares from the Fund at net asset value for resale to the public or to
broker-dealers at the public offering price. Upon notice to all broker-dealers
("Selling Brokers") with whom it has sales agreements, the Distributor may allow
such Selling Brokers up to the full applicable sales charge during periods
specified in such notice. During these periods, such Selling Brokers may be
deemed to be underwriters as that term is defined in the Securities Act of 1933.
The Distribution Contract was initially adopted by the affirmative vote of
the Fund's Board of Trustees including the vote a majority of Trustees who are
not parties to the agreement or interested persons of any such party, cast in
person at a meeting called for such purpose. The Distribution Contract shall
continue in effect until December 22, 1994 and from year to year if approved by
either the vote of the Fund's shareholders or the Board of Trustees including
the vote of a majority of Trustees who are not parties to the agreement or
interested persons of any such party, cast in person at a meeting called for
such purpose. The Distribution Contract may be terminated at any time, without
penalty, by either party upon sixty (60) days' written notice or by a vote of a
majority of the outstanding voting securities of the Fund and terminates
automatically in the case of an assignment by the Distributor.
Total underwriting commissions for sales of the Fund's Class A Shares for
the fiscal years ended December 31, 1992, 1993 and 1994 were $2,854,274,
$2,391,072 and $1,805,845, respectively. Of such amounts $220,605, $233,560 and
$126,490, respectively, were retained by the Fund's former distributor,
Transamerica Fund Distributors, Inc. and the remainder was reallowed to dealers.
For the period from December 22, 1994 to December 31, 1994, underwriting
commissions were paid to the Distributor.
DISTRIBUTION PLAN. The Trustees, including the Independent Trustees of the
Fund, approved new distribution plans pursuant to Rule 12b-1 under the 1940 Act
for Class A Shares ("Class A Plan") and Class B Shares ("Class B Plan"). Such
Plans were approved by a majority of the outstanding shares of each respective
class on December 16, 1994 and became effective on December 22, 1994.
Under the Class A Plan, the distribution or service fees will not exceed an
annual rate of 0.15% of the average daily net asset value of the Class A Shares
of the Fund (determined in accordance with such Fund's Prospectus as from time
to time in effect). Any expenses under the Class A Plan not reimbursed within
12 months of being presented to the Fund for repayment are forfeited and not
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<PAGE> 68
carried over to future years. Under the Class B Plan, the distribution or
service fees to be paid by the Fund will not exceed an annual rate of 1.00% of
the average daily net assets of the Class B Shares of the Fund (determined in
accordance with such Fund's prospectus as from time to time in effect); provided
that the portion of such fee used to cover Service Expenses (described below)
shall not exceed an annual rate of 0.25% of the average daily net asset value of
the Class B Shares of the Fund. The Distributor has agreed to limit the payment
of expenses pursuant to the Class B Plan to 0.90% of the average daily net
assets of the Class B Shares of the Fund. Under the Class B Plan, the fee
covers the Distribution and Service Expenses (described below) and interest
expenses on unreimbursed distribution expenses. In accordance with generally
accepted accounting principles, the Fund does not treat distribution fees in
excess of 0.75% of the Fund's net assets attributable to Class B Shares as a
liability of the Fund and does not reduce the current net assets of class B by
such amount although the amount may be payable in the future.
Under the Plans, expenditures shall be calculated and accrued daily and
paid monthly or at such other intervals as the Trustees shall determine. The
fee may be spent by the Distributor on Distribution Expenses or Service
Expenses. "Distribution Expenses" include any activities or expenses primarily
intended to result in the sale of shares of the relevant class of the Fund,
including, but not limited to: (i) initial and ongoing sales compensation
payable out of such fee as such compensation is received by the Distributor or
by Selling Brokers, (ii) direct out-of-pocket expenses incurred in connection
with the distribution of shares, including expenses related to printing of
prospectuses and reports; (iii) preparation, printing and distribution of sales
literature and advertising material; (iv) an allocation of overhead and other
branch office expenses of the Distributor related to the distribution of Fund
Shares (v) distribution expenses that were incurred by the Fund's former
distributor and not recovered through payments under the Class A or Class B
former plans or through receipt of contingent deferred sales charges; and (vi)
in the event that any other investment company (the "Acquired Fund") sells all
or substantially all of its assets, merges or otherwise engages in a combination
with the Fund, distribution expenses originally incurred in connection with the
distribution of the Acquired Fund's shares. Service Expenses under the Plans
include payments made to, or on account of, account executives of selected
broker-dealers (including affiliates of the Distributor) and others who furnish
personal and shareholder account maintenance services to shareholders of the
relevant class of the Fund.
During the fiscal year ended December 31, 1994, total payments made by the
Fund under the former Class A Rule 12b-1 plan to the former distributor amounted
to $405,172, which represented payments for service fees. During the period
from December 22, 1994 to December 31, 1994, payment under the Class A Plan was
made to the Distributor.
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<PAGE> 69
During the fiscal year ended December 31, 1994, total payments made by the
Fund under the former Class B Rule 12b-1 plan to the former distributor amounted
to $709,198 of which:
** (1) $118,200 represented service fees which were comprised of $93,054 for
distribution and/or administrative services provided by the Fund's
former distributor and $25,146 for service fees paid to
broker/dealers.
(2) $590,998 represented as the total of distribution fees paid to the
former distributor which are comprised of:
a) $249,768 for dealer commission payments;
b) $62,442 for underwriting fees; and
c) $278,788 for interest or the carrying charges.
For the fiscal year ended December 31, 1994, the former distributor
received $302,402 in contingent deferred sales charges from redemption of the
Fund's Class B shares. For the period from December 22, 1994 to December 31,
1994, the Distributor received fees under the Class B Plan and contingent
deferred sales charges from redemptions of Class B shares.
Each of the Plans provides that it will continue in effect only as long as
its continuance is approved at least annually by a majority of both the Trustees
and the Independent Trustees. Each of the Plans provides that it may be
terminated (a) at any time by vote of a majority of the Trustees, a majority of
the Independent Trustees, or a majority of the respective Class' outstanding
voting securities or (b) by the Distributor on 60 days' notice in writing to the
Fund. Each of the Plans further provides that it may not be amended to increase
the maximum amount of the fees for the services described therein without the
approval of a majority of the outstanding shares of the class of the Fund which
has voting rights with respect to the Plan. Each of the Plans provides that no
material amendment to the Plan will, in any event, 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 Shares and Class B Shares have exclusive voting
rights with respect to the Plan applicable to their respective class of shares.
The Board of Trustees, including the Trustees who are not interested in the Fund
and have no direct or indirect interest in the Plans, has determined 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.
Information regarding the services rendered under the Plans and the
Distribution Agreement and the amounts paid therefore by the respective Class of
the Fund are provided to, and reviewed by, the Board of Trustees on a quarterly
basis. In its quarterly review, the Board of Trustees considers the continued
appropriateness of the Plans and the Distribution Agreement and the level of
compensation provided therein.
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<PAGE> 70
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share
without the imposition of a sales charge so that the Fund will receive the full
amount of the purchase payment.
CONTINGENT DEFERRED SALES CHARGE. Class B Shares which are redeemed within
six years of purchase will be subject to a contingent deferred sales charge
("CDSC") at the rates set forth in the Class A and Class B Prospectus as a
percentage of the dollar amount subject to the CDSC. The charge will be
assessed on an amount equal to the lesser of the current market value or the
original purchase cost of the Class B Shares being redeemed. Accordingly, no
CDSC will be imposed on increases in account value above the initial purchase
prices, including Class B Shares derived from reinvestment of dividends or
capital gains distributions. Certain redemptions of Class A Shares may be
subject to a CDSC, as described in the Prospectus.
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 purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
Proceeds from the CDSC are paid to the Distributor and are used in whole or
in part by the Distributor to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B Shares, such as the payment of compensation to select Selling Brokers
for selling Class B Shares. The combination of the CDSC and the distribution
and service fees facilitates the ability of the Fund to sell the Class B Shares
without a sales charge being deducted at the time of the purchase. See the
Class A and Class B Prospectus for additional information regarding the CDSC.
SPECIAL REDEMPTIONS
Although it is the Fund's present policy to make payment of redemption
proceeds in cash, if the Board of Trustees determines that a material adverse
effect would otherwise be experienced by remaining investors, redemption
proceeds may be paid in whole or in part by a distribution in kind of securities
from the Fund in conformity with rules of the Securities and Exchange
Commission, valuing such securities in the same manner they are valued in
determining NAV, and selecting the securities in such manner as the Board may
deem fair and equitable. If such a distribution occurs, investors receiving
securities and selling them before their maturity could receive less than the
redemption value of such securities and, in addition, could incur certain
transaction costs. Such a redemption is not as liquid as a redemption paid in
cash or federal funds. The Fund has elected to be governed by
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<PAGE> 71
Rule 18f-1 under the 1940 Act, pursuant to which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90 day period for any one account.
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE. As described more fully in the Prospectus, the Fund
permits exchanges of shares of any class of the Fund for shares of the same
class in any other John Hancock fund offering that class.
SYSTEMATIC WITHDRAWAL PLAN. As described briefly in the Class A and Class
B Prospectus, the Fund permits the establishment of a Systematic Withdrawal
Plan. Payments under this plan represent proceeds arising from the redemption of
Fund shares. Since the redemption price of Fund shares may be more or less than
the shareholder's cost, depending upon the market value of the securities owned
by the Fund at the time of redemption, the distribution of cash pursuant to this
plan may result in realization of gain or loss for purposes of Federal, state
and local income taxes. The maintenance of a Systematic Withdrawal Plan
concurrently with purchases of additional Class A or Class B Shares of the Fund
could be disadvantageous to a shareholder because of the initial sales charge
payable on such purchases of Class A Shares and the CDSC imposed on redemptions
of Class B Shares and because redemptions are taxable events. Therefore, a
shareholder should not purchase Fund shares at the same time as a Systematic
Withdrawal Plan is in effect. The 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 Fund Services.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM ("MAAP"). This program is explained
fully in the Fund's Class A and Class B Prospectus and the Account Privileges
Application. The program, as it relates to automatic investment checks, is
subject to the following conditions;
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be
under no obligation to notify the shareholder as to the non-payment of any
check.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor
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Services which is received at least five (5) business days prior to the due date
of any investment.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed 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 mutual fund, subject to the minimum investment
limit in that fund. The proceeds from the redemption of Class A Shares may be
reinvested at net asset value without paying a sales charge in Class A Shares of
the Fund or in Class A Shares of another John Hancock mutual fund. If a CDSC
was paid upon a redemption, a shareholder may reinvest the proceeds from that
redemption at net asset value in additional shares of the class from which the
redemption was made. The shareholder's account will be credited with the amount
of any CDSC charged upon the prior redemption and the new shares will continue
to be subject to the CDSC. The holding period of the shares acquired through
reinvestment will, for purposes of computing the CDSC payable upon a subsequent
redemption, include the holding period of the redeemed shares. The Fund may
modify or terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for
Federal income tax purposes even if the reinvestment privilege is exercised, and
any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Dividends, Distributions and Tax Status."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a 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 Fund will not price its securities on
the following national holidays: New Year's Day; President's Day; Good Friday;
Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
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TAX STATUS
The Fund 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 continue to so qualify in the future. As such and
by complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on taxable income
(including net short-term and long-term capital gains from the disposition of
portfolio securities or the right to when-issued securities prior to issuance,
or from the lapse, exercise, delivery under or closing out of options or futures
contracts, income from repurchase agreements and other taxable securities,
income attributable to accrued market discount, income from securities lending,
and a portion of the discount from certain stripped tax-exempt obligations or
their coupons) which is distributed to shareholders at least annually 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 avoid liability for such tax by
satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in Fund shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
The Fund's distributions of tax-exempt interest ("exempt-interest
dividends") timely designated as such will be treated as tax-exempt interest
under the Code, provided that the Fund qualifies as a regulated investment
company and at least 50% of the value of its assets at the end of each quarter
of its taxable year is invested in tax-exempt obligations. Shareholders are
required to report their receipt of tax-exempt interest, including such
distributions, on their Federal income tax returns. The portion of the Fund's
distributions designated as exempt-interest dividends may differ from the actual
percentage
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that its tax-exempt income comprised of its total income during the period of
any particular shareholder's investment. The Fund will report to shareholders
the amount designated as exempt-interest dividends for each year.
Interest income from certain types of tax-exempt bonds that are private
activity bonds in which the Fund may invest is treated as an item of tax
preference for purposes of the Federal alternative minimum tax. To the extent
that the Fund invests in these types of tax-exempt bonds, shareholders will be
required to treat as an item of tax preference for Federal alternative minimum
purposes that part of the Fund's exempt-interest dividends which is derived from
interest on these tax-exempt bonds. Exempt-interest dividends derived from
interest income from all tax-exempt bonds may be included in corporate "adjusted
current earnings" for purposes of computing the alternative minimum tax
liability, if any, of corporate shareholders of the Fund.
The amount of the Fund's net short-term and long-term capital gains, if
any, in any given year will vary depending upon the Adviser's current investment
strategy and whether the Adviser believes it to be in the best interest of the
Fund to dispose of portfolio securities or enter into options or futures
transactions that will generate capital gains. At the time of an investor's
purchase of Fund shares, a portion of the purchase price is often attributable
to realized or unrealized appreciation in the Fund's portfolio or, less
frequently, to undistributed taxable income of the Fund. Consequently,
subsequent distributions from such appreciation or income may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon his basis in his shares. Such gain or loss will be treated as capital gain
or loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon the shareholder's tax holding period for
the shares. A sales charge paid in purchasing Class A shares of the Fund cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 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. Such disregarded load 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 will 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 an election to reinvest dividends in additional shares.
In such a case, the basis of the
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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, if not thus disallowed, will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares.
Although its present intention is to distribute all net short-term and
long-term capital gains, if any, the Fund reserves the right to retain and
reinvest all or any portion of its "net capital gain," which is the excess, as
computed for Federal income tax purposes, 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. 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 income
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 generally permitted to carry
forward a net capital loss in any year to offset its net capital gains, if any,
during the eight years following the year of the loss. To the extent subsequent
capital gains are offset by such losses, they would not result in Federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders. The Fund has $268,000 of capital loss carry forwards, which
expire in 2002, available to offset future capital gains.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for Federal income tax purposes to the
extent it is deemed related to exempt-interest dividends paid by the Fund.
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 funds may not be directly traceable
to the purchase of shares.
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Dividends paid by the Fund to its corporate shareholders will not qualify
for the corporate dividends received deduction in their hands.
If the Fund invests in zero coupon securities or, in general, any other
securities with original issue discount (or with market discount if the Fund
elects to include accrued market discount in income currently), the Fund must
accrue income on such investments prior to the receipt of the corresponding cash
payments. However, the Fund must distribute, at least annually, all or
substantially all of its net income, including such accrued income, to
shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, the Fund may have to dispose
of its portfolio securities under disadvantageous circumstances to generate
cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting portfolio positions may be deferred rather
than being taken into account currently in calculating the Fund's gains. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. Certain of the applicable tax rules may be
modified if the Fund is eligible and chooses to make one or more of certain tax
elections that may be available. The Fund will take into account the special
tax rules (including consideration of available elections) applicable to options
and futures contracts in order to minimize any potential adverse tax
consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. 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. 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.
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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 that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute 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.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
The following discussion assumes that the Fund will be qualified as a
regulated investment company under subchapter M of the Code and will be
qualified thereunder to pay exempt interest dividends.
Individual shareholders of the Fund who are subject to California personal
income taxation will not be required to include in their California gross income
that portion of their federal exempt-interest dividends which the Fund clearly
and accurately identifies as directly attributable to interest earned on
obligations the interest on which is exempt from California personal income
taxation, provided that at least 50 percent of the value of the Fund's total
assets consists of such obligations. Distributions to individual shareholders
derived from interest on Tax-Exempt Securities issued by governmental
authorities in states other than California and short-term capital gains will be
taxed as dividends for purposes of California personal income taxation. The
Fund's long-term capital gains for Federal income tax purposes that are
distributed to the shareholders will be taxed as long-term capital gains to
individual shareholders of the Fund for purposes of California personal income
taxation. Gain or loss, if any, resulting from a sale or redemption of shares
will be recognized in the year of the sale or redemption. Present California
law taxes both long-term and short-term capital gains at the rates applicable to
ordinary income. Interest on indebtedness incurred or continued by a
shareholder in connection with the purchase of shares of the Fund will not be
deductible for California personal income tax purposes.
Generally, corporate shareholders of the Fund subject to the California
franchise tax will be required to include any gain on a sale or redemption of
shares and all distributions of exempt interest, capital gains and other taxable
income, if any, as income subject to such tax.
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The Fund will not be subject to California franchise or corporate income
tax on interest income or net capital gain distributed to the shareholders.
Shares of the Fund will be exempt from local property taxes in California.
Shares of the Fund will not be excludable from the taxable estates of
deceased California resident shareholders for purposes of the California estate
and generation skipping taxes. California estate and generation skipping taxes
are creditable against the corresponding Federal taxes.
The foregoing is a general, abbreviated summary of certain of the
provisions of California law presently in effect as it directly governs the
taxation of the shareholders of the Fund. These provisions are subject to change
by legislative or administrative action, and any such change may be retroactive
with respect to the Fund's transactions. Shareholders are advised to consult
with their own tax advisers for more detailed information concerning California
tax matters.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Investment Adviser pursuant
to recommendations made by an investment committee of the Investment Adviser,
which consists of officers and directors of the Investment Adviser and
affiliates and officers and Trustees who are interested persons of the Fund.
Orders for purchases and sales of securities are placed in a manner which, in
the opinion of the officers of the Fund, will offer the best price and market
for the execution of each such transaction. Purchases from underwriters of
portfolio securities may include a commission or commissions paid by the issuer
and transactions with dealers serving as market makers reflect a "spread."
Investments in debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on such transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing
primary policy, the Rules of Fair Practice of the NASD and other policies that
the Trustees may determine, the Investment 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.
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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 Investment
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 Investment Adviser. The
receipt of research information is not expected to reduce significantly the
expenses of the Investment Adviser. The research information and statistical
assistance furnished by brokers and dealers may benefit the Life Company or
other advisory clients of the Investment Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Investment Adviser
may result in research information and statistical assistance beneficial to the
Fund. The Fund will make no commitments to allocate portfolio transactions upon
any prescribed basis. While the Fund's officers will be primarily responsible
for the allocation of the Fund's brokerage business, their policies and
practices 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 December
31, 1994, 1993 and 1992, no negotiated brokerage commissions were paid on
portfolio transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Fund may pay to a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that 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 December 31, 1994,
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 Investment Adviser's indirect parent, the Life Company, is the indirect
sole shareholder of John Hancock Freedom Securities Corporation and its
subsidiaries, three of which, Tucker Anthony Incorporated ("Tucker Anthony")
John Hancock Distributors, Inc. ("John Hancock Distributors") and Sutro &
Company, Inc. ("Sutro"), are broker-dealers ("Affiliated Brokers"). 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 Tucker Anthony, Sutro or John Hancock Distributors. During the year
ended December 31, 1994, the Fund did not execute any portfolio transactions
with then affiliated brokers.
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Any of the Affiliated Brokers may act as broker for the Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the 1940 Act.
Commissions paid to an Affiliated Broker must be at least as favorable as those
which the Trustees believe to be contemporaneously charged by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold. A transaction would not be placed with an Affiliated Broker
if the Fund would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions for its
other most favored, but unaffiliated, customers, except for accounts for which
the Affiliated Broker acts as a clearing broker for another brokerage 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
1940 Act) of the Fund, the Investment Adviser or the Affiliated Brokers. Because
the Investment Adviser, which is affiliated with the Affiliated Brokers, has, as
an investment adviser to the Fund, the obligation to provide investment
management services, which includes elements of research and related investment
skills, such research and related skills will not be used by the Affiliated
Brokers as a basis for negotiating commissions at a rate higher than that
determined in accordance with the above criteria. The Fund will not effect
principal transactions with Affiliated Brokers.
The Fund's portfolio turnover rates for the fiscal years ended December 31,
1993 and 1994 were 51% and 62%, respectively.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205-9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Investor
Services a monthly transfer agent fee of $19 per account for the Class A Shares
and $22.50 per account for the Class B Shares, plus out-of-pocket expenses.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has
been selected as the independent auditors of the Fund. The financial statements
of the Fund included in the Prospectus and this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods indicated in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
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CUSTODY OF PORTFOLIO
Investor Bank & Trust Company ("IBT") 24 Federal Street, Boston,
Massachusetts, serves as custodian of the cash and investment securities of the
Fund. IBT is also responsible for, among other things, receipt and delivery of
the Fund's investment securities in accordance with procedures and conditions
specified in the custody agreement.
DESCRIPTION OF THE FUND'S SHARES
SHARES OF THE FUND. Ownership of the Fund is represented by transferable
shares of beneficial interest. The Declaration of Trust permits the Trustees to
create an unlimited number of series and classes of shares of the Fund and, with
respect to each series and class, to issue an unlimited number of full or
fractional shares and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
of the Fund.
Each share of each series or class of the Fund represents an equal
proportionate interest with each other in that series or class, none having
priority or preference over other shares of the same series or class. The
interest of investors in the various series or classes of the Fund is separate
and distinct. All consideration received for the sales of shares of a particular
series or class of the Fund, all assets in which such consideration is invested
and all income, earnings and profits derived from such investments will be
allocated to and belong to that series or class. As such, each such share is
entitled to dividends and distributions out of the net income belonging to that
series or class as declared by the Trustees. Shares of the Fund have a par
value of $0.01 per share. The assets of each series are segregated on the
Fund's books and are charged with the liabilities of that series and with a
share of the Fund's general liabilities. The Trustees determine those assets
and liabilities deemed to be general assets or liabilities of the Fund, and
these items are allocated among each series in proportion to the relative total
net assets of each series. In the unlikely event that the liabilities allocable
to a series exceed the assets of that series, all or a portion of such
liabilities may have to be borne by the other series.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional classes within
any series (which would be used to distinguish among the rights of different
categories of shareholders, as might be required by future regulations or other
unforeseen circumstances). As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Fund designated as Class A and Class B. Class A and Class B Shares of
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the Fund represent an equal proportionate interest in the aggregate net asset
values attributable to that class of the Fund. Holders of Class A Shares and
Class B Shares each have certain exclusive voting rights on matters relating to
the Class A Plan and the Class B Plan, respectively. 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 caused by the fact that (i)
Class B Shares will pay higher distribution and service fees than Class A Shares
and (ii) each of Class A Shares and Class B Shares will bear any class expenses
properly allocable to such class of shares, subject to the conditions set forth
in a private letter ruling that the Fund has received from the Internal Revenue
Service relating to its multiple-class structure. Similarly, the net asset
value per share may vary depending whether Class A Shares or Class B Shares are
purchased.
VOTING RIGHTS. Shareholders are entitled to a full vote for each full
share held. The Trustees themselves have the power to alter the number and the
terms of office of Trustees, and they may at any time lengthen their own terms
or make their terms of unlimited duration (subject to certain removal
procedures) and appoint their own successors, provided that at all times at
least a majority of the Trustees have been elected by shareholders. The voting
rights of shareholders are not cumulative, so that holders of more than 50
percent of the shares voting can, if they choose, elect all Trustees being
selected, while the holders of the remaining shares would be unable to elect any
Trustees. Although the Fund need not hold annual meetings of shareholders, the
trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the 1940 Act or the Declaration of Trust. Also, a
shareholder's meeting must be called if so requested in writing by the holders
of record of 10% or more of the outstanding shares of the Fund. In addition,
the Trustees may be removed by the action of the holders of record of two-thirds
or more of the outstanding shares.
SHAREHOLDER LIABILITY. The Declaration of Trust provides that no Trustee,
officer, employee or agent of the Fund is liable to the Fund or to a
shareholder, nor is any Trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the Fund, except as such liability may
arise from his or its own bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties. It also provides that all third persons shall
look solely to the Fund's property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be
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indemnified against all liability in connection with the affairs of the Fund.
As a Massachusetts business trust, the Fund is not required to issue share
certificates. The Fund shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders.
REPORTS TO SHAREHOLDERS. Shareholders of the Fund will receive annual and
semi-annual reports showing diversification of investments, securities owned and
other information regarding the Fund's activities. The financial statements of
the Fund are audited at least once a year by the Fund's independent auditors.
REGISTRATION STATEMENT. This Statement of Additional Information and the
Prospectus do not contain all of the information set forth in the Fund's
Registration Statement filed with the Securities and Exchange Commission. The
complete Registration Statement may be obtained from the Securities and Exchange
Commission upon payment of the fee prescribed by the rules and regulations of
the Commission.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1994, the annualized yields of the
Fund's Class A Shares and Class B Shares were 6.16% and 5.70%, respectively
(6.01% and 5.55%, respectively, without taking into account the expense
limitation arrangements). As of December 31, 1994 the average annual total
returns of the Class A Shares of the Fund for the one year period and since
inception on December 29, 1989 were -13.61% and 4.99%, respectively As of
December 31, 1994, the average annual returns for the Fund's Class B Shares for
the one year period and since inception December 31, 1991 were -14.99% and
2.27%. Without taking into account the expense limitation arrangements, the
foregoing total return performance would have been lower.
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
Yield = 2 [ (a-b + 1 ) 6 -1]
---
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the period
that would be entitled to receive dividends.
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d= the maximum offering price per share on the last day of the period
(NAV where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Fund which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt. The tax equivalent yields for the
Fund's Class A and Class B Shares at the maximum federal and California tax rate
(42.4%) for the 30-day period ended December 31, 1994 were 10.69% and 9.90%,
respectively.
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
P (1+T) n = ERV
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.
In the case of Class A Shares or Class B Shares, this calculation assumes
the maximum sales charge is included in the initial investment or the CDSC is
applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. 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.
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 maximum sales
charge on Class A Shares or the CDSC on Class B Shares into account. Excluding
the Fund's sales charge on Class A Shares and the CDSC on Class B Shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, 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
-48-
<PAGE> 85
Analysis," a monthly publication which tracks net assets, total return, and
yield on approximately 1,700 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. The Fund may
also cite Morningstar Mutual Values, an independent mutual fund information
service which ranks mutual funds. 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.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will
also be utilized.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
ADDITIONAL PERFORMANCE INFORMATION. The Fund may use comparative
performance information from certain industry research materials and/or
published in various periodicals. The characteristics of the investments in
such comparisons may be different from those investments of the Fund's
portfolio. In addition, the formula used to calculate the performance
statistics of such investments may not be identical to the formula used by the
Fund to calculate its performance figures. From time to time, advertisements or
information for the Fund may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund. Such advertisements or
information may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail in the communication.
The Fund may from time to time advertise its comparative performance as
measured or refer to results published by various periodicals including, but not
limited to, Lipper Analytical Services, Inc. Barron's, "The Wall Street
Journal," "New York Times," Weisenberger Investment Companies Service,
Donoghue's Money Fund Report, Stanger's Investment Advisor, Financial Planning,
Money, Fortune, Personal Finance, Muni Week, Institutional Investor, Business
Week, Financial World and Forbes. In addition, the Fund may from time to time
advertise its performance relative to certain indexes and benchmark investments,
including: (a) the Shearson Lehman Municipal Bond Index, (b) Bond Buyer 25
Review Bond Index, (c) the Consumer Price Index, and
-49-
<PAGE> 86
(d) taxable investments such as certificates of deposit, money market deposit
accounts, checking accounts, savings accounts, money market mutual funds.
The composition of the investments in such indexes and the characteristics
of such benchmark investments are not identical to, and in some cases are very
different from, those of the Fund's portfolio. These indexes and averages are
generally unmanaged and the items included in the calculations of such indexes
and averages may not be identical to the formulas used by the Fund to calculate
its performance figures.
-50-
<PAGE> 87
APPENDIX A
CORPORATE AND TAX-EXEMPT BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S)
Ass, Aa, A and Baa - Tax-exempt bonds rated Aaa are judged to be of the
"best quality." The rating of Aa is assigned to bonds that are of "high quality
by all standards," but long-term risks appear somewhat larger than Aaa rated
bonds. The Aaa and Aa rated bonds are generally known as "high grade bonds." The
foregoing ratings for tax-exempt bonds are rated conditionally. Bonds for which
the security depends upon the completion of some act or upon the fulfillment of
some condition are rated conditionally. These are bonds secured by (a) earnings
of projects under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals that begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Such parenthetical
ratings denotes the probable credit stature upon completion of construction or
elimination of the basis of the condition. Bonds rated A are considered as
upper medium grade obligations. Principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future. Bonds rated Baa are considered a medium grade
obligations; i.e., they are neither highly protected or 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.
STANDARD & POOR'S CORPORATION ("S&P")
AAA, AA, A and BBB - Bonds rated AAA bear the highest rating assigned to
debt obligations and indicates an extremely strong capacity to pay principal and
interest. Bonds rated AA are considered "high grade," are only slightly less
marked than those of AAA ratings and have the second strongest capacity for
payment of debt service. Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat susceptible to the adverse effects or
changes in circumstances and economic conditions. The foregoing ratings are
sometimes followed by a "p" indicating that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the bonds being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. Although a provisional rating addresses credit quality subsequent of
completion of the project, it makes no comment on the likelihood of, or the risk
of default upon failure of, such completion. Bonds rated BBB are regarded as
having an adequate capacity to repay principal and pay interest. Whereas they
normally exhibit protection parameters,
-51-
<PAGE> 88
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to repay principal and pay interest for bonds in this
category than for bonds in the A category.
FITCH INVESTORS SERVICE ("FITCH")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and
of the highest quality. The obligor has an extraordinary ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
high quality. The obligor's ability to pay interest and repay principal, while
very strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue. Bonds rated A are considered to be
investment grade and of good 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. Bonds rated BBB are considered to be investment grade and of
satisfactory 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 weaken this ability than bonds with
higher ratings.
TAX-EXEMPT NOTE RATINGS
MOODY'S - MIG-1 and MIG-2. Notes rated MIG-1 are judged to be of the best
quality, enjoying strong protection from established cash flow or funds for
their services or from established and broad-based access to the market for
refinancing or both. Notes rated MIG-2 are judged to be of high quality with
ample margins of protection, though not as large as MIG-1.
S&P - SP-1 and SP-2. SP-1 denotes a very strong or strong capacity to pay
principal and interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+). SP-2 denotes a
satisfactory capacity to pay principal interest.
FITCH - FIN-1 and FIN-2. Notes assigned FIN-1 are regarded as having the
strongest degree of assurance for timely payment. A plus symbol may be used to
indicate relative standing. Notes assigned FIN-2 reflect a degree of assurance
for timely payment only slightly less in degree than the highest category.
CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
MOODY'S - Commercial Paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Prime-1, indicates highest quality repayment capacity of
rated issue and Prime-2 indicates higher quality.
-52-
<PAGE> 89
S&P - Commercial Paper ratings are a current assessment of the likelihood
of timely payment of debts having an original maturity of no more than 365 days.
Issues rated A have the greatest capacity for a timely payment and the
designation 1, 2 and 3 indicates the relative degree of safety. Issues rated
"A-1+" are those with an "overwhelming degree of credit protection."
FITCH - Commercial Paper ratings reflect current appraisal of the degree of
assurance of timely payment. F-1 issues are regarded as having the strongest
degree of assurance for timely payment. (+) is used to designate the relative
position of an issuer within the rating category. F-2 issues reflect an
assurance of timely payment only slightly less in degree than the strongest
issues. The symbol (LOC) may follow either category and indicates that a letter
of credit issued by a commercial bank is attached to the commercial paper note.
OTHER CONSIDERATIONS - The ratings of S&P, Moody's, and Fitch represent
their respective opinions of the quality of the municipal securities they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, municipal securities
with the same maturity, coupon and ratings may have different yields and
municipal securities of the same maturity and coupon with different ratings may
have the same yield.
-53-
<PAGE> 90
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ---------- -----------
<S> <C> <C>
LONG-TERM MUNICIPAL
OBLIGATIONS-97.01%
COMMUNITY
FACILITIES-12.62%
Capistrano Unified School
District Community
Facilities District Bonds
7.000% due 09/01/18...................... $ 1,500,000 $ 1,331,250
7.500% due 09/01/07...................... 3,500,000 3,246,250
8.375% due 10/01/20...................... 3,000,000 3,041,250
Fontana Special Tax
Community Facilities
District Bonds
8.375% due 04/01/11...................... 10,000,000 8,262,500
8.400% due 04/01/15...................... 1,000,000 823,750
Fresno Joint Powers
Financing Authority
Revenue Refunding Bonds
6.550% due 09/02/12...................... 2,000,000 1,812,500
Industry Urban Development
Agency Bonds
6.900% due 11/01/16...................... 1,020,000 975,375
7.375% with various
maturities to 05/01/15................ 1,145,000 1,187,937
Los Alamitos Unified
School District Special
Tax Community Facilities
District Bonds
7.150% due 08/15/21...................... 6,005,000 5,359,463
Los Angeles County
Improvement Bonds
8.375% due 09/02/18...................... 3,865,000 3,947,131
Pleasanton Joint Power
Financing Authority
Revenue Bonds
6.600% due 09/02/08...................... 2,940,000 2,730,525
Sacramento Unified School
District Special Tax
Community Facilities
District Bonds
7.300% due 09/01/13...................... 760,000 779,000
Saddleback Valley Unified
School District
Community Facilities
District Bonds
7.750% due 09/01/16...................... 3,200,000 3,124,000
Santa Clarita Community
Facilities District
Special Tax Bonds
7.450% due 11/15/10...................... 3,600,000 3,636,000
-----------
40,256,931
HEALTH-12.92%
California Health Facilities
Financing Authority
Revenue Bonds
5.600% due 05/01/33...................... 3,800,000 2,987,750
5.800% due 12/01/18...................... 3,140,000 2,633,675
6.250% due 07/01/12...................... 1,135,000 1,037,106
7.500% due 04/01/22...................... 2,000,000 2,020,000
California Statewide
Community Development
Authority Revenue
Certificates of
Participation
5.500% due 07/01/23...................... 6,000,000 4,915,000
5.600% due 11/15/17...................... 2,435,000 1,996,700
6.200% due 08/01/12...................... 1,250,000 1,129,687
6.250% due 08/01/22...................... 2,590,000 2,263,012
6.500% due 08/01/22...................... 15,750,000 13,978,125
6.700% due 05/01/11...................... 1,250,000 1,200,000
6.750% due 12/01/21...................... 7,500,000 7,040,625
------------
41,201,680
HOSPITALS-7.93%
Arcadia Hospital
Revenue Bonds
6.625% due 11/15/22...................... 1,205,000 1,051,363
Bakersfield Memorial
Hospital Revenue Bonds
6.500% due 01/01/22...................... 2,000,000 1,792,500
</TABLE>
6
<PAGE> 91
STATEMENT OF NET ASSETS
John HancocK California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
Covina Hospital Revenue
Certificates of
Participation
7.000% due 03/01/17...................... 925,000 857,937
Duarte City of Hope
Medical Center
Certificates of
Participation
6.250% due 04/01/23...................... 13,900,000 11,571,750
Rancho Mirage Joint Powers
Financing Authority
Certificates of
Participation
7.000% due 03/01/22...................... 4,500,000 4,201,875
San Bernardino County
Certificates of
Participation
5.500% due 08/01/17...................... 7,500,000 5,812,500
-----------
25,287,925
HOUSING--0.57%
California Housing Finance
Agency Revenue Bonds
7.375% due 08/01/17...................... 335,000 341,700
Upland Housing Authority
Revenue Bonds
7.500% due 07/01/03...................... 190,000 190,238
7.850% due 07/01/20...................... 1,280,000 1,294,400
-----------
1,826,338
INDUSTRIAL
DEVELOPMENT--0.30%
ABAG Finance Authority
for Nonprofit Corps.
Certificates of
Participation
6.800% due 10/01/11...................... 1,000,000 962,500
MORTGAGE INSURED
BONDS--1.38%
California Housing Finance
Agency Home Mortgage
Revenue Refunding Bonds
7.250% due 08/01/17...................... 3,500,000 3,561,250
Southern California Home
Finance Authority Single
Family Mortgage Revenue
Bonds Series A
6.750% due 09/01/22...................... 850,000 835,125
-----------
4,396,375
MUNICIPAL UTILITY
DISTRICTS--0.92%
Sacramento Municipal
Utility District Electric
Revenue Bonds
5.750% due 05/15/22...................... 2,700,000 2,274,750
Southern California Public
Power Authority
Transmission Project
Revenue Bonds
5.500% due 07/01/20...................... 800,000 655,000
-----------
2,929,750
PUBLIC FACILITIES--21.03%
Anaheim Certificates of
Participation
6.870% due 07/16/23(A)................... 2,000,000 1,690,000
Anaheim Public Finance
Authority Electric Utility
Revenue Bonds
5.750% due 10/01/22..................... 2,750,000 2,354,688
California Public Capital
Improvements Financing
Authority Revenue Bonds
8.125% due 03/01/95...................... 230,000 230,862
</TABLE>
7
<PAGE> 92
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
California State Public
Works Board Lease
Revenue Bonds
5.000% due 12/01/19 .................... 7,795,000 6,021,638
6.700% due 10/01/17 .................... 1,500,000 1,428,750
Chula Vista Certificates of
Participation
6.000% with various
maturities to 09/01/12 ................. 1,700,000 1,506,875
Concord Joint Powers
Financing Authority
Lease Revenue Bonds
5.250% due 08/01/19 .................... 3,520,000 2,772,000
Cupertino Certificates of
Participation
5.750% due 01/01/16 .................... 2,500,000 2,137,500
Delano Certificates of
Participation
7.000% due 04/01/10 .................... 2,000,000 1,915,000
Encinitas Certificates of
Participation
6.750% due 12/01/11 .................... 1,300,000 1,270,750
Inglewood Certificates of
Participation
7.000% due 08/01/19 .................... 1,000,000 966,250
Los Angeles County
Certificates of Participation
6.250% due 07/01/03 .................... 2,000,000 1,920,000
6.500% due 07/01/08 .................... 4,000,000 3,735,000
Los Angeles County Disney
Parking Certificates of
Participation
6.500% due 03/01/23 .................... 2,000,000 1,820,000
Los Angeles County Public
Works Finance Authority
Revenue Bonds
6.000% due 10/01/15 ................... 3,750,000 3,375,000
Oceanside Certificates of
Participation
6.000% due 04/01/17 .................... 2,875,000 2,461,719
6.375% due 04/01/12 .................... 3,000,000 2,767,500
Orange County Certificates
of Participation
6.700% due 08/01/18 .................... 1,000,000 963,750
San Diego County
Certificates of
Participation
6.750% due 08/01/19 .................... 3,000,000 2,996,250
San Jose Financing
Authority Revenue Bonds
6.400% due 09/01/17 .................... 2,000,000 1,857,500
San Marcus Public Facilities
Authority Revenue
Refunding Bonds
6.200% due 08/01/22 .................... 5,000,000 4,156,250
San Mateo Joint Powers
Financing Authority
Lease Revenue
Refunding Bonds
5.000% due 07/01/21 .................... 1,815,000 1,393,012
5.125% due 07/01/18 .................... 2,500,000 1,978,125
Santa Ana Financing
Authority Lease
Revenue Bonds
6.250% with various
maturities to 07/01/24 ................. 11,790,000 11,041,550
Stanislaus County
Certificates of
Participation
7.550% due 04/01/18 .................... 2,295,000 2,283,525
Vallejo Certificates of
Participation
8.000% due 02/01/06 .................... 2,000,000 2,025,000
-----------
67,068,494
REDEVELOPMENT-
COMMERCIAL--1.22%
Azusa Redevelopment
Agency Tax
Allocation Bonds
7.000% due 08/01/22 .................. 2,000,000 1,875,000
</TABLE>
8
<PAGE> 93
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ---------- -----------
<S> <C> <C>
BRENTWOOD REDEVELOPMENT
Agency Tax
Allocation Bonds
7.700% due 11/01/08..................... 135,000 135,844
Richmond Joint Powers
Financing Authority
Revenue Bonds
7.700% due 10/01/10..................... 1,835,000 1,880,875
-----------
3,891,719
REDEVELOPMENT-
MIXED USE--15.94%
Avalon Community
Improvement Agency Tax
Allocation Bonds
6.400% due 08/01/22..................... 1,975,000 1,752,813
Bakersfield Central District
Development Agency Tax
Allocation Bonds
6.625% due 04/01/15..................... 4,000,000 3,665,000
Burbank Redevelopment
Agency Tax
Allocation Bonds
6.000% due 12/01/23..................... 2,750,000 2,296,250
Clearlake Redevelopment
Agency Tax
Allocation Bonds
6.400% due 10/01/23..................... 500,000 446,250
Concord Redevelopment
Agency Tax Allocation
General Obligation Bonds
5.750% due 07/01/10..................... 1,145,000 970,387
Davis City Redevelopment
Agency Tax
Allocation Bonds
7.000% due 09/01/24..................... 5,115,000 5,204,513
Huntington Park Public
Financing Authority
Revenue Bonds
7.600% due 09/01/18..................... 5,000,000 4,675,000
Inglewood Redevelopment
Agency Tax
Allocation Bonds
6.125% due 07/01/13..................... 1,000,000 873,750
Lincoln Redevelopment
Agency Tax Allocation
Revenue Bonds
7.650% due 08/01/17..................... 3,350,000 3,379,313
Merced Public Financing
Authority Revenue Bonds
5.500% due 12/01/15..................... 3,630,000 2,958,450
Orange County
Development Agency Tax
Allocation Bonds
6.125% due 09/01/23..................... 3,000,000 2,302,500
Orange Redevelopment
Agency Tax Allocation
Revenue Bonds
5.700% due 10/01/17..................... 3,000,000 2,478,750
Palm Springs Financing
Authority Revenue Bonds
6.400% due 09/01/17..................... 3,000,000 2,737,500
Pittsburg Redevelopment
Agency Tax
Allocation Bonds
7.400% due 08/15/20..................... 3,040,000 2,983,000
Pomona Public Financing
Authority Revenue
Refunding Bonds
5.750% due 02/01/20..................... 10,000,000 7,912,500
Santa Cruz County Public
Financing Authority
Revenue Bonds
6.200% due 09/01/23..................... 2,000,000 1,677,500
Suisun City Redevelopment
Agency Tax
Allocation Bonds
7.250% due 10/01/20..................... 425,000 460,594
</TABLE>
9
<PAGE> 94
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
Tracy Community
Development Agency Toll
Road Revenue Bonds
6.000% due 03/01/24...................... 5,000,000 4,056,250
-----------
50,830,320
SCHOOLS--5.97%
Beaumont Unified School
District Certificates of
Participation
7.700% due 01/01/21...................... 1,000,000 985,000
Cucamonga School District
Certificates of
Participation
7.600% due 12/01/15...................... 1,000,000 1,022,500
Elk Grove Unified School
District Special
Tax Bonds
7.125% due 12/01/24...................... 1,000,000 1,016,250
Perris Union High School
District Certificates of
Participation
5.900% due 09/01/23...................... 2,000,000 1,667,500
San Gabriel Valley School
Financing Authority
Revenue Refunding Bonds
5.500% due 02/01/19...................... 1,500,000 1,215,000
Saugus Unified School
District Certificates of
Participation
7.500% due 08/01/09...................... 700,000 733,250
Sierra Unified School
District Certificates of
Participation
6.000% due 03/01/12...................... 2,000,000 1,707,500
Simi Valley Unified School
District Certificates of
Participation
6.100% due 08/01/22...................... 3,000,000 2,737,500
University of California
Certificates of Participation
5.500% due 11/01/14...................... 2,000,000 1,642,500
5.600% due 11/01/20...................... 6,180,000 4,990,350
Victor Valley Unified School
District Certificates of
Participation
7.875% due 11/01/12...................... 1,255,000 1,316,181
-----------
19,033,531
TRANSPORTATION--1.09%
San Diego MTDB Authority
Lease Revenue Bonds
5.375% due 06/01/23...................... 2,500,000 2,050,000
San Joaquin Hills
Transportation Corridor
Agency Toll Road
Revenue Bonds
6.750% due 01/01/32...................... 1,750,000 1,448,125
-----------
3,498,125
WASTE--2.98%
California Pollution Control
Financing Authority
Pollution Control
Revenue Bonds
5.850% due 12/01/23...................... 500,000 419,375
California Pollution Control
Financing Authority
Solid Waste Disposal
Revenue Bonds
6.875% due 11/01/27...................... 2,000,000 1,882,500
Stanislaus Waste to Energy
Financing Agency
Revenue Bonds
7.625% due 01/01/10...................... 1,000,000 1,007,500
Vallejo Sanitation and Flood
Control District
Certificates of Participation
5.000% due 07/01/19...................... 8,000,000 6,190,000
-----------
9,499,375
</TABLE>
10
<PAGE> 95
STATEMENT OF NET ASSETS
John Hancock California Tax-Free Income Fund
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
WATER--12.14%
Apple Valley Water District
Improvement Bonds
7.875% due 09/02/11...................... 2,425,000 2,500,781
California Department of
Water Resources
Central Valley Project
Revenue Bonds
5.500% due 12/01/23...................... 6,000,000 4,942,500
Calleguas-Las Virgines
Public Financing
Authority Revenue Bonds
5.125% due 07/01/21...................... 4,500,000 3,493,125
Central Coast Water
Authority Revenue Bonds
6.600% due 10/01/22...................... 3,200,000 3,132,000
East Bay Municipal Utility
District Water System
Revenue Refunding Bonds
6.000% due 06/01/12...................... 1,000,000 930,000
Metropolitan Water
District Waterworks
Revenue Bonds
5.000% due 07/01/20...................... 7,500,000 5,784,375
5.500% due 07/01/19...................... 5,000,000 4,181,250
Orange Cove Irrigation
District Revenue
Certificates of Participation
7.000% due 02/01/15...................... 2,500,000 2,409,375
7.250% due 02/01/12...................... 2,000,000 2,000,000
San Bernardino Municipal
Water Department
Certificates of Participation
6.250% due 02/01/17...................... 2,510,000 2,365,675
Santa Barbara Water and
Sewer Certificates of
Participation
6.700% due 04/01/27...................... 2,000,000 1,957,500
Turlock Irrigation District
Certificates of
Participation
7.300% due 01/01/11...................... 4,165,000 4,165,000
Turlock Irrigation District
Revenue Refunding
Bonds Series A
5.750% due 01/01/18...................... 1,000,000 873,750
------------
38,735,331
------------
TOTAL LONG-TERM
MUNICIPAL OBLIGATIONS
(Cost $342,717,564).......................... 309,418,394
SHORT-TERM
OBLIGATIONS--0.88%
VARIABLE RATE REVENUE
BONDS--0.88%
INDUSTRIAL
DEVELOPMENT--0.88%
California Pollution Control
Financing Authority
Pollution Control Revenue
Bonds Series A
5.000% due 01/03/95(B)................... 2,800,000 2,808,941
------------
TOTAL SHORT-TERM
OBLIGATIONS
(Cost $2,808,941)............................ 2,808,941
------------
TOTAL INVESTMENTS--97.89%
(Cost $345,526,505).......................... 312,227,335
CASH AND OTHER ASSETS,
LESS LIABILITIES--2.11%...................... 6,720,818
------------
NET ASSETS, at value,
equivalent to $9.28 per
share for 26,034,286
Class A Shares ($.01 par
value) outstanding and
$9.28 per share for
8,339,105 Class B Shares
($.01 par value)
outstanding--100.00%....................... $318,948,153
============
</TABLE>
(A) Floating rate securities.
(B) Interest rate reset date.
See Notes to Financial Statements.
11
<PAGE> 96
STATEMENT OF OPERATIONS/STATEMENTS OF CHANGES NET ASSETS
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
- --------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest................................... $ 23,033,267
------------
Expenses:
Management fees............................ $ 1,919,101
Distribution expenses
(see Note D)............................. 1,114,370
Transfer agent fees........................ 244,131
Administrative service fees................ 158,594
Custodian fees............................. 100,287
Audit and legal fees....................... 39,491
Registration fees.......................... 36,394
Trustees' fees and expenses................ 27,905
Insurance expense.......................... 25,872
Shareholder reports........................ 23,859
Organization costs......................... 4,619
Miscellaneous.............................. 20,155
Less: Expense
reimbursement............................ (506,921) 3,207,857
----------- ------------
Net Investment Income.................. 19,825,410
------------
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS
Net realized loss on
investments.............................. (4,180,216)
Net change in unrealized
depreciation of
investments.............................. (51,218,323)
------------
Net realized and Unrealized
Loss on Investments.................. (55,398,539)
------------
Decrease in net assets
Resulting from Operations............ $(35,573,129)
====================================================================
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
OPERATIONS:
NET INVESTMENT INCOME...................... $ 19,825,410 $ 16,517,620
Net realized gain (loss) on
investments.............................. (4,180,216) 9,880,178
Net change in unrealized
appreciation
(depreciation) of
investments.............................. (51,218,323) 9,798,946
------------ ------------
Increase (decrease) in net
assets resulting from
operations............................... (35,573,129) 36,196,744
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income-
Class A.................................. (15,737,105) (14,358,309)
Class B.................................. (3,992,716) (2,149,913)
Net realized gain on
investments-
Class A.................................. - (8,029,591)
Class B.................................. - (1,848,387)
------------ ------------
Total distributions to
shareholders......................... (19,729,821) (26,386,200)
------------ ------------
SHARE TRANSACTIONS
Increase in shares
outstanding................................ 29,122,142 91,709,279
------------ ------------
Increase (decrease) in
net assets................................. (26,180,808) 101,519,823
NET ASSETS
Beginning of year.......................... 345,128,961 243,609,138
------------ ------------
End of year................................ $318,948,153 $345,128,961
============ ============
Undistributed Net
Investment Income........................ $ 127,227 $ 31,638
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 97
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------------------------- ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------------------------------- ------------------------------
1994(1) 1993 1992(2) 1991 1990 1994(1) 1993 1992(2)
--------- -------- -------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share income and capital changes
for a share outstanding during
each year:
Net asset value, beginning of year....... $ 10.85 $ 10.41 $ 10.32 $ 9.91 $ 10.00 $ 10.85 $ 10.41 $ 10.32
INCOME FROM
INVESTMENT OPERATIONS
Net investment income................... 0.58 0.62 0.66 0.69 0.74 0.51 0.54 0.58
Net realized and unrealized gain
(loss) on investments................. (1.57) 0.76 0.25 0.47 (0.16) (1.57) 0.76 0.25
--------- -------- -------- ------- -------- -------- -------- -------
Total from Investment Operations.... (0.99) 1.38 0.91 1.16 0.58 (1.06) 1.30 0.83
LESS DISTRIBUTIONS
Dividends from net investment
income................................ (0.58) (0.62) (0.67) (0.70) (0.67) (0.51) (0.54) (0.59)
Distributions from realized gains....... - (0.32) (0.15) (0.05) - - (0.32) (0.15)
--------- -------- -------- ------- -------- -------- -------- -------
Total Distributions................. (0.58) (0.94) (0.82) (0.75) (0.67) (0.51) (0.86) (0.74)
--------- -------- -------- ------- -------- -------- -------- -------
Net asset value, end of year............ $ 9.28 $ 10.85 $ 10.41 $ 10.32 $ 9.91 $ 9.28 $ 10.85 $ 10.41
======== ======== ======== ======= ======= ======== ======== =======
TOTAL RETURN(3)......................... (9.31)% 13.60% 9.15% 12.26% 6.13% (9.99)% 12.76% 8.35%
======== ======== ======== ======= ======= ======== ======== =======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average
net assets............................ 0.89% 0.87% 0.83% 0.80% 0.84% 1.64% 1.62% 1.60%
Ratio of expense reimbursement
to average net assets................. (0.14)% (0.18)% (0.25)% (0.40)% (0.84)% (0.14)% (0.18)% (0.25)%
======== ======== ======== ======= ======= ======== ======== =======
Ratio of net expenses to average
net assets............................ 0.75% 0.69% 0.58% 0.40% 0.00% 1.50% 1.44% 1.35%
======== ======== ======== ======= ======= ======= ======= =======
Ratio of net investment income
to average net assets................. 5.85% 5.69% 6.36% 6.75% 7.11% 5.10% 4.82% 5.43%
Portfolio turnover...................... 62% 51% 34% 45% 62% 62% 51% 34%
Net Assets, end of year
(in thousands)........................ $241,583 $279,692 $217,014 $163,693 $80,200 $77,365 $65,437 $26,595
</TABLE>
(1) December 22, 1994, John Hancock Advisers, Inc. became the Investment
Adviser. Prior to this date, Transamerica Fund Management Company was
the Investment Adviser.
(2) Per share information has been calculated using the average number of
shares outstanding.
(3) Total return does not include the effect of the initial sales charge for
Class A Shares nor the contingent deferred sales charge for Class B
Shares. Total return does include the benefit of a voluntary expense
reimbursement by the Investment Adviser. Without such benefit, total
return would be lower.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 98
NOTES TO FINANCIAL STATEMENTS
John Hancock California Tax-Free Income Fund
December 31, 1994
NOTE A--
SIGNIFICANT ACCOUNTING POLICIES
John Hancock California Tax-Free Income Fund (the ``Fund''), formerly
Transamerica California Tax-Free Income Fund, is a diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended. On December 16, 1994, the shareholders of each of the mutual
funds managed by Transamerica Fund Management Company (TFMC) voted to approve
new Investment Advisory contracts with John Hancock Advisers, Inc. Each such
approval was subject to the acquisition of TFMC by The Berkeley Financial Group
(known beginning January 1, 1995 as John Hancock Funds), the parent company of
John Hancock Advisers, Inc. The acquisition became effective December 22, 1994.
The Fund's name change was also effective on this date.
The Fund offers two classes of shares to the public. Class A Shares
are subject to an initial sales charge of up to 4.75% and a 12b-1 distribution
plan. Class B Shares are subject to a contingent deferred sales charge and a
separate 12b-1 distribution plan. The following is a summary of significant
accounting policies consistently followed by the Fund.
(1) The Fund values its investments by using quotations provided by
market makers, estimates of market value, or values received from an
independent pricing service. Securities for which market quotations are not
readily available are valued at a fair value as determined in good faith by the
Fund's Board of Trustees. Short-term investments are valued at amortized cost
(original cost plus amortized discount or accrued interest).
(2) Security transactions are accounted for on the trade date. Interest
income is accrued daily. Debt premiums and original issue discounts are
amortized using the yield-to-maturity method. Discounts other than original
issue are not amortized. Realized gains and losses from security transactions
are determined on the basis of identified cost for both financial reporting and
federal income tax purposes.
(3) Income dividends are declared daily by the Fund and paid to
shareholders or reinvested at net asset value monthly. Other distributions are
recorded on the ex-dividend date and may be reinvested at net asset value.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
Distributions payable to shareholders at December 31, 1994 were $907,182.
(4) No provision for federal income taxes has been made since it is the
Fund's intention to distribute all of its taxable income and profits to its
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code. At December 31, 1994, the Fund had a realized capital loss
carryforward of approximately $268,000, which will expire in 2002.
(5) The Fund reports custodian fees net of credits and charges
resulting from cash positions in the custodial accounts greater than or less
than the amounts required to settle portfolio transactions. For the year ended
December 31, 1994, these amounts were $11,967 and $26,382, respectively.
(6) On a daily basis, income, unrealized and realized gains and losses,
and expenses which are not class specific are allocated to each class based on
their respective relative net assets. Class specific expenses, such as
distribution expenses, are applied to the class to which they are attributed.
NOTE B--
MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
From January 1, 1994 through December 21, 1994, TFMC acted as the
Investment Adviser to the Fund. On December 22, 1994, John Hancock Advisers,
Inc., a wholly-owned subsidiary of John Hancock Funds, became Investment
Adviser following the approval of the Fund's shareholders. Throughout these
financial statement notes, TFMC and John Hancock Advisers, Inc. are referred to
collectively as the ``Investment Adviser'', as each acted in this capacity
during the time periods noted above. The Investment Adviser has a sub-advisory
agreement with, and pays a fee to, Transamerica Investment Services, Inc. (the
``Sub-Adviser''). TFMC was, prior to December 22, 1994, and the Sub-Adviser is
presently a subsidiary of Transamerica Corporation.
The Fund's management fee is payable monthly and is calculated based on
the monthly average daily net assets of the Fund at an annual rate of 0.55%. At
December 31, 1994, the management fee payable to the Investment Adviser was
$118,703.
The Investment Adviser also provided administrative services to the
Fund pursuant to an administrative service agreement. During the year ended
December 31, 1994, the Fund paid or accrued $109,540 to the Investment Adviser
for these services, of which $13,620 was payable at December 31, 1994.
The Investment Adviser voluntarily agreed to reimburse the Fund for all
normal operating expenses, excluding distribution expenses, in excess of 0.60%,
on an annual basis, of the Fund's average daily net assets through December 31,
1994. For the year ended December 31, 1994, the Investment Adviser reimbursed
the Fund $506,921 pursuant to this agreement.
14
<PAGE> 99
NOTES TO FINANCIAL STATEMENTS
John Hancock California Tax-Free Income Fund
During the year ended December 31, 1994, Transamerica Fund
Distributors, Inc., an affiliate of TFMC and principal underwriter of the Fund
through December 21, 1994, and John Hancock Funds, Inc., an affiliate of John
Hancock Advisers, Inc. and principal underwriter since December 22, 1994,
retained $126,490 as their portion of the commissions charged on sales of Class
A Shares of the Fund. Throughout these financial statement notes, Transamerica
Fund Distributors, Inc. and John Hancock Funds, Inc. are referred to
collectively as the ``Distributor'', as each acted in this capacity during the
time periods noted above. At December 31, 1994, receivables from and payable
to the Distributor for Fund share transactions were $182,622 and $725,576,
respectively.
The Fund paid no compensation directly to any officer. Certain officers
of the Fund are affiliated with the Investment Adviser.
During the year ended December 31, 1994, the Fund paid legal fees of
$6,000 to Baker & Botts. A partner with Baker & Botts was an officer of the
Fund until December 22, 1994.
NOTE C--
COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the year ended December 31, 1994, purchases and sales of securities,
other than short-term obligations, aggregated $241,713,463 and $211,597,251,
respectively.
At December 31, 1994, receivables from brokers for securities sold were
$1,028,289. The identified cost of investments owned was the same for both
financial reporting and federal income tax purposes. At December 31, 1994, the
gross unrealized appreciation and gross unrealized depreciation of investments
for federal income tax purposes were $1,262,641 and $34,561,811, respectively.
NOTE D--
PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Fund is
authorized under separate distribution plans to finance activities related to
the distribution of its Class A and Class B Shares (the ``Class A Plan'' and
the ``Class B Plan,'' respectively). The distribution plans, together with the
initial sales charge on Class A Shares and the contingent deferred sales charge
on Class B Shares, comply with the regulations covering maximum sales charges
assessed by mutual funds distributed through securities dealers that are NASD
members.
The Class A Plan and the Class B Plan permit each class to make
payments to the Distributor up to 0.15% annually of average daily net assets
for certain distribution costs such as service fees paid to dealers, production
and distribution of prospectuses to prospective investors, services provided to
new and existing shareholders and other distribution related activities. During
the year ended December 31, 1994, the Fund made payments to the Distributor of
$405,172 or 0.15% for Class A and $118,200 or 0.15% for Class B, related to the
above activities.
The Class B Plan also permits Class B to reimburse the Distributor up
to 0.75% annually of average daily net assets for costs related to compensation
paid to securities dealers, in place of an initial sales charge to investors,
on the sale of Class B Shares. These costs are based upon a commission payment
charge of 5% of the value of Class B Shares sold (excluding shares acquired
through reinvestment), reduced by the amount of contingent deferred sales
charges (CDSC) that have been received by the Distributor on redemptions of
Class B Shares. These costs also include a charge of interest (carrying charge)
at an annual rate of 1% over the prevailing prime rate to the extent cumulative
commission payment charges, plus any previous carrying charges, less CDSC
received by the Distributor, have not been paid in full by the Fund. For the
year ended December 31, 1994, Class B reimbursed the Distributor $590,998 or
0.75% for such costs. For the year ended December 31, 1994, the Distributor
received $302,402 in CDSC.
At December 31, 1994, Class A had $96,343 and Class B had $77,295
payable to the Distributor pursuant to the above distribution plans.
NOTE E--
ORGANIZATION
The Fund was organized as a Massachusetts business trust on October 17, 1989.
The Fund had no transactions between that date and December 31, 1989, the
date of the Fund's initial offering of shares to the public, other than the
sale at $10.00 per share (net asset value) of 10,000 shares to TFMC.
The organization expenses of the Fund have been deferred and are being
amortized over a period during which it is expected that a benefit will be
realized, but not longer than five years from the date of commencement of
operations.
15
<PAGE> 100
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE F--SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1994 1993
-------------------------- --------------------------
SHARES DOLLARS SHARES DOLLARS
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold-Class A........................................ 5,288,858 $ 54,343,070 6,222,367 $ 67,684,801
Shares sold-Class B........................................ 3,496,364 36,145,744 3,570,391 39,032,830
Shares issued in reinvestment of distributions-Class A..... 669,253 6,642,113 922,955 10,028,581
Shares issued in reinvestment of distributions-Class B..... 200,879 1,988,933 213,817 2,322,382
Shares redeemed-Class A.................................... (5,712,088) (56,313,131) (2,204,763) (24,012,146)
Shares redeemed-Class B.................................... (1,391,946) (13,684,587) (305,683) (3,347,169)
---------- ------------ ---------- ------------
Net increase in shares outstanding......................... 2,551,320 $ 29,122,142 8,419,084 $ 91,709,279
========== ============ ========== ============
</TABLE>
The components of net assets at December 31, 1994, are as follows:
<TABLE>
<S> <C>
Capital paid-in (unlimited number of shares authorized)................................................. $356,244,025
Undistributed net investment income..................................................................... 127,227
Accumulated net realized loss on investments............................................................ (4,123,929)
Net unrealized depreciation of investments.............................................................. (33,299,170)
------------
NET ASSETS.............................................................................................. $318,948,153
============
</TABLE>
16
<PAGE> 101
John Hancock California Tax-Free Income Fund
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
John Hancock California Tax-Free Income Fund
We have audited the accompanying statement of net assets of John Hancock
California Tax-Free Income Fund, formerly Transamerica California Tax-Free
Income Fund, as of December 31, 1994, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the financial highlights for each
of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of John Hancock California Tax-Free Income Fund at December 31, 1994,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the indicated periods in conformity with generally
accepted accounting principles.
Houston, Texas
February 3, 1995
17
