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CALIFORNIA PORTFOLIO
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 8, 1995
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of California Portfolio ("California Portfolio"), a series of John
Hancock Tax-Exempt Series Fund, a Massachusetts business trust, will be held at
101 Huntington Avenue, Boston, Massachusetts 02199 on Friday, September 8, 1995
at 9:00 a.m., Boston time, and at any adjournment thereof, for the following
purposes:
1. To consider and act upon a proposal to approve an Agreement and Plan of
Reorganization (the "Reorganization Agreement") between John Hancock
Tax-Exempt Series Fund, on behalf of California Portfolio, and John Hancock
California Tax-Free Income Fund ("California Fund"), providing for
California Fund's acquisition of all California Portfolio's assets in
exchange solely for: (a) California Fund's assumption of California
Portfolio's liabilities and (b) the issuance of California Fund Class A
shares to California Portfolio for distribution to its shareholders; and
2. To consider and act upon such other matters as may properly come before the
Meeting or any adjournment of the Meeting.
The Board of Trustees has fixed the close of business on July 14, 1995 as
the record date for determination of shareholders who are entitled to notice of
and to vote at the Meeting and any adjournment of the Meeting.
If you cannot attend the Meeting in person, please complete, date and sign
the enclosed proxy and return it to John Hancock Investor Services Corporation,
101 Huntington Avenue, Boston, Massachusetts 02199 in the enclosed envelope. It
is important that you exercise your right to vote. THE ENCLOSED PROXY IS BEING
SOLICITED BY THE BOARD OF TRUSTEES OF JOHN HANCOCK TAX-EXEMPT SERIES FUND.
By order of the Board of Trustees,
THOMAS H. DROHAN, Secretary
Boston, Massachusetts
July 28, 1995
650PX 7/95
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CALIFORNIA PORTFOLIO
PROXY STATEMENT
JOHN HANCOCK CALIFORNIA
TAX-FREE INCOME FUND
PROSPECTUS
This Proxy Statement and Prospectus sets forth the information you should
know before voting on the proposed reorganization of California Portfolio into
John Hancock California Tax-Free Income Fund ("California Fund"). California
Portfolio is a series of John Hancock Tax-Exempt Series Fund, a Massachusetts
business trust (the "Trust"). California Fund is a Massachusetts business trust.
This Proxy Statement and Prospectus relates to Class A shares of beneficial
interest, $0.01 par value per share (collectively, the "California Fund Class A
Shares"), of California Fund which will be issued in exchange for all of
California Portfolio's assets. In exchange for these assets, California Fund
will also assume all of the liabilities of California Portfolio. The California
Fund Class A Shares issued to California Portfolio for distribution to
California Portfolio's shareholders will have an aggregate net asset value equal
to the aggregate net asset value of California Portfolio. The asset values of
California Portfolio and the California Fund Class A Shares will be determined
at the close of business (4:00 p.m. Eastern Time) on the Closing Date (as
defined below) for purposes of the proposed reorganization.
Following the receipt of California Fund Class A Shares (1) California
Portfolio will be liquidated, (2) the California Fund Class A Shares will be
distributed to California Portfolio's shareholders pro rata in exchange for
their shares of California Portfolio and (3) California Portfolio will be
terminated. Consequently, California Portfolio shareholders will become Class A
shareholders of California Fund. These transactions are collectively referred to
in this Proxy Statement and Prospectus as the "Reorganization." No Class B
shares of California Fund will be issued in the Reorganization.
The Reorganization is being structured as a tax-free reorganization so
that, in the opinion of tax counsel, no gain or loss will be recognized by
California Fund, California Portfolio or the shareholders of California
Portfolio. The terms and conditions of the Reorganization are more fully
described in this Proxy Statement and Prospectus, and in the Agreement and Plan
of Reorganization that is attached as EXHIBIT A.
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California Fund is a diversified open-end management investment company
organized as a Massachusetts business trust in 1989. California Fund seeks to
provide as high a level of income exempt from both federal income taxes and
California personal income taxes as is consistent with preservation of capital.
The principal place of business of both California Portfolio and California
Fund is at 101 Huntington Avenue, Boston, Massachusetts 02199. Their toll-free
telephone number is 1-800-225-5291.
Please read this Proxy Statement and Prospectus carefully and retain it for
future reference. This Proxy Statement and Prospectus, which is accompanied by
the Prospectus of California Fund dated May 1, 1995, as supplemented July 3,
1995 (EXHIBIT B), sets forth information that you should know before approving
the Reorganization. The Prospectus of California Portfolio dated January 1, 1995
is incorporated herein by reference and is available, upon oral or written
request and at no charge, from California Portfolio.
A Statement of Additional Information dated July 28, 1995 relating to this
Proxy Statement and Prospectus, and containing additional information about each
of California Fund and California Portfolio, including historical financial
statements, is on file with the Securities and Exchange Commission ("SEC"). It
is available, upon oral or written request and at no charge, from California
Fund. The Statement of Additional Information is incorporated by reference into
this Prospectus.
SHARES OF CALIFORNIA FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION, AND THE SHARES OF
CALIFORNIA FUND 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.
The date of this Proxy Statement and Prospectus is July 28, 1995.
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TABLE OF CONTENTS
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PAGE
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INTRODUCTION................................................ 1
SUMMARY..................................................... 2
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 13
INFORMATION CONCERNING THE MEETING.......................... 13
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION.... 15
CAPITALIZATION.............................................. 23
COMPARATIVE PERFORMANCE INFORMATION......................... 24
BUSINESS OF CALIFORNIA FUND................................. 26
General................................................ 26
Investment Objective and Policies...................... 26
Portfolio Management................................... 26
Trustees............................................... 26
Investment Adviser and Distributor..................... 26
Expenses............................................... 26
Custodian and Transfer Agent........................... 26
California Fund Class A Shares......................... 26
Purchase of California Fund Class A Shares............. 26
Redemption of California Fund Class A Shares........... 27
Dividends, Distributions and Taxes..................... 27
BUSINESS OF CALIFORNIA PORTFOLIO............................ 27
General................................................ 27
Investment Objective and Policies...................... 27
Portfolio Management................................... 27
Trustees............................................... 27
Investment Adviser and Distributor..................... 27
Expenses............................................... 28
Custodian and Transfer Agent........................... 28
California Portfolio Shares............................ 28
Purchase of California Portfolio Shares................ 28
Redemption of California Portfolio Shares.............. 28
Dividends, Distributions and Taxes..................... 28
EXPERTS..................................................... 28
AVAILABLE INFORMATION....................................... 29
</TABLE>
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EXHIBITS
A -- Agreement and Plan of Reorganization by and between John Hancock
Tax-Exempt Series Fund, on behalf of California Portfolio, and John
Hancock California Tax-Free Income Fund (attached hereto).
B -- Prospectus of John Hancock California Tax-Free Income Fund, dated May
1, 1995, as supplemented July 3, 1995 (attached hereto).
C -- Annual Report to Shareholders of John Hancock California Tax-Free
Income Fund, dated August 31, 1994 (included herewith).
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PROXY STATEMENT AND PROSPECTUS
FOR SPECIAL MEETING OF SHAREHOLDERS OF
CALIFORNIA PORTFOLIO
TO BE HELD ON SEPTEMBER 8, 1995
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies by the Board of Trustees of the Trust (the "Board of
Trustees"). The proxies will be voted at the Special Meeting of Shareholders
(the "Meeting") of California Portfolio to be held at 101 Huntington Avenue,
Boston, Massachusetts 02199 on Friday, September 8, 1995 at 9:00 a.m., Boston
time, and at any adjournment or adjournments of the Meeting. The purposes of the
Meeting are set forth in the accompanying Notice of Special Meeting of
Shareholders.
This Proxy Statement and Prospectus incorporates by reference the
prospectus of California Portfolio, dated January 1, 1995 (the "California
Portfolio Prospectus"), and includes the prospectus of California Fund, dated
May 1, 1995, as supplemented July 3, 1995 (the "California Fund Prospectus").
The Annual Report to Shareholders of California Fund, dated December 31, 1994,
is included with this Proxy Statement and Prospectus. These materials will be
mailed to shareholders of California Portfolio on or after July 28, 1995.
California Portfolio's most recent Semi-Annual Report to Shareholders was
previously sent to shareholders on or about April 30, 1995.
As of June 30, 1995, 4,101,762.042 shares of beneficial interest of
California Portfolio were outstanding.
All properly executed proxies received by management prior to the Meeting,
unless revoked, will be voted at the Meeting according to the instructions on
the proxies. If no instructions are given, shares of California Portfolio
represented by proxies will be voted FOR the proposal (the "Proposal") to
approve the Agreement and Plan of Reorganization (the "Agreement") between the
Trust, on behalf of California Portfolio, and California Fund.
The Board of Trustees knows of no business that will be presented for
consideration at the Meeting other than what is mentioned in the immediately
preceding paragraph. If other business is properly brought before the Meeting,
proxies will be voted according to the best judgment of the persons named as
proxies.
In addition to the mailing of these proxy materials, proxies may be
personally solicited by Trustees, officers and employees of California
Portfolio; by personnel of California Portfolio's investment adviser, John
Hancock Advisers, Inc., California Portfolio's transfer agent, John Hancock
Investor
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Services Corporation ("Investor Services"); by broker-dealer firms; or by a
professional solicitation organization, in person or by telephone. California
Portfolio and California Fund (each, a "Fund" and collectively, the "Funds")
will each bear its own fees and expenses in connection with the Reorganization
discussed in this Proxy Statement and Prospectus.
The information concerning California Fund in this Proxy Statement and
Prospectus has been supplied by California Fund. The information regarding
California Portfolio in this Proxy Statement and Prospectus has been supplied by
the Trust.
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus. The summary is qualified by reference to
the more complete information contained in this Proxy Statement and Prospectus,
and in the Exhibits attached and included with this document. Please read this
entire Proxy Statement and Prospectus carefully.
REASONS FOR THE PROPOSED REORGANIZATION
The Trust's Board of Trustees has determined that the proposed
Reorganization is in the best interests of California Portfolio and its
shareholders. In making this determination, the Trustees considered several
relevant factors, including (1) the fact that the investment objectives and
policies of California Portfolio and California Fund are generally similar, (2)
the likelihood that the Reorganization will result in improved economies of
scale and a corresponding decrease in the expenses payable by California
Portfolio and, indirectly, its shareholders (without giving effect to the
voluntary expense limitations currently in effect for both Funds) and (3) the
fact that combining the Funds' assets into a single portfolio will enable
California Fund to achieve greater diversification than California Portfolio is
now able to achieve. The Trust's Board of Trustees believes that the California
Fund Class A Shares received in the Reorganization will provide existing
California Portfolio shareholders with substantially the same investment
advantages that they currently enjoy at a comparable level of risk. For a more
detailed discussion of the reasons for the proposed Reorganization, see
"Proposal to Approve the Agreement and Plan of Reorganization--Reasons For The
Proposed Reorganization."
THE FUNDS' EXPENSES
Both Funds are subject to various fees and expenses. The table set forth
below shows the shareholder transaction and operating expenses of shares of
California Portfolio and Class A shares of California Fund. The table also shows
the pro forma operating expenses of Class A shares of California Fund, which
assume that the proposed reorganization took place on December 31,
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1994. All data reflect current fees and expenses, including temporary agreements
by the Adviser to limit both Funds' expenses.
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CALIFORNIA
CALIFORNIA FUND CLASS A
PORTFOLIO SHARES
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SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on
purchases (as a percentage of
offering price)..................... 4.50% 4.50%
Maximum sales charge imposed on
reinvested dividends................ None None
Maximum deferred sales charge*........ None None
Redemption fee+....................... None None
Exchange fee.......................... None None
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CALIFORNIA
CALIFORNIA FUND CLASS A PRO
PORTFOLIO SHARES FORMA
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ANNUAL FUND OPERATING EXPENSES
(as a percentage of net assets)
Management Fee (after expense
limitations)**...................... 0.17% 0.41% 0.41 %
12b-1 Fee............................. 0.30%*** 0.15% 0.15 %
Other Expenses++ (after expense
limitations)**...................... 0.23% 0.19% 0.19 %
----- ----- -----
TOTAL FUND OPERATING
EXPENSES**..................... 0.70% 0.75% 0.75 %
</TABLE>
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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 in the event of certain redemption transactions within
one year of purchase.
** Expenses shown reflect voluntary and temporary agreements by the Adviser to
limit both Funds' expenses. Without these limitations, the expense
categories as a percentage of average net assets would be: California
Portfolio: management fee--0.50%; and total operating expenses--1.03%;
California Fund Class A shares: management fee--0.55%; and total operating
expenses--0.89%; Pro forma: management fee--0.55%; and total operating
expenses--0.89%.
*** The amount of the 12b-1 fee used to cover service expenses is up to 0.25% of
California Portfolio's average net assets, and the remaining portion is used
to cover distribution expenses.
+ Redemption by wire fee (currently $4.00) not included.
++ Other expenses include transfer agent, legal, audit, custody and other
expenses.
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If the proposed Reorganization is consummated, the actual total operating
expenses of California Fund may vary from the pro forma operating expenses
indicated in the above table and footnote(**).
THE FUNDS' INVESTMENT ADVISER
John Hancock Advisers, Inc. (the "Adviser") acts as investment adviser to
both Funds.
BUSINESS OF CALIFORNIA PORTFOLIO
California Portfolio is a non-diversified series of the Trust, an open-end
management investment company organized as a Massachusetts business trust in
1987. As of December 31, 1994, California Portfolio's net assets were
approximately $45,314,950. Dianne Sales-Singer is the portfolio manager of
California Portfolio. Ms. Sales-Singer will continue to serve as California
Portfolio's portfolio manager until the Reorganization.
BUSINESS OF JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
California Fund is a diversified, open-end management investment company
organized as a Massachusetts business trust in 1989. As of December 31, 1994,
California Fund's net assets were approximately $318,948,153. All investment
decisions for California Fund are made by the Adviser's tax-exempt fixed-income
team. No single person is primarily responsible for making recommendations to
the team. The Adviser's tax-exempt fixed-income team will continue to make all
investment decisions for California Fund after the Reorganization.
COMPARISON OF THE INVESTMENT OBJECTIVES AND POLICIES OF CALIFORNIA PORTFOLIO AND
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
California Portfolio. The investment objective of California Portfolio is
to provide current income that is excludable from gross income for Federal
income tax purposes and is exempt from California personal income tax. At least
80% of the Portfolio's net assets (taken at market value) consist of municipal
bonds and notes and other debt instruments, whose interest is excludable from
gross income for Federal income tax purposes and is exempt from California
personal income tax (collectively, "California Tax-Exempt Securities").
California Portfolio may also invest in U.S. Government securities, taxable
commercial paper, bank obligations, and cash equivalents and engage in hedging
and nonhedging transactions in futures contracts and options on futures
contracts.
California Fund. The investment objective of California 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.
Under normal market conditions, at least 80% of the Fund's total
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assets are invested in California Tax-Exempt Securities. During normal
investment conditions, a substantial portion of California Fund's assets will be
invested in municipal bonds (without regard to maturities) and other long-term
obligations. California Fund may also invest in U.S. Government securities,
non-California tax-exempt securities, commercial paper, bank obligations and
repurchase agreements and engage in hedging transactions in options on debt
securities and municipal bond indices, interest rate futures and options on such
futures.
California Fund's and California Portfolio's respective investment
objectives and 80% policies are designated as fundamental and therefore cannot
be changed without shareholder approval.
In considering whether to approve the Reorganization, you should consider
the differences between the two Funds' investment objectives and policies. For a
discussion of the risks associated with an investment in the Funds, see "Risk
Factors and Special Considerations."
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CALIFORNIA PORTFOLIO CALIFORNIA FUND
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Investment Objective is to provide Objective is to provide as
Objective current income that is high a level of current
excludable from gross income income exempt from Federal
for Federal income tax income taxes and California
purposes and exempt from the personal income taxes as is
personal income tax of consistent with preservation
California. California of capital.
Portfolio seeks to provide
the maximum level of
tax-exempt income that is
consistent with preservation
of capital.
Primary At least 80% of California At least 80% of California
Investments Portfolio's net assets in Fund's total assets in the
the following California following California
Tax-Exempt Securities: (1) Tax-Exempt Securities, with
bonds rated at least A by an emphasis on municipal
Standard & Poor's Ratings bonds and other long- term
Group ("S&P"), Moody's obligations: (1) bonds rated
Investors Service, Inc. within the five highest rat-
("Moody's") or Fitch ing categories by S&P,
Investors Service, Inc. Moody's or Fitch, provided
("Fitch") (or unrated bonds that no more than 20% of
issued by an issuer with California Fund's assets
outstanding A-rated bonds); will be invested in bonds
(2) up to one-third of rated lower than BBB or, if
California Portfolio's total unrated, determined to be of
assets in bonds rated BBB, comparable quality by the
Baa, BB or Ba by S&P, Adviser; (2) notes and
Moody's or Fitch or, if commercial paper rated
unrated, determined by the within the two highest rat-
Adviser to be of comparable ing categories by S&P,
quality; (3) notes of Moody's or Fitch; (3)
issuers having outstanding participation interests
tax-exempt bonds rated not rated at least A (or issued
lower than A, notes by an issuer with
guaranteed by the U.S. outstanding A-rated bonds)
Government or rated MIG-1 or by S&P, Moody's or Fitch;
MIG-2 by Moody's or unrated and (4) unrated bonds, notes
notes determined by the and commercial paper
Adviser to be of comparable determined by the Adviser to
quality; and (4) commercial be of comparable quality to
paper rated at least A-2, permitted rated invest-
P-2 or F-2 by S&P, Moody's ments, provided that
or Fitch or, if unrated, California Fund may not
determined by the Adviser to invest more than 25% of its
be of comparable quality. assets in unrated obli-
These investments may gations. These investments
include variable rate and may include variable rate
floating rate obligations. and floating rate
obligations.
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CALIFORNIA PORTFOLIO CALIFORNIA FUND
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Other California Portfolio may California Fund may purchase
Investments purchase securities on a securities on a forward
forward commitment or commitment or when-issued
when-issued basis and may basis and may invest in
invest in U.S. Government private activity bonds and
securities; private activity the following short- term
bonds and taxable com- instruments: (1) non-
mercial paper meeting the California tax-exempt
above credit quality securities; (2) U.S.
standards; obligations of Government securities; (3)
banks with at least taxable commercial paper
$1,000,000,000 of assets; meeting the above credit
and cash equivalents, quality standards; (4)
including certificates of certificates of deposit and
deposit, bankers' bankers' acceptances of
acceptances and repurchase domestic banks with assets
agreements. California of $1,000,000,000 or more;
Portfolio may also invest in and (5) repurchase
illiquid, restricted and agreements on securities in
Rule 144A securities, which California Fund may
subject to a 10% limit on invest (collectively,
illiquid investments. This "Short-Term Instruments").
10% limit is a fundamental California Fund may also
policy and therefore cannot invest in illiquid
be changed without securities and Rule 144A
shareholder approval. restricted securities,
subject to a 10% limit on
illiquid investments and a
10% limit on Rule 144A
restricted securities.
Permitted Futures contracts and Variable and floating rate
Investments in options on futures contracts obligations. Also options on
Derivative to hedge against changes in debt securities and
Instruments securities prices and municipal bond indices,
interest rates or for interest rate and municipal
speculative purposes. Also bond index futures and op-
variable and floating rate tions on such futures to
obligations. hedge against changes in
securities prices and
interest rates.
Diversification California Portfolio is not California Fund is
and Industry diversified but does not diversified, and does not
Concentration concentrate more than 25% of concentrate more than 25% of
its assets in any one its assets in any one
industry. industry.
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CALIFORNIA PORTFOLIO CALIFORNIA FUND
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Temporary When the Adviser determines When the Adviser determines
Defensive that temporary defensive that temporary defensive
Investments investments are appropriate, investments are appropriate,
California Portfolio may California Fund may invest
invest up to 50% of its net more than 20% of its assets
assets in cash, short-term in Short-Term Instruments
U.S. Government securities (as defined above), as long
and commercial paper and as at the end of each quar-
bank obligations meeting the ter of its taxable year,
requirements described these investments do not
above. exceed 50% of its assets.
</TABLE>
FORM OF ORGANIZATION
California Portfolio is one of three separate series of the Trust, a
Massachusetts business trust. California Fund is a Massachusetts business trust.
California Fund has authorized and outstanding Class A and Class B shares.
California Portfolio has authorized and outstanding only one class of shares,
which are similar to Class A shares (but not so designated).
Each share of a Fund represents an equal proportionate interest in the
assets belonging to that Fund. The liabilities attributable to California
Portfolio are not charged against the assets of any other series of the Trust.
Shares of California Portfolio and each other series of the Trust are voted
separately with respect to matters pertaining to California Portfolio or any
such series, but all shares vote together for the election of the Trust's
Trustees and the ratification of the Trust's independent accountants.
The shares of each class of California Fund represent an interest in the
same portfolio of investments of California Fund. Except as stated below, each
class of California Fund has equal rights as to voting, redemption, dividends
and liquidation. Each class bears different distribution and transfer agent fees
and may bear other expenses properly attributable to the particular class. Class
A and Class B shareholders of California Fund have exclusive voting rights with
regard to the Rule 12b-1 distribution plan covering their class of shares.
Shares of California Portfolio and Class A shares of California Fund are
offered with a front-end sales charge. Shares of California Portfolio are
subject to a Rule 12b-1 fee of 0.30% of the Portfolio's average daily net
assets, of which up to 0.25% of these average daily net assets is for service
expenses and the remainder is for distribution expenses. Class A shares of
California Fund are subject to a Rule 12b-1 fee of 0.15% of the average daily
net assets attributable to Class A shares.
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As part of the Reorganization, Class A shares of California Fund will be
issued to California Portfolio and then distributed by it to California
Portfolio's shareholders.
SALES CHARGES AND DISTRIBUTION AND SERVICE FEES
California Portfolio imposes an initial sales charge on its shares and
California Fund imposes an initial sales charge on its Class A shares as
described above in the table under the caption "The Funds' Expenses". An initial
sales charge does not apply to shares acquired through the reinvestment of
dividends from net investment income or capital gain distributions.
Class A shares of California Fund acquired by California Portfolio's
shareholders pursuant to the Reorganization will not be subject to any initial
sales charge or CDSC. However, the CDSC imposed upon certain redemptions within
one year of purchase (referred to above) will continue to apply to the Class A
shares of California Fund issued in the Reorganization. The holding period for
determining the application of this CDSC will be calculated from the date the
California Portfolio shares were issued.
Both Funds have adopted distribution plans pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). Under
its Rule 12b-1 plan, California Portfolio may pay fees to John Hancock Funds,
Inc. ("John Hancock Funds") to reimburse distribution and service expenses
incurred in connection with the Portfolio's shares. These fees are payable at an
annual rate of up to 0.30% of California Portfolio's average daily net assets.
Of the fee payable by California Portfolio, up to 0.25% of net assets may be for
service expenses and the remainder will be for distribution expenses.
Under its Rule 12b-1 Plan for Class A shares, California Fund may pay fees
to John Hancock Funds to reimburse distribution and service expenses incurred in
connection with the Fund's Class A shares. These fees are payable at an annual
rate of up to 0.15% of California Fund's average daily net assets attributable
to California Fund's Class A shares.
The Board of Trustees of California Fund has determined that, if the
Reorganization is consummated, unreimbursed distribution and shareholder service
expenses originally incurred in connection with California Portfolio's shares
will be reimbursable under California Fund's Rule 12b-1 Plan. As of December 31,
1994, the unreimbursed distribution and shareholder service expenses for Class A
shares of California Fund and shares of California Portfolio were $0 and
$98,304, respectively. See "Unreimbursed Distribution and Shareholder Expenses"
below.
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PURCHASES AND EXCHANGES
Shares of California Fund may be purchased through certain broker-dealers
and through John Hancock Funds at the public offering price, which is based on
the next determined net asset value per share, plus any applicable sales charge.
The minimum initial investment in California Fund is $1,000 ($250 for group
investments and retirement plans). In anticipation of the Reorganization, after
the Record Date, no new accounts may be opened in California Portfolio. Existing
shareholders of California Portfolio may continue to purchase shares of
California Portfolio after the Record Date.
Shareholders of California Fund may exchange their shares at net asset
value for shares of the same class of certain other funds managed by the
Adviser. Shareholders of California Portfolio may exchange their shares at net
asset value for Class A shares of certain other funds managed by the Adviser.
Shares of any fund acquired in this manner will incur a CDSC, if still
applicable, upon redemption. The exchange privilege is available only in those
states where exchanges can be made legally.
DISTRIBUTION PROCEDURES
It is the policy of both Funds to pay dividends monthly from net investment
income. Each Fund also distributes annually all of its other income, including
both net realized short-term and long-term capital gains, if any. California
Portfolio will make, immediately prior to the Closing Date (as defined below), a
distribution of all of its net income and net realized capital gains, if any,
not previously distributed.
REINVESTMENT OPTIONS
Unless an election is made to receive cash, the shareholders of both Funds
automatically reinvest all of their respective dividends and capital gain
distributions in additional shares. These reinvestments are made at the net
asset value per share and are not subject to any sales charge.
REDEMPTION PROCEDURES
Shares of both Funds may be redeemed on any business day at a price equal
to the net asset value of the shares next determined after receipt of a
redemption request in good order, less any applicable CDSC. Alternatively,
shareholders of both Funds may sell their shares through securities dealers, who
may charge a fee. Redemptions and repurchases of certain shares of California
Portfolio and California Fund are subject to the applicable CDSC. Shares of
California Portfolio may be redeemed up to and including the Closing Date (as
defined below).
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REORGANIZATION
Effect of the Reorganization. Pursuant to the terms of the Agreement, the
proposed Reorganization will consist of the acquisition by California Fund of
all the assets of California Portfolio in exchange solely for (i) the assumption
by California Fund of all the liabilities of California Portfolio and (ii) the
issuance of California Fund Class A shares equal to the value of these assets,
less the amount of these liabilities (the "California Fund Class A Shares"), to
California Portfolio. As part of the liquidation process, California Portfolio
will immediately distribute to its shareholders these California Fund Class A
Shares in exchange for their shares of California Portfolio. Consequently,
shareholders of California Portfolio will become Class A shareholders of
California Fund. After completion of the Reorganization, the existence of
California Portfolio will be terminated.
The Reorganization will become effective as of 5:00 p.m. on the closing
date, scheduled for September 15, 1995, or another date on or before December
31, 1995 as authorized representatives of the Funds may agree (the "Closing
Date"). The California Fund Class A Shares issued to California Portfolio for
distribution to California Portfolio's shareholders will have an aggregate net
asset value equal to the aggregate net asset value of California Portfolio. For
purposes of the Reorganization, the asset values of California Portfolio and
California Fund Class A Shares will be determined as of the close of business
(4:00 p.m. Eastern Time) on the Closing Date.
The Trust's Board of Trustees, including the Trustees not affiliated with
either Fund, unanimously approved the Reorganization, and determined that it was
in the best interests of California Portfolio and that the interests of
California Portfolio's shareholders will not be materially diluted as a result
of the Reorganization. Similarly, California Fund's Board of Trustees, including
the Trustees not affiliated with either Fund, unanimously approved the
Reorganization, and determined that it was in the best interests of California
Fund and that the interests of California Fund's shareholders will not be
materially diluted as a result of the Reorganization. For a discussion of the
factors considered by the Trust's Board of Trustees, see "Proposal to Approve
the Agreement and Plan of Reorganization--Reasons for the Proposed
Reorganization."
Tax Considerations. The consummation of the Reorganization is subject to
the receipt of an opinion of Hale and Dorr, counsel to the Funds, satisfactory
to the Trust and California Fund and substantially to the effect that:
(a) the acquisition by California Fund of all of California Portfolio's
assets solely in exchange for the issuance of California Fund Class A Shares to
California Portfolio and the assumption of all of California Portfolio's
liabilities by California Fund, followed by the distribution by California
Portfolio, in liquidation of California Portfolio, of California Fund Class A
Shares to the
11
<PAGE> 17
shareholders of California Portfolio in exchange for their shares of beneficial
interest of California Portfolio and the termination of California Portfolio,
will constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and California Portfolio
and California Fund will each be "a party to a reorganization" within the
meaning of Section 368(b) of the Code;
(b) no gain or loss will be recognized by California Portfolio upon (i) the
transfer of all of its assets to California Fund (in the exchange described
above) and (ii) the distribution by California Portfolio of California Fund
Class A Shares to California Portfolio's shareholders;
(c) no gain or loss will be recognized by California Fund upon the receipt
of California Portfolio's assets in the exchange described above;
(d) the basis of the assets of California Portfolio acquired by California
Fund will be, in each instance, the same as the basis of those assets in the
hands of California Portfolio immediately prior to the transfer;
(e) the tax holding period of the assets of California Portfolio in the
hands of California Fund will, in each instance, include California Portfolio's
tax holding period for those assets;
(f) the shareholders of California Portfolio will not recognize gain or
loss upon the exchange of all of their California Portfolio shares for
California Fund Class A Shares as part of the Reorganization;
(g) the basis of the California Fund Class A Shares received by California
Portfolio shareholders in the Reorganization will be the same as the basis of
the California Portfolio shares surrendered in exchange therefor; and
(h) the tax holding period of the California Fund Class A Shares received
by California Portfolio shareholders will include, for each shareholder, the tax
holding period for the California Portfolio shares surrendered in exchange
therefor, provided the California Portfolio shares were held as capital assets
on the date of the exchange.
THE MEETING
Time, Place and Date. The Meeting will be held on Friday, September 8,
1995, at 101 Huntington Avenue, Boston, Massachusetts 02199, at 9:00 a.m. Boston
time.
Record Date. The Record Date for determining shareholders entitled to
notice of and to vote at the Meeting is July 14, 1995.
Vote Required for Approval. Approval of the Agreement by the shareholders
of California Portfolio requires the affirmative vote of not less than a
"majority of the outstanding voting securities" (as defined in the Investment
12
<PAGE> 18
Company Act) of California Portfolio. The Reorganization does not require the
approval of California Fund's shareholders. See "Proposal to Approve the
Agreement and Plan of Reorganization--Voting Rights and Required Vote."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Please see the California Fund Prospectus and the California Portfolio
Prospectus for a more complete description of each Fund's investment objectives
and policies, as well as their risk factors.
In deciding whether to approve the Reorganization, you should consider the
similarities and differences between the investment objectives and policies and
risk factors of the Funds. See "Summary--Comparison of the Investment Objectives
and Policies of California Portfolio and John Hancock California Tax-Free Income
Fund."
Both Funds are intended for long-term investors who can accept the risks
associated with investing primarily in fixed income securities. If either
California or any of its local governmental entities is unable to meet its
financial obligations, the income derived by both Funds, their respective net
asset values and their respective abilities to preserve or realize capital
appreciation or maintain liquidity could be adversely affected.
Because of its emphasis on bonds and other long-term California Tax-Exempt
Securities, California Fund may be more susceptible than California Portfolio to
the effects of changes in interest rates. Generally, a rise in interest rates
will result in a decrease in the Fund's net asset value, while a decline will
result in an increase in the Fund's net asset value.
INFORMATION CONCERNING THE MEETING
SOLICITATION, REVOCATION AND USE OF PROXIES
The presence (in person or by proxy) of a majority of California
Portfolio's outstanding shares that are entitled to vote at the Meeting will be
a quorum for the transaction of business. A California Portfolio shareholder
executing and returning a proxy has the power to revoke it at any time before it
is exercised, by filing a written notice of revocation with California
Portfolio's transfer agent, John Hancock Investor Services Corporation, P.O. Box
9116, Boston, Massachusetts 02205-9116, or by returning a duly executed proxy
with a later date before the time of the Meeting. Any shareholder who has
executed a proxy but is present at the Meeting and wishes to vote in person may
revoke his or her proxy by notifying the Secretary of the Trust (without
complying with any formalities) at any time before it is voted. Presence at the
Meeting alone will not serve to revoke a previously executed and returned proxy.
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<PAGE> 19
If a quorum is not present in person or by proxy at the time any session of
the Meeting is called to order, the persons named as proxies may vote those
proxies that have been received to adjourn the Meeting to a later date. If a
quorum is present but there are not sufficient votes in favor of the Proposal,
the persons named as proxies may propose one or more adjournments of the Meeting
to permit further solicitation of proxies with respect to the Proposal. Any
adjournment will require the affirmative vote of a majority of the shares of
California Portfolio represented in person or by proxy at the session of the
Meeting to be adjourned. If an adjournment of the Meeting is proposed because
there are not sufficient votes in favor of the Reorganization, even though a
quorum is present at the Meeting, the persons named as proxies will vote those
proxies in favor of the Reorganization in favor of adjournment, and will vote
those proxies against the Reorganization against adjournment.
In addition to the solicitation of proxies by mail or in person, the Trust
may also arrange to have votes recorded by telephone by officers and employees
of the Trust or by personnel of the Adviser or Investor Services. The telephone
voting procedure is designed to authenticate a shareholder's identity, to allow
a shareholder to authorize the voting of shares in accordance with the
shareholder's instructions and to confirm that the voting instructions have been
properly recorded. If these procedures were subject to a successful legal
challenge, such votes would not be counted at the Meeting. The Trust has not
sought to obtain an opinion of counsel on this matter and is unaware of any such
challenge at this time. A shareholder would be called on a recorded line at the
telephone number the Trust has in its records for the account and would be asked
the shareholder's Social Security number or other identifying information. The
shareholder would then be given an opportunity to authorize proxies to vote his
shares at the Meeting in accordance with the shareholder's instructions. To
ensure that the shareholder's instructions have been recorded correctly, the
shareholder will also receive a confirmation of the voting instructions in the
mail. A special toll-free number will be available in case the voting
information contained in the confirmation is incorrect. If the shareholder
decides after voting by telephone to attend the Meeting, the shareholder can
revoke the proxy at that time and vote the shares at the Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only California Portfolio shareholders of record at the close of business
on July 14, 1995 (the "Record Date") are entitled to notice of and to vote at
the Meeting and any adjournment of the Meeting. At the close of business on June
30, 1995, 4,101,762.042 shares of beneficial interest of California Portfolio
were outstanding, and 24,980,447.307 Class A shares of beneficial interest of
California Fund were outstanding.
14
<PAGE> 20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF CALIFORNIA PORTFOLIO AND CALIFORNIA FUND
To the knowledge of the Trust, as of June 30, 1995, no person owned of
record or beneficially 5% or more of the outstanding shares of beneficial
interest of California Portfolio. To the knowledge of California Fund, as of
June 30, 1995, only the following person owned of record or beneficially 5% or
more of its outstanding Class A shares of beneficial interest: Merrill, Lynch,
Pierce, Fenner & Smith Inc., Jacksonville, FL (7.79%). On the basis of its
present holdings, Merrill, Lynch, Pierce, Fenner & Smith Inc. will own
approximately 6.56% of California Fund's Class A shares immediately after the
Reorganization (if the Reorganization is consummated).
As of June 30, 1995, the Trustees and officers of the Trust, as a group,
owned in the aggregate less than 1% of the outstanding shares of beneficial
interest of California Portfolio. As of June 30, 1995, the Trustees and officers
of California Fund, as a group, owned in the aggregate less than 1% of the
outstanding shares of beneficial interest of California Fund.
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
GENERAL
The shareholders of California Portfolio are being asked to approve the
Agreement, a copy which is attached as Exhibit A. The Reorganization will
consist of: (a) the transfer of all of California Portfolio's assets to
California Fund, in exchange solely for the issuance of California Fund Class A
Shares to California Portfolio and the assumption of California Portfolio's
liabilities by California Fund, (b) the subsequent distribution by California
Portfolio, as part of its liquidation, of the California Fund Class A Shares to
California Portfolio's shareholders and (c) the termination of California
Portfolio's existence. The California Fund Class A Shares issued upon the
consummation of the Reorganization will have an aggregate net asset value equal
to the aggregate value of the assets attributable to California Portfolio's
shares, less liabilities attributable to California Portfolio's shares. As noted
above, the asset values of California Portfolio and California Fund will be
determined at the close of business (4:00 p.m. Eastern Time) on the Closing Date
for purposes of the Reorganization. See "Description of Agreement" below.
Pursuant to the Agreement, California Portfolio will liquidate and
distribute the California Fund Class A Shares received, as described above, pro
rata to the shareholders of record determined as of the close of regular trading
on the New York Stock Exchange on the Closing Date. The result of the transfer
of assets will be that California Fund will add to its portfolio the net
15
<PAGE> 21
assets of California Portfolio. Shareholders of California Portfolio will become
Class A shareholders of California Fund.
The Agreement and the Reorganization were unanimously approved by the
Trust's Board of Trustees on behalf of California Portfolio at a meeting held on
May 1, 1995. The Agreement and the Reorganization were unanimously approved by
the Board of Trustees of California Fund at a meeting held on May 16, 1995.
REASONS FOR THE PROPOSED REORGANIZATION
The Trust's Board of Trustees believes that the proposed Reorganization
will be advantageous to the shareholders of California Portfolio in several
respects. The Board of Trustees considered the following matters, among others,
in approving the Proposal.
First, the Board of Trustees believes that it is not advantageous to
operate and market California Portfolio separately from California Fund because
their investment objectives and policies are substantially identical. For a
complete description of California Fund's investment objective and policies, see
the California Fund Prospectus attached as EXHIBIT B.
Second, the Board of Trustees considered the fact that California Portfolio
is substantially smaller than California Fund. The Board of Trustees determined
that the existence of a larger competing fund within the same fund complex and
with substantially identical investment characteristics is likely to impede the
marketing and asset growth of California Portfolio.
Third, the Board of Trustees considered that shareholders may be better
served by a fund offering greater diversification. As a diversified fund under
the Investment Company Act, California Fund may not concentrate its assets in
the securities of a single issuer to the same extent as California Portfolio,
which is not a diversified fund under the Investment Company Act. In addition,
to the extent that the Funds' assets are combined into a single portfolio and a
larger asset base is created as a result of the Reorganization, greater
diversification of California Fund's investment portfolio can be achieved than
is currently possible in either Fund. Greater diversification is expected to be
beneficial to shareholders of both Funds, because it may reduce the negative
effect which the adverse performance of any one security may have on the
performance of the entire portfolio.
Fourth, the Board of Trustees believes that the California Fund Class A
Shares received in the Reorganization will provide existing California Portfolio
shareholders with substantially the same investment advantages that they
currently enjoy at a comparable level of risk. The Board of Trustees also
considered the performance history of each Fund.
16
<PAGE> 22
Fifth, a combined fund offers economies of scale that should have a
positive effect on the expenses borne indirectly by the shareholders of
California Portfolio. Both Funds incur substantial costs for accounting, legal,
transfer agency services, insurance, and custodial and administrative services.
The Trust's Board of Trustees expects that the Reorganization will result in a
decrease in the expenses payable by California Portfolio (and hence indirectly
borne by its shareholders), without giving effect to the voluntary and temporary
expense limitations currently in effect for both Funds. Giving effect to the
expense limitations currently in effect, the Reorganization will result in an
increase in estimated total operating expenses attributable to shareholders of
California Portfolio.
In determining that the Reorganization is in the best interests of
California Portfolio and the interests of its shareholders, the Board of
Trustees considered the fact that the Adviser will receive certain benefits from
the Reorganization. The Reorganization will result in a consolidated portfolio
management effort, and may result in time savings to the Adviser by reducing the
number of reports and regulatory filings that it needs to prepare. In addition,
the Reorganization is expected to reduce the amount by which the Adviser has
voluntarily and temporarily agreed to reduce the Funds' expenses.
UNREIMBURSED DISTRIBUTION AND SHAREHOLDER SERVICE EXPENSES
The Board of Trustees of California Fund has determined that, if the
Reorganization is consummated, distribution and shareholder service expenses
incurred in connection with shares of California Portfolio, and not reimbursed
under California Portfolio's Rule 12b-1 Plan, will be reimbursable expenses
under California Fund's Class A Rule 12b-1 Plan (the "assumption"). However, the
maximum aggregate amounts payable during any fiscal year under California Fund's
Class A Rule 12b-1 Plan (0.15% of average daily net assets attributable to Class
A shares) will not be affected by the assumption.
With respect to Class A shares of California Fund, the Reorganization and
the assumption will not result in a material increase on a pro forma basis in
the percentage that the unreimbursed expenses represent of the combined Funds'
net assets. As of December 31, 1994, California Fund had no unreimbursed
distribution and shareholder service expenses attributable to its Class A
shares. As of the same date, the unreimbursed distribution and shareholder
service expenses of California Portfolio were $98,304 (0.22% of California
Portfolio's net assets).
After the Reorganization, on a pro forma combined basis, the unreimbursed
distribution and shareholder service expenses of California Fund attributable to
Class A shares will be $98,304 (0.03% of California Fund's pro forma net assets
attributable to Class A shares).
17
<PAGE> 23
The assumption will have no immediate effect upon the payments made under
California Fund's Class A Rule 12b-1 Plan. California Fund is not obligated to
assure that these amounts are recouped by John Hancock Funds.
Unreimbursed distribution and shareholder service expenses do not currently
appear as an expense or liability in the financial statements of either Fund,
nor will they appear in the financial statements of California Fund after the
Reorganization until paid or accrued. Unreimbursed expenses do not enter into
the calculation of a Fund's net asset value or the formula for calculating Rule
12b-1 payments. Even in the event of termination or noncontinuance of California
Fund's Rule 12b-1 Plans, California Fund is not legally committed, and is not
required to commit, to the payment of any unreimbursed distribution and
shareholder service expenses. The staff of the SEC has not approved or
disapproved the treatment of the unreimbursed distribution and shareholder
service expenses described in this Proxy Statement.
BOARDS' EVALUATION AND RECOMMENDATION
On the basis of the factors described above and other factors, the Trust's
Board of Trustees, including a majority of the Trustees who are not "interested
persons" (as defined in the Investment Company Act) of California Portfolio,
determined that the Reorganization is in the best interests of California
Portfolio and that the interests of California Portfolio's shareholders will not
be materially diluted as a result of the Reorganization. On the same basis, the
Board of Trustees of California Fund, including a majority of the Trustees who
are not "interested persons" (as defined in the Investment Company Act) of
California Fund, determined that the Reorganization is in the best interests of
California Fund and that the interests of California Fund's shareholders will
not be materially diluted as a result of the Reorganization.
THE TRUSTEES OF CALIFORNIA PORTFOLIO RECOMMEND THAT SHAREHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION.
DESCRIPTION OF AGREEMENT
The following description of the Agreement is a summary, does not purport
to be complete, and is subject in all respects to the provisions of the
Agreement, and is qualified in its entirety by reference to the Agreement. A
copy of the Agreement is attached to this Proxy Statement and Prospectus as
Exhibit A and should be read in its entirety. Paragraph references are to
appropriate provisions of the Agreement.
Method of Carrying Out Reorganization. If California Portfolio
shareholders approve the Agreement, the Reorganization will be consummated
promptly after the various conditions to the obligations of each of the parties
18
<PAGE> 24
are satisfied (see Agreement, paragraphs 6 through 8). The Reorganization will
be completed on the Closing Date (as defined above).
On the Closing Date, California Portfolio will transfer all of its assets
to California Fund in exchange for California Fund Class A Shares with an
aggregate net asset value equal to the value of the assets delivered, less the
liabilities of California Portfolio assumed, as of the close of business on the
Closing Date (see Agreement, paragraphs 1 and 2).
The value of California Portfolio's assets and California Fund's net asset
value per Class A share will be determined according to the valuation procedures
set forth in California Fund's Declaration of Trust, By-laws and Prospectus (see
"Share Price" in the California Fund Prospectus). No initial sales charge or
CDSC will be imposed upon delivery of the California Fund Class A Shares in
exchange for the assets of California Portfolio.
Surrender of Share Certificates. California Portfolio shareholders whose
shares are represented by one or more share certificates should, prior to the
Closing Date, either surrender their certificates to California Portfolio or
deliver to California Portfolio an affidavit with respect to lost certificates,
in such form and accompanied by such surety bonds as California Portfolio may
require (collectively, an "Affidavit"). On the Closing Date, all certificates
which have not been surrendered will be deemed to be cancelled, will no longer
evidence ownership of California Portfolio's shares and will evidence ownership
of California Fund Class A Shares. Shareholders may not redeem or transfer
California Fund Class A Shares received in the Reorganization until they have
surrendered their California Portfolio share certificates or delivered an
Affidavit relating to them. Unless a shareholder specifically requests a share
certificate, California Fund will not issue share certificates in the
Reorganization.
Conditions Precedent to Closing. The obligation of California Portfolio to
consummate the Reorganization is subject to the satisfaction of certain
conditions precedent, including the performance by California Fund of all acts
and undertakings required under the Agreement and the receipt of all consents,
orders and permits necessary to consummate the Reorganization (see Agreement,
paragraphs 6 through 8).
The obligation of California Fund to consummate the Reorganization is
subject to the satisfaction of certain conditions precedent, including the
performance by the Trust and California Portfolio of all acts and undertakings
to be performed under the Agreement, the receipt of certain documents and
financial statements from California Portfolio and the receipt of all consents,
orders and permits necessary to consummate the Reorganization (see Agreement,
paragraphs 6 through 8).
19
<PAGE> 25
The obligations of both parties are subject to the receipt of approval and
authorization of the Agreement by the vote of not less than a majority of the
outstanding shares of beneficial interest of California Portfolio entitled to
vote (as described in the section captioned "Voting Rights and Required Vote"),
and the receipt of a favorable opinion of Hale and Dorr as to the federal income
tax consequences of the Reorganization (see Agreement, paragraph 8.6).
Termination of Agreement. The Agreement may be terminated, whether or not
approval of California Portfolio's shareholders has been obtained, by mutual
agreement of the parties. In addition, either party may terminate its
obligations under the Agreement at or prior to the Closing Date, because of a
material breach by the other party of any representations, warranties or
agreements contained in the Agreement, or if a condition precedent in the
Agreement has not been met.
Expenses of the Reorganization. California Fund and California Portfolio
will each be responsible for its own expenses incurred in connection with
entering into and carrying out the provisions of the Reorganization Agreement,
whether or not the Reorganization is consummated.
TAX CONSIDERATIONS
The consummation of the Reorganization is subject to the receipt of a
favorable opinion of Hale and Dorr, counsel to the Funds, satisfactory to the
Trust and California Fund and substantially to the effect that:
(i) The acquisition by California Fund of all of the assets of
California Portfolio solely in exchange for the issuance of California Fund
Class A Shares to California Portfolio and the assumption of all of
California Portfolio's liabilities by California Fund, followed by the
distribution by California Portfolio, in liquidation of California
Portfolio, of California Fund Class A Shares to the shareholders of
California Portfolio in exchange for their shares of beneficial interest of
California Portfolio and the termination of California Portfolio, will
constitute a "reorganization" within the meaning of Section 368(a) of the
Code, and California Portfolio and California Fund will each be "a party to
a reorganization" within the meaning of Section 368(b) of the Code;
(ii) no gain or loss will be recognized by California Portfolio upon
(a) the transfer of all of its assets to California Fund solely in exchange
for the issuance of California Fund Class A Shares to California Portfolio,
and the assumption of all of California Portfolio's liabilities by
California Fund; and (b) the distribution by California Portfolio of these
California Fund Class A Shares to the shareholders of California Portfolio;
20
<PAGE> 26
(iii) no gain or loss will be recognized by California Fund upon the
receipt of California Portfolio's assets solely in exchange for the
issuance of California Fund Class A Shares to California Portfolio and the
assumption of all of California Portfolio's liabilities by California Fund;
(iv) the basis of the assets of California Portfolio acquired by
California Fund will be, in each instance, the same as the basis of those
assets in the hands of California Portfolio immediately prior to the
transfer;
(v) the tax holding period of the assets of California Portfolio in
the hands of California Fund will, in each instance, include California
Portfolio's tax holding period for those assets;
(vi) the shareholders of California Portfolio will not recognize gain
or loss upon the exchange of all their California Portfolio shares solely
for California Fund Class A Shares as part of the Reorganization;
(vii) the basis of the California Fund Class A Shares received by the
California Portfolio shareholders in the Reorganization will be the same as
the basis of the California Portfolio shares surrendered in exchange
therefor; and
(viii) the tax holding period of the California Fund Class A Shares
received by the California Portfolio shareholders will include, for each
shareholder, the tax holding period for the California Portfolio shares
surrendered in exchange therefor, provided the California Portfolio shares
were held as capital assets on the date of the exchange.
VOTING RIGHTS AND REQUIRED VOTE
Each California Portfolio share is entitled to one vote. Approval of the
Proposal requires the affirmative vote of a majority of the outstanding voting
securities of California Portfolio. Under the Investment Company Act, this means
that, to be approved, the Proposal must receive the affirmative vote of the
lesser of (i) 67% or more of the outstanding shares of California Portfolio
present at the Meeting and entitled to vote, if the holders of more than 50% of
the outstanding shares of California Portfolio are present or represented by
proxy, or (ii) more than 50% of the outstanding shares of California Portfolio.
Shares of beneficial interest of California Portfolio represented in person
or by proxy (including shares which abstain or do not vote with respect to the
Proposal) will be counted for purposes of determining whether a quorum is
present at the meeting. Accordingly, an abstention from voting has the same
effect as a vote against the Proposal. However, if a broker or nominee holding
shares in "street name" indicates on the proxy card that it does not have
discretionary authority to vote on the Proposal, those shares will not be
considered as present and entitled to vote with respect to the Proposal.
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<PAGE> 27
Accordingly, a "broker non-vote" has no effect on the voting in determining
whether the Proposal has been adopted pursuant to item (i) above, provided that
the holders of more than 50% of the outstanding shares (excluding the "broker
non-votes") are present or represented. However, with respect to determining
whether the Proposal has been adopted pursuant to item (ii) above, because
shares represented by a "broker non-vote" are considered outstanding shares, a
"broker non-vote" has the same effect as a vote against the Proposal.
If the requisite approval of shareholders is not obtained, California
Portfolio will continue to engage in business as a series of a registered open-
end, management investment company and the Trust's Board of Trustees will
consider what further action may be appropriate.
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<PAGE> 28
CAPITALIZATION
The following table sets forth the capitalization of California Fund and
California Portfolio as of December 31, 1994, and the pro forma combined
capitalization of both California Fund and California Portfolio as if the
Reorganization had occurred on that date. The table reflects a pro forma
exchange ratio of approximately 1.1638 California Fund Class A Shares being
issued for each share of California Portfolio. If the Reorganization is
consummated, the actual exchange ratio on the Closing Date may vary from the
exchange ratio indicated due to changes in the market value of the portfolio
securities of both California Fund and California Portfolio between December 31,
1994 and the Closing Date, changes in the amount of undistributed net investment
income and net realized capital gains of California Fund and California
Portfolio during that period resulting from income and distributions, and
changes in the accrued liabilities of California Fund and California Portfolio
during the same period.
DECEMBER 31, 1994
<TABLE>
<CAPTION>
CALIFORNIA CALIFORNIA PRO FORMA
PORTFOLIO FUND COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
Net Assets........... $45,314,950 $241,583,058(1) $286,898,008
Net Asset Value
Per Share:......... $10.80 $9.28 $9.28
Shares
Outstanding:....... 4,196,941 26,034,286 30,917,669(2)
</TABLE>
- ---------------
(1) Excludes net assets attributable to Class B shares.
(2) If the Reorganization had taken place on December 31, 1994, California
Portfolio would have received 4,883,383 Class A shares of California Fund
which would have been available for distribution to California Portfolio's
shareholders. No assurance can be given as to the number of Class A shares
of California Fund that will be received by California Portfolio on the
Closing Date. The foregoing is merely an example of what California
Portfolio would have received and distributed had the Reorganization been
consummated on December 31, 1994 and should not be relied upon to reflect
the amount that will actually be received on the Closing Date.
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<PAGE> 29
COMPARATIVE PERFORMANCE INFORMATION
TOTAL RETURN
The average annual total return at the public offering price of California
Portfolio's shares for the one-year and five-year periods ended December 31,
1994 was (10.33)% and 5.36%, respectively. The average annual total return at
the public offering price of California Portfolio's shares for the period from
September 9, 1987 (commencement of operations) through December 31, 1994 was
7.04%.
The average annual total return at the public offering price of California
Fund's Class A shares for the one-year and five-year periods ended December 31,
1994 was (13.61)%, and 5.00%, respectively.
The average annual total return is determined by multiplying a hypothetical
initial investment of $1,000 in a class by the average annual compound rate of
return (including capital appreciation/depreciation, and dividends and
distributions paid and reinvested) attributable to that class for the stated
period and annualizing the result.
The table below indicates the total return (capital changes plus
reinvestment of all dividends and distributions) on a hypothetical investment of
$1,000 in shares of California Portfolio and Class A shares of California Fund
covering the indicated periods ending December 31, 1994. The data below
represent historical performance which should not be considered indicative of
future performance of either California Fund or California Portfolio.
Performance and net asset value of both California Portfolio and California Fund
will fluctuate such that shares, when redeemed, may be worth more or less than
their original cost.
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<PAGE> 30
VALUE OF A $1,000 INVESTMENT IN CALIFORNIA PORTFOLIO
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE OF
INVESTMENT
ON TOTAL RETURN TOTAL RETURN
AMOUNT DEC. 31, 1994 INCLUDING SALES CHARGE EXCLUDING SALES CHARGE
INVESTMENT OF INCLUDING ------------------------ ------------------------
INVESTMENT PERIOD DATE INVESTMENT SALES CHARGE CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
- -------------------------------- ---------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
From Inception (September 9,
1987)
to December 31, 1994.......... 9/9/87 $1,000 $1,646.68 64.67% 7.04% 72.41% 7.71%
5 years ended December 31,
1994.......................... 12/31/89 $1,000 $1,298.30 29.83% 5.36% 42.62% 7.36%
1 year ended December 31,
1994.......................... 12/31/93 $1,000 $ 896.75 (10.33)% (10.33)% (7.09)% (7.09)%
</TABLE>
VALUE OF A $1,000 INVESTMENT IN JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE OF
INVESTMENT
ON TOTAL RETURN TOTAL RETURN
AMOUNT DEC. 31, 1994 INCLUDING SALES CHARGE EXCLUDING SALES CHARGE
INVESTMENT OF INCLUDING ------------------------ ------------------------
INVESTMENT PERIOD DATE INVESTMENT SALES CHARGE CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
- -------------------------------- ---------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES:
5 years ended December 31,
1994.......................... 12/31/89 $1,000 $1,276.10 27.61% 5.00% 33.99% 6.03%
1 year ended December 31,
1994.......................... 12/31/93 $1,000 $ 863.91 (13.61)% (13.61)% (9.31)% (9.31)%
</TABLE>
25
<PAGE> 31
BUSINESS OF CALIFORNIA FUND
GENERAL
For a discussion of the organization and operation of California Fund, see
"Investment Objectives and Policies" and "Organization and Management of the
Fund" in the California Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of California Fund's investment objective and policies,
see "Investment Objectives and Policies" in the California Fund Prospectus.
PORTFOLIO MANAGEMENT
All investment decisions for California Fund are made by the Adviser's
tax-exempt fixed-income team. No single person is primarily responsible for
making recommendations to the team.
TRUSTEES
For a discussion of the responsibilities of California Fund's Board of
Trustees, see "Organization and Management of the Fund" in the California Fund
Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For a discussion regarding California Fund's investment adviser and
distributor, see "Organization and Management of the Fund," "How to Buy Shares"
and "Share Price" in the California Fund Prospectus.
EXPENSES
For a discussion of California Fund's expenses, see "Expense Information"
and "The Fund's Expenses" in the California Fund Prospectus.
CUSTODIAN AND TRANSFER AGENT
California Fund's custodian is Investors Bank & Trust Company. California
Fund's transfer agent is John Hancock Investor Services Corporation.
CALIFORNIA FUND CLASS A SHARES
For a discussion of the California Fund Class A Shares, see "Organization
and Management of the Fund" in the California Fund Prospectus.
PURCHASE OF CALIFORNIA FUND CLASS A SHARES
For a discussion of how Class A shares of California Fund may be purchased
or exchanged, see "How to Buy Shares," "Alternative Purchase Arrangements" and
"Additional Services and Programs" in the California Fund Prospectus.
26
<PAGE> 32
REDEMPTION OF CALIFORNIA FUND CLASS A SHARES
For a discussion of how Class A shares of California Fund may be redeemed,
see "How to Redeem Shares" in the California Fund Prospectus. Former
shareholders of California Portfolio whose shares are represented by share
certificates will be required to surrender their certificates for cancellation
or deliver an affidavit of loss accompanied by an adequate surety bond to
Investor Services in order to redeem California Fund Shares received in the
Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of California Fund's policy with respect to dividends,
distributions and taxes, see "Dividends and Taxes" in the California Fund
Prospectus.
BUSINESS OF CALIFORNIA PORTFOLIO
GENERAL
For a discussion of the organization and operation of California Portfolio,
see "Investment Objective and Policies" and "Organization and Management of the
Fund" in the California Portfolio Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of California Portfolio's investment objectives and
policies, see "Investment Objective and Policies" in the California Portfolio
Prospectus.
PORTFOLIO MANAGEMENT
Day-to-day management of California Portfolio is carried out by Dianne
Sales-Singer. Ms. Singer has been employed by the Adviser since 1989.
TRUSTEES
For a discussion of the responsibilities of the Trust's Board of Trustees,
see "Organization and Management of the Fund" in the California Portfolio
Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For a discussion regarding California Portfolio's investment adviser and
distributor, see "Organization and Management of the Fund," "How to Buy Shares"
and "Share Price" in the California Portfolio Prospectus.
27
<PAGE> 33
EXPENSES
For a discussion of the California Portfolio's expenses, see "Expense
Information" and "The Fund's Expenses" in the California Portfolio Prospectus.
CUSTODIAN AND TRANSFER AGENT
California Portfolio's custodian is Investors Bank & Trust Company.
California Portfolio's transfer agent is John Hancock Investor Services
Corporation.
CALIFORNIA PORTFOLIO SHARES
For a discussion of California Portfolio's shares of beneficial interest,
see "Organization and Management of the Fund" in the California Portfolio
Prospectus.
PURCHASE OF CALIFORNIA PORTFOLIO SHARES
For a discussion of how shares of California Portfolio may be purchased or
exchanged, see "How to Buy Shares," "Alternative Purchase Arrangements" and
"Additional Services and Programs" in the California Portfolio Prospectus. In
anticipation of the Reorganization, California Portfolio has stopped offering
its shares to all investors other than existing shareholders.
REDEMPTION OF CALIFORNIA PORTFOLIO SHARES
For a discussion of how shares of California Portfolio may be redeemed
(other than in the Reorganization), see "How to Redeem Shares" in the California
Portfolio Prospectus. California Portfolio shareholders whose shares are
represented by share certificates will be required to surrender their
certificates for cancellation or deliver an affidavit of loss accompanied by an
adequate surety bond to Investor Services in order to redeem California Fund
Class A Shares received in the Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of California Portfolio's policy with respect to
dividends, distributions and taxes, see "Distributions and Taxes" in the
California Portfolio Prospectus.
EXPERTS
The respective financial statements and the financial highlights of
California Fund as of December 31, 1994 and for the fiscal year then ended,
incorporated by reference into this Proxy Statement and Prospectus, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing in the Statement of Additional Information, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. The financial statements and the financial highlights
of California Portfolio as of August 31, 1994 and for the fiscal year then
ended, incorporated by reference into this Proxy Statement
28
<PAGE> 34
and Prospectus, have been audited by Price Waterhouse LLP, independent auditors,
as set forth in their report thereon appearing in the Statement of Additional
Information, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act, and in accordance therewith
file reports, proxy statements and other information with the SEC. Such reports,
proxy statements and other information filed by California Fund and the Trust,
on behalf of California Portfolio, can be inspected and copied (at prescribed
rates) at the public reference facilities of the SEC at 450 Fifth Street, N.W.,
Washington, D.C., and at the following regional offices: Chicago (500 West
Madison Street, Suite 1400, Chicago, Illinois); and New York (7 World Trade
Center, Suite 1300, New York, New York). Copies of such material can also be
obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
29
<PAGE> 35
EXHIBIT A
AGREEMENT AND
PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this
14th day of July, 1995, by and between John Hancock California Tax-Free Income
Fund (the "Acquiring Fund"), a Massachusetts business trust, and California
Portfolio (the "Acquired Fund"), a series of John Hancock Tax-Exempt Series Fund
(the "Trust"), a Massachusetts business trust. The principal place of business
of the Acquiring Fund and the Trust is 101 Huntington Avenue, Boston,
Massachusetts 02199. The Acquiring Fund and the Acquired Fund are sometimes
referred to collectively herein as the "Funds" and individually as a "Fund."
This Agreement is intended to be and is adopted as a plan of
"reorganization," as such term is used in Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). The reorganization will consist of the
transfer of all of the assets of the Acquired Fund to the Acquiring Fund in
exchange solely for the issuance of Class A shares of beneficial interest of the
Acquiring Fund (the "Acquiring Fund Shares") to the Acquired Fund and the
assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund,
followed by the distribution by the Acquired Fund, on or promptly after the
Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Acquired Fund in liquidation and termination of the Acquired
Fund as provided herein, all upon the terms and conditions set forth in this
Agreement.
In consideration of the premises of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF
LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE
ACQUIRED FUND
1.1 The Acquired Fund will transfer all of its assets (consisting, without
limitation, of portfolio securities and instruments, dividends and interest
receivables, cash and other assets), as set forth in the statement of assets and
liabilities referred to in Paragraph 7.2 hereof (the "Statement of Assets and
Liabilities"), to the Acquiring Fund free and clear of all liens and
encumbrances, except as otherwise provided herein, in exchange for (i) the
assumption by the Acquiring Fund of the known and unknown liabilities of the
Acquired Fund, including the liabilities set forth in the Statement of Assets
and Liabilities (the "Acquired Fund Liabilities"), which shall be assigned and
A-1
<PAGE> 36
transferred to the Acquiring Fund by the Acquired Fund and assumed by the
Acquiring Fund, and (ii) delivery by the Acquiring Fund to the Acquired Fund,
for distribution PRO RATA by the Acquired Fund to its shareholders in proportion
to their ownership of shares of beneficial interest of the Acquired Fund, as of
the close of business on the closing date (the "Closing Date"), of a number of
the Acquiring Fund Shares having an aggregate net asset value equal to the value
of the assets, less such liabilities (herein referred to as the "net value of
the assets"), of the Acquired Fund so transferred, assumed, assigned and
delivered, all determined as provided in Paragraph 2.1 hereof and as of a date
and time as specified therein. Such transactions shall take place at the closing
provided for in Paragraph 3.1 hereof (the "Closing"). All computations shall be
provided by Investors Bank & Trust Company (the "Custodian"), as custodian and
pricing agent for the Acquiring Fund and the Acquired Fund, and shall be
recomputed by Ernst & Young LLP, the independent accountants of the Acquiring
Fund. The determination of the Custodian, as recomputed by said accountants,
shall, absent manifest error, be conclusive and binding on all parties in
interest.
1.2 The Acquired Fund has provided the Acquiring Fund with a list of the
current securities holdings of the Acquired Fund as of the date of execution of
this Agreement. The Acquired Fund reserves the right to sell any of these
securities (except to the extent sales may be limited by representations made in
connection with issuance of the tax opinion provided for in Paragraph 8.6
hereof) but will not, without the prior approval of the Acquiring Fund, acquire
any additional securities other than securities of the type in which the
Acquiring Fund is permitted to invest.
1.3 The Acquiring Fund and the Acquired Fund shall each bear its own
expenses in connection with the transactions contemplated by this Agreement.
1.4 On or as soon after the Closing Date as is conveniently practicable
(the "Liquidation Date"), the Acquired Fund will liquidate and distribute PRO
RATA to shareholders of record (the "Acquired Fund shareholders"), determined as
of the close of regular trading on the New York Stock Exchange on the Closing
Date, the Acquiring Fund Shares received by the Acquired Fund pursuant to
Paragraph 1.1 hereof. Such liquidation and distribution will be accomplished by
the transfer of the Acquiring Fund Shares then credited to the account of the
Acquired Fund on the books of the Acquiring Fund, to open accounts on the share
records of the Acquiring Fund in the names of the Acquired Fund shareholders and
representing the respective PRO RATA number of Acquiring Fund Shares due such
shareholders. The Acquiring Fund shall not issue certificates representing
Acquiring Fund Shares in connection with such exchange.
1.5 The Acquired Fund shareholders holding certificates representing their
ownership of shares of beneficial interest of the Acquired Fund shall
A-2
<PAGE> 37
surrender such certificates or deliver an affidavit with respect to lost
certificates in such form and accompanied by such surety bonds as the Acquired
Fund may require (collectively, an "Affidavit"), to John Hancock Investor
Services Corporation prior to the Closing Date. Any Acquired Fund share
certificate which remains outstanding on the Closing Date shall be deemed to be
cancelled, shall no longer evidence ownership of shares of beneficial interest
of the Acquired Fund and shall evidence ownership of Acquiring Fund Shares.
Unless and until any such certificate shall be so surrendered or an Affidavit
relating thereto shall be delivered, dividends and other distributions payable
by the Acquiring Fund subsequent to the Liquidation Date with respect to
Acquiring Fund Shares shall be paid to the holder of such certificate(s), but
such shareholders may not redeem or transfer Acquiring Fund Shares received in
the Reorganization. The Acquiring Fund will not issue share certificates in the
Reorganization.
1.6 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a
name other than the registered holder of the Acquired Fund shares on the books
of the Acquired Fund as of that time shall, as a condition of such issuance and
transfer, be paid by the person to whom such Acquiring Fund Shares are to be
issued and transferred.
1.7 The existence of the Acquired Fund shall be terminated as promptly as
practicable following the Liquidation Date.
1.8 Any reporting responsibility of the Trust with respect to the Acquired
Fund, including, but not limited to, the responsibility for filing of regulatory
reports, tax returns, or other documents with the Securities and Exchange
Commission (the "Commission"), any state securities commissions, and any
federal, state or local tax authorities or any other relevant regulatory
authority, is and shall remain the responsibility of the Trust.
2. VALUATION
2.1 The net asset value of the Acquiring Fund Shares and the net value of
the assets of the Acquired Fund to be transferred shall in each case be
determined as of the close of business (4:00 p.m. Boston time) on the Closing
Date. The net asset value of the Acquiring Fund Shares shall be computed by the
Custodian in the manner set forth in the Acquiring Fund's Declaration of Trust,
as amended and restated, or By-laws and the Acquiring Fund's then-current
prospectus and statement of additional information and shall be computed in each
case to not fewer than four decimal places. The net value of the assets of the
Acquired Fund to be transferred shall be computed by the Custodian by
calculating the value of the assets transferred by the Acquired Fund and by
subtracting therefrom the amount of the liabilities assigned and transferred to
and assumed by the Acquiring Fund on the Closing Date, said assets and
liabilities to be valued in the manner set forth in the Acquired
A-3
<PAGE> 38
Fund's then-current prospectus and statement of additional information and shall
be computed in each case to not fewer than four decimal places.
2.2 The number of Acquiring Fund Shares to be issued (including fractional
shares, if any) in exchange for the Acquired Fund's assets shall be determined
by dividing the value of the Acquired Fund's assets, less the liabilities
assumed by the Acquiring Fund, by the Acquiring Fund's net asset value per Class
A share, all as determined in accordance with Paragraph 2.1 hereof.
2.3 All computations of value shall be made by the Custodian in accordance
with its regular practice as pricing agent for the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be September 15, 1995 or such other date on or
before December 31, 1995, as the parties may agree. The Closing shall be held as
of 5:00 p.m. at the offices of the Trust and the Acquiring Fund, 101 Huntington
Avenue, Boston, Massachusetts 02199, or at such other time and/or place as the
parties may agree.
3.2 Portfolio securities that are not held in book-entry form in the name
of the Custodian as record holder for the Acquired Fund shall be presented by
the Acquired Fund to the Custodian for examination no later than five business
days preceding the Closing Date. Portfolio securities which are not held in
book-entry form shall be delivered by the Acquired Fund to the Custodian for the
account of the Acquiring Fund on the Closing Date, duly endorsed in proper form
for transfer, in such condition as to constitute good delivery thereof in
accordance with the custom of brokers, and shall be accompanied by all necessary
federal and state stock transfer stamps or a check for the appropriate purchase
price thereof. Portfolio securities held of record by the Custodian in
book-entry form on behalf of the Acquired Fund shall be delivered to the
Acquiring Fund by the Custodian by recording the transfer of beneficial
ownership thereof on its records. The cash delivered shall be in the form of
currency or by the Custodian crediting the Acquiring Fund's account maintained
with the Custodian with immediately available funds.
3.3 In the event that on the Closing Date (a) the New York Stock Exchange
shall be closed to trading or trading thereon shall be restricted or (b) trading
or the reporting of trading on said Exchange or elsewhere shall be disrupted so
that accurate appraisal of the value of the net assets of the Acquiring Fund or
the Acquired Fund is impracticable, the Closing Date shall be postponed until
the first business day after the day when trading shall have been fully resumed
and reporting shall have been restored; provided that if trading shall not be
fully resumed and reporting restored on or before December 31, 1995, this
Agreement may be terminated by the Acquiring
A-4
<PAGE> 39
Fund or by the Acquired Fund upon the giving of written notice to the other
party.
3.4 The Acquired Fund shall deliver at the Closing a list of the names,
addresses, federal taxpayer identification numbers and backup withholding and
nonresident alien withholding status of the Acquired Fund shareholders and the
number of outstanding shares of beneficial interest of the Acquired Fund owned
by each such shareholder, all as of the close of business on the Closing Date,
certified by its Treasurer, Secretary or other authorized officer (the
"Shareholder List"). The Acquiring Fund shall issue and deliver to the Acquired
Fund a confirmation evidencing the Acquiring Fund Shares to be credited on the
Closing Date, or provide evidence satisfactory to the Acquired Fund that such
Acquiring Fund Shares have been credited to the Acquired Fund's account on the
books of the Acquiring Fund. At the Closing, each party shall deliver to the
other such bills of sale, checks, assignments, stock certificates, receipts or
other documents as such other party or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Trust on behalf of the Acquired Fund represents, warrants and
covenants to the Acquiring Fund as follows:
(a) The Trust is a business trust duly organized, validly existing and
in good standing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and, subject to
approval by the shareholders of the Acquired Fund, to carry out the
transactions contemplated by this Agreement. Neither the Trust nor the
Acquired Fund is required to qualify to do business in any jurisdiction in
which it is not so qualified or where failure to qualify would not subject
it to any material liability or disability. The Trust has all necessary
federal, state and local authorizations to own all of its properties and
assets and to carry on its business as now being conducted;
(b) The Trust is a registered investment company classified as a
management company and its registration with the Commission as an
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"), is in full force and effect. The Acquired Fund is a
non-diversified series of the Trust;
(c) The Trust and the Acquired Fund are not, and the execution,
delivery and performance of their obligations under this Agreement will not
result, in violation of any provision of the Trust's Declaration of Trust,
as amended and restated, or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the Trust or the
Acquired Fund is a party or by which it is bound;
A-5
<PAGE> 40
(d) Except as otherwise disclosed in writing and accepted by the
Acquiring Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Trust or the Acquired Fund or any of the
Acquired Fund's properties or assets. The Trust knows of no facts which
might form the basis for the institution of such proceedings, and neither
the Trust nor the Acquired Fund is a party to or subject to the provisions
of any order, decree or judgment of any court or governmental body which
materially and adversely affects the Acquired Fund's business or its
ability to consummate the transactions herein contemplated;
(e) The Acquired Fund has no material contracts or other commitments
(other than this Agreement or agreements for the purchase of securities
entered into in the ordinary course of business and consistent with its
obligations under this Agreement) which will not be terminated without
liability to the Acquired Fund at or prior to the Closing Date;
(f) The statement of assets and liabilities, including the schedule of
investments, of the Acquired Fund as of February 28, 1995 and the related
statement of operations for the six months then ended (unaudited), and the
statement of assets and liabilities, including the schedule of investments,
of the Acquired Fund as of August 31, 1994 and the related statement of
operations for the year then ended, and the statement of changes in net
assets for the years ended August 31, 1994 and 1993 (audited by Price
Waterhouse LLP) (copies of which have been furnished to the Acquiring Fund)
present fairly in all material respects the financial condition of the
Acquired Fund as of February 28, 1995 and August 31, 1994, respectively,
and the results of its operations and changes in net assets for the
respective stated periods in accordance with generally accepted accounting
principles consistently applied, and there were no actual or contingent
liabilities of the Acquired Fund as of the respective dates thereof not
disclosed therein;
(g) Since February 28, 1995, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquired Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by the Acquiring Fund;
(h) At the date hereof and by the Closing Date, all federal, state and
other tax returns and reports, including information returns and payee
statements, of the Acquired Fund required by law to have been filed or
furnished by such dates shall have been filed or furnished, and all
federal, state and other taxes, interest and penalties shall have been paid
A-6
<PAGE> 41
so far as due, or provision shall have been made for the payment thereof,
and to the best of the Acquired Fund's knowledge no such return is
currently under audit and no assessment has been asserted with respect to
such returns or reports;
(i) The Acquired Fund has elected to be treated as a regulated
investment company for federal income tax purposes, has qualified as such
for each taxable year of its operation and will qualify as such as of the
Closing Date with respect to its final taxable year ending on the Closing
Date;
(j) The authorized capital of the Trust consists of an unlimited
number of shares of beneficial interest, no par value per share. All issued
and outstanding shares of beneficial interest of the Acquired Fund are, and
at the Closing Date will be, duly and validly issued and outstanding, fully
paid and nonassessable by the Trust. All of the issued and outstanding
shares of beneficial interest of the Acquired Fund will, at the time of
Closing, be held by the persons and in the amounts set forth in the
Shareholder List submitted to the Acquiring Fund pursuant to Paragraph 3.4
hereof. The Acquired Fund does not have outstanding any options, warrants
or other rights to subscribe for or purchase any of its shares of
beneficial interest, nor is there outstanding any security convertible into
any of its shares of beneficial interest;
(k) At the Closing Date, the Acquired Fund will have good and
marketable title to the assets to be transferred to the Acquiring Fund
pursuant to Paragraph 1.1 hereof, and full right, power and authority to
sell, assign, transfer and deliver such assets hereunder, and upon delivery
and payment for such assets, the Acquiring Fund will acquire good and
marketable title thereto subject to no restrictions on the full transfer
thereof, including such restrictions as might arise under the Securities
Act of 1933, as amended (the "1933 Act");
(l) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of the Trust on
behalf of the Acquired Fund, and this Agreement constitutes a valid and
binding obligation of the Trust and the Acquired Fund enforceable in
accordance with its terms, subject to the approval of the Acquired Fund's
shareholders;
(m) The information to be furnished by the Acquired Fund to the
Acquiring Fund for use in applications for orders, registration statements,
proxy materials and other documents which may be necessary in connection
with the transactions contemplated hereby shall be accurate and complete
and shall comply in all material respects with federal securities and other
laws and regulations thereunder applicable thereto;
A-7
<PAGE> 42
(n) The proxy statement of the Acquired Fund (the "Proxy Statement")
to be included in the Registration Statement referred to in Paragraph 5.7
hereof (other than written information furnished by the Acquiring Fund for
inclusion therein, as covered by the Acquiring Fund's warranty in Paragraph
4.2(m) hereof), on the effective date of the Registration Statement, on the
date of the meeting of the Acquired Fund shareholders and on the Closing
Date, shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which such
statements were made, not misleading;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated by this Agreement;
(p) All of the issued and outstanding shares of beneficial interest of
the Acquired Fund have been offered for sale and sold in conformity with
all applicable federal and state securities laws;
(q) The prospectus of the Acquired Fund, dated January 1, 1995 (the
"Acquired Fund Prospectus"), previously furnished to the Acquiring Fund,
does not contain any untrue statements of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading.
4.2 The Acquiring Fund represents, warrants and covenants to the Acquired
Fund as follows:
(a) The Acquiring Fund is a business trust duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has the power to own all of its properties and assets and
to carry out the Agreement. The Acquiring Fund is not required to qualify
to do business in any jurisdiction in which it is not so qualified or where
failure to qualify would not subject it to any material liability or
disability. The Acquiring Fund has all necessary federal, state and local
authorizations to own all of its properties and assets and to carry on its
business as now being conducted;
(b) The Acquiring Fund is a registered investment company classified
as a management company and its registration with the Commission as an
investment company under the 1940 Act is in full force and effect. The
Acquiring Fund is a diversified investment company under the 1940 Act;
(c) The prospectus (the "Acquiring Fund Prospectus") and statement of
additional information for Class A and Class B shares of the
A-8
<PAGE> 43
Acquiring Fund, each dated May 1, 1995, and any amendments or supplements
thereto on or prior to the Closing Date, and the Registration Statement on
Form N-14 to be filed in connection with this Agreement (the "Registration
Statement") (other than written information furnished by the Acquired Fund
for inclusion therein, as covered by the Acquired Fund's warranty in
Paragraph 4.1(m) hereof) will conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder, the Acquiring Fund Prospectus
does not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading and the Registration Statement will not include any
untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
(d) At the Closing Date, the Acquiring Fund will have good and
marketable title to the assets of the Acquiring Fund;
(e) The Acquiring Fund is not, and the execution, delivery and
performance of its obligations under this Agreement will not result, in
violation of any provisions of the Acquiring Fund's Declaration of Trust,
as amended and restated, or By-laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the Acquiring
Fund is a party or by which the Acquiring Fund is bound;
(f) Except as otherwise disclosed in writing and accepted by the
Acquired Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Acquiring Fund or any of the Acquiring
Fund's properties or assets. The Acquiring Fund knows of no facts which
might form the basis for the institution of such proceedings, and the
Acquiring Fund is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body which materially and
adversely affects the Acquiring Fund's business or its ability to
consummate the transactions herein contemplated;
(g) The statement of assets and liabilities of the Acquiring Fund, as
of June 30, 1995, and the related statement of operations for the period
then ended and the schedule of investments (unaudited) (copies of which
have been furnished to the Acquired Fund), present fairly in all material
respects the financial position of the Acquiring Fund as of June 30, 1995
and the results of its operations for the period then ended in accordance
with generally accepted accounting principles consistently
A-9
<PAGE> 44
applied and there are no known actual or contingent liabilities of the
Acquiring Fund as of the respective dates thereof not disclosed herein;
(h) Since June 30, 1995, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquiring Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred;
(i) The Acquiring Fund has elected to be treated as a regulated
investment company for federal income tax purposes, has qualified as such
for each taxable year of its operation and will qualify as such as of the
Closing Date;
(j) The authorized capital of the Acquiring Fund consists of an
unlimited number of shares of beneficial interest, $0.01 par value per
share. All issued and outstanding shares of beneficial interest of the
Acquiring Fund are, and at the Closing Date will be, duly and validly
issued and outstanding, fully paid and nonassessable by the Acquiring Fund.
The Acquiring Fund does not have outstanding any options, warrants or other
rights to subscribe for or purchase any of its shares of beneficial
interest, nor is there outstanding any security convertible into any of its
shares of beneficial interest;
(k) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms;
(l) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund pursuant to the terms of this Agreement, when so issued and
delivered, will be duly and validly issued shares of beneficial interest of
the Acquiring Fund and will be fully paid and nonassessable by the
Acquiring Fund;
(m) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements, proxy materials and other
documents which may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete and shall comply in all
material respects with federal securities and other laws and regulations
applicable thereto; and
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated by the Agreement, except for
A-10
<PAGE> 45
the registration of the Acquiring Fund Shares under the 1933 Act, the 1940
Act and under state securities laws.
5. COVENANTS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
5.1 Except as expressly contemplated herein to the contrary, the Acquiring
Fund and the Trust on behalf of the Acquired Fund will operate their respective
businesses in the ordinary course between the date hereof and the Closing Date,
it being understood that such ordinary course of business will include customary
dividends and distributions and any other distributions necessary or desirable
to avoid federal income or excise taxes.
5.2 The Trust will call a meeting of the Acquired Fund shareholders to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be issued
hereunder are not being acquired by the Acquired Fund for the purpose of making
any distribution thereof other than in accordance with the terms of this
Agreement.
5.4 The Trust on behalf of the Acquired Fund will provide such information
within its possession or reasonably obtainable as the Acquiring Fund requests
concerning the beneficial ownership of the Acquired Fund's shares of beneficial
interest.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund each shall take, or cause to be taken, all action, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
the transactions contemplated by this Agreement.
5.6 The Trust on behalf of the Acquired Fund shall furnish to the Acquiring
Fund on the Closing Date the Statement of Assets and Liabilities of the Acquired
Fund as of the Closing Date, which statement shall be prepared in accordance
with generally accepted accounting principles consistently applied and shall be
certified by the Trust's Treasurer or Assistant Treasurer. As promptly as
practicable but in any case within 60 days after the Closing Date, the Acquired
Fund shall furnish to the Acquiring Fund, in such form as is reasonably
satisfactory to the Acquiring Fund, a statement of the earnings and profits of
the Acquired Fund for federal income tax purposes and of any capital loss
carryovers and other items that will be carried over to the Acquiring Fund as a
result of Section 381 of the Code, and which statement will be certified by the
President of the Acquired Fund.
5.7 The Acquiring Fund will prepare and file with the Commission the
Registration Statement in compliance with the 1933 Act and the 1940 Act in
A-11
<PAGE> 46
connection with the issuance of the Acquiring Fund Shares as contemplated
herein.
5.8 The Trust on behalf of the Acquired Fund will prepare a Proxy
Statement, to be included in the Registration Statement in compliance with the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
the 1940 Act and the rules and regulations thereunder (collectively, the "Acts")
in connection with the special meeting of shareholders of the Acquired Fund to
consider approval of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
TRUST ON BEHALF OF THE ACQUIRED FUND
The obligations of the Trust on behalf of the Acquired Fund to complete the
transactions provided for herein shall be, at its election, subject to the
performance by the Acquiring Fund of all the obligations to be performed by it
hereunder on or before the Closing Date, and, in addition thereto, the following
further conditions:
6.1 All representations and warranties of the Acquiring Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date; and
6.2 The Acquiring Fund shall have delivered to the Acquired Fund a
certificate executed in its name by the Acquiring Fund's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
satisfactory to the Acquired Fund and dated as of the Closing Date, to the
effect that the representations and warranties of the Acquiring Fund made in
this Agreement are true and correct at and as of the Closing Date, except as
they may be affected by the transactions contemplated by this Agreement, and as
to such other matters as the Trust on behalf of the Acquired Fund shall
reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions provided
for herein shall be, at its election, subject to the performance by the Trust on
behalf of the Acquired Fund of all the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
further conditions:
7.1 All representations and warranties of the Trust on behalf of the
Acquired Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
A-12
<PAGE> 47
the transactions contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date;
7.2 The Trust on behalf of the Acquired Fund shall have delivered to the
Acquiring Fund the Statement of Assets and Liabilities of the Acquired Fund,
together with a list of its portfolio securities showing the federal income tax
bases and holding periods of such securities, as of the Closing Date, certified
by the Treasurer or Assistant Treasurer of the Trust;
7.3 The Trust on behalf of the Acquired Fund shall have delivered to the
Acquiring Fund on the Closing Date a certificate executed in the name of the
Acquired Fund by a President or Vice President and a Treasurer or Assistant
Treasurer of the Trust, in form and substance satisfactory to the Acquiring Fund
and dated as of the Closing Date, to the effect that the representations and
warranties of the Trust on behalf of the Acquired Fund in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other matters
as the Acquiring Fund shall reasonably request; and
7.4 At or prior to the Closing Date, the Acquired Fund's investment
adviser, or an affiliate thereof, shall have made all payments, or applied all
credits, to the Acquired Fund required by any applicable contractual or state-
imposed expense limitation.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST, THE ACQUIRING
FUND AND THE ACQUIRED FUND
The obligations hereunder of the Trust, the Acquiring Fund and the Acquired
Fund are each subject to the further conditions that on or before the Closing
Date:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of
beneficial interest of the Acquired Fund in accordance with the provisions of
the Trust's Declaration of Trust, as amended and restated, and By-Laws, and
certified copies of the resolutions evidencing such approval by the Acquired
Fund's shareholders shall have been delivered by the Acquired Fund to the
Acquiring Fund;
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain changes or other relief in connection with, this
Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those of
A-13
<PAGE> 48
the Commission and of state Blue Sky and securities authorities, including
"no-action" positions of such federal or state authorities) deemed necessary by
the Trust or the Acquiring Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may waive
any such conditions for itself;
8.4 The Registration Statement shall have become effective under the 1933
Act and the 1940 Act and no stop orders suspending the effectiveness thereof
shall have been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been instituted or be
pending, threatened or contemplated under the 1933 Act or the 1940 Act;
8.5 The Acquired Fund shall have distributed to its shareholders all of its
investment company taxable income (as defined in Section 852(b)(2) of the Code)
for its taxable year ending on the Closing Date and all of its net capital gain
(as such term is used in Section 852(b)(3)(C) of the Code), after reduction by
any available capital loss carryforward, for its taxable year ending on the
Closing Date; and
8.6 The parties shall have received an opinion of Messrs. Hale and Dorr,
satisfactory to the Acquiring Fund and the Trust on behalf of the Acquired Fund,
substantially to the effect that for federal income tax purposes:
(a) The acquisition by the Acquiring Fund of all of the assets of the
Acquired Fund solely in exchange for the issuance of Acquiring Fund Shares
to the Acquired Fund and the assumption of all of the Acquired Fund
Liabilities by the Acquiring Fund, followed by the distribution by the
Acquired Fund, in liquidation of the Acquired Fund, of Acquiring Fund
Shares to the shareholders of the Acquired Fund in exchange for their
shares of beneficial interest of the Acquired Fund and the termination of
the Acquired Fund, will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and the Acquired Fund and the Acquiring Fund
will each be "a party to a reorganization" within the meaning of Section
368(b) of the Code;
(b) No gain or loss will be recognized by the Acquired Fund upon (i)
the transfer of all of its assets to the Acquiring Fund solely in exchange
for the issuance of Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring Fund
and (ii) the distribution by the Acquired Fund of such Acquiring Fund
Shares to the shareholders of the Acquired Fund;
(c) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund solely in exchange for the
A-14
<PAGE> 49
issuance of the Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring Fund;
(d) The basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be, in each instance, the same as the basis of those
assets in the hands of the Acquired Fund immediately prior to the transfer;
(e) The tax holding period of the assets of the Acquired Fund in the
hands of the Acquiring Fund will, in each instance, include the Acquired
Fund's tax holding period for those assets;
(f) The shareholders of the Acquired Fund will not recognize gain or
loss upon the exchange of all of their shares of beneficial interest of the
Acquired Fund solely for Acquiring Fund Shares as part of the transaction;
(g) The basis of the Acquiring Fund Shares received by the Acquired
Fund shareholders in the transaction will be the same as the basis of the
shares of beneficial interest of the Acquired Fund surrendered in exchange
therefor; and
(h) The tax holding period of the Acquiring Fund Shares received by
the Acquired Fund shareholders will include, for each shareholder, the tax
holding period for his shares of beneficial interest of the Acquired Fund
surrendered in exchange therefor, provided that such Acquired Fund shares
were held as capital assets on the date of the exchange.
The Acquiring Fund and the Trust on behalf of the Acquired Fund agree to
make and provide representations which are reasonably necessary to enable Hale
and Dorr to deliver an opinion substantially as set forth in this Paragraph 8.6.
Notwithstanding anything herein to the contrary, neither the Trust nor the
Acquiring Fund may waive the conditions set forth in this Paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1 The Acquiring Fund and the Trust on behalf of the Acquired Fund
represent and warrant to the other that there are no brokers or finders entitled
to receive any payments in connection with the transactions provided for herein.
9.2 The Acquiring Fund and the Acquired Fund shall each be liable solely
for its own expenses incurred in connection with entering into and carrying out
the provisions of this Agreement whether or not the transactions contemplated
hereby are consummated.
A-15
<PAGE> 50
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Trust on behalf of the Acquired Fund agree
that neither party has made any representation, warranty or covenant not set
forth herein or referred to in Paragraph 4 hereof and that this Agreement
constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Trust
and the Acquiring Fund. In addition, either party may at its option terminate
this Agreement at or prior to the Closing Date:
(a) because of a material breach by the other of any representation,
warranty, covenant or agreement contained herein to be performed at or
prior to the Closing Date;
(b) because of a condition herein expressed to be precedent to the
obligations of the terminating party which has not been met and which
reasonably appears will not or cannot be met;
(c) by resolution of the Trust's Board of Trustees if circumstances
should develop that, in the good faith opinion of such Board, make
proceeding with the Agreement not in the best interest of the Acquired
Fund's shareholders; or
(d) by resolution of the Acquiring Fund's Board of Trustees if
circumstances should develop that, in the good faith opinion of such Board,
make proceeding with the Agreement not in the best interest of the
Acquiring Fund's shareholders.
11.2 In the event of any such termination, there shall be no liability for
damages on the part of the Trust, the Acquiring Fund or the Acquired Fund, or
the Trustees or officers of the Trust or the Acquiring Fund, but each party
shall bear the expenses incurred by it incidental to the preparation and
carrying out of this Agreement.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the Trust
and the Acquiring Fund. However, following the meeting of shareholders of the
Acquired Fund held pursuant to Paragraph 5.2 of this
A-16
<PAGE> 51
Agreement, no such amendment may have the effect of changing the provisions
regarding the method for determining the number of Acquiring Fund Shares to be
received by the Acquired Fund shareholders under this Agreement to the detriment
of such shareholders without their further approval; provided that nothing
contained in this Article 12 shall be construed to prohibit the parties from
amending this Agreement to change the Closing Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to the Acquiring Fund or to the
Trust, each at 101 Huntington Avenue, Boston, Massachusetts 02199, Attention:
President, and, in either case, with copies to Hale and Dorr, 60 State Street,
Boston, Massachusetts 02109, Attention: Pamela J. Wilson, Esq.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW;
ASSIGNMENT
14.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the prior written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or give
any person, firm or corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason of
this Agreement.
14.5 All persons dealing with the Trust or the Acquiring Fund must look
solely to the property of the Trust or the Acquiring Fund, respectively, for the
enforcement of any claims against the Trust or the Acquiring Fund as neither the
Trustees, officers, agents or shareholders of the Trust or the Acquiring Fund
assume any personal liability for obligations entered into on behalf of the
Trust or the Acquiring Fund, respectively. None of the other series of the
A-17
<PAGE> 52
Trust shall be responsible for any obligations assumed by or on behalf of the
Acquired Fund under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or Vice President and has caused its corporate seal
to be affixed hereto.
JOHN HANCOCK CALIFORNIA TAX-FREE
INCOME FUND
By: /S/ ANNE C. HODSDON
---------------------------------
ANNE C. HODSDON
PRESIDENT
JOHN HANCOCK TAX-EXEMPT SERIES FUND,
on behalf of CALIFORNIA PORTFOLIO
By: /S/ THOMAS H. DROHAN
---------------------------------
THOMAS H. DROHAN
SENIOR VICE PRESIDENT
AND SECRETARY
A-18
<PAGE> 53
EXHIBIT B
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
CLASS A AND CLASS B SHARES
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 1995
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment policies have been revised to allow investments in
unrated bonds comparable to BBB, and up to 20% of the Fund's total assets to be
invested in bonds rated BB/Ba or equivalent. The paragraphs under this section
numbered (1) and (5) are deleted in their entirety and replaced by:
The Fund pursues its objective by investing in:
(1) Bonds which, at the time of purchase, are rated within one of the five
highest ratings by Standard & Poor's Ratings Group ("S&P") (AAA, AA, A,
BBB or BB), Moody's Investor Services ("Moody's") (AAA, AA, A, Baa, or
Ba) or Fitch Investor Services ("Fitch") (AAA, AA, A, BBB or BB).
(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. 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. Not more than
20% of the Fund's total assets will be invested in bonds rated lower
than BBB or, if unrated, determined to be of comparable quality, in the
opinion of the Adviser.
July 3, 1995
B-1
<PAGE> 54
JOHN HANCOCK
CALIFORNIA TAX-FREE
INCOME FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1995
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Expense Information........................................ B-2
The Fund's Financial Highlights............................ B-4
Investment Objective and Policies.......................... B-5
Organization and Management of the Fund.................... B-12
Alternative Purchase Arrangements.......................... B-13
The Fund's Expenses........................................ B-14
Dividends and Taxes........................................ B-16
Performance................................................ B-17
How to Buy Shares.......................................... B-19
Share Price................................................ B-20
How to Redeem Shares....................................... B-27
Additional Services and Programs........................... B-29
Investments, Techniques and Risk Factors................... B-33
Appendix A................................................. B-37
</TABLE>
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.
B-2
<PAGE> 55
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.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
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%
</TABLE>
- ---------------
* 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.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
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
</TABLE>
(This example should not be considered a representation of past or future
expenses. Actual
expenses may be greater or lesser than those shown.)
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.
B-3
<PAGE> 56
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."
B-4
<PAGE> 57
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:
<TABLE>
<CAPTION>
CLASS B
SHARES
-------
CLASS A SHARES YEAR
----------------------------------------------------------- ENDED
DECEMBER
YEAR ENDED DECEMBER 31, 31,
----------------------------------------------------------- -------
1994 1993 1992(1) 1991 1990 1994
-------- -------- -------- -------- ------- -------
<S> <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
-------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.......................... 0.58 0.62 0.66 0.69 0.74 0.51
Net realized and unrealized gain (loss) on
investments.................................. (1.57) 0.76 0.25 0.47 (0.16) (1.57)
-------- -------- -------- -------- ------- -------
Total from Investment Operations............. (0.99) 1.38 0.91 1.16 0.58 (1.06)
-------- -------- -------- -------- ------- -------
Less Distributions
Dividends from net investment income........... (0.58) (0.62) (0.67) (0.70) (0.67) (0.51)
Distributions from realized gains.............. -- (0.32) (0.15) (0.05) -- --
-------- -------- -------- -------- ------- -------
Total Distributions.......................... (0.58) (0.94) (0.82) (0.75) (0.67) (0.51)
-------- -------- -------- -------- ------- -------
Net asset value, end of year................... $9.28 $10.85 $10.41 $10.32 $9.91 $9.28
======== ======== ======== ======== ======= =======
Total Return(2).............................. (9.31)% 13.60% 9.15% 12.26% 6.13% (9.99)%
-------- -------- -------- -------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net assets........ 0.89% 0.87% 0.83% 0.80% 0.84% 1.64%
Ratio of expense limitation to average net
assets....................................... (0.14)% (0.18)% (0.25)% (0.40)% (0.84)% (0.14)%
Ratio of net expenses to average net assets.... 0.75% 0.69% 0.58% 0.40% 0.00% 1.50%
Ratio of net investment income to average net
assets....................................... 5.85% 5.69% 6.36% 6.75% 7.11% 5.10%
Portfolio turnover............................. 62% 51% 34% 45% 62% 62%
Net Assets, end of year (in thousands)......... $241,583 $279,692 $217,014 $163,693 $80,200 $77,365
<CAPTION>
1993 1992(1)
------- -------
<S> <C><C> <C>
PER SHARE INCOME AND CAPITAL CHANGES FOR A SHARE
OUTSTANDING DURING EACH YEAR:
Net asset value, beginning of year............. $10.41 $10.32
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.......................... 0.54 0.58
Net realized and unrealized gain (loss) on
investments.................................. 0.76 0.25
------- -------
Total from Investment Operations............. 1.30 0.83
------- -------
Less Distributions
Dividends from net investment income........... (0.54) (0.59)
Distributions from realized gains.............. (0.32) (0.15)
------- -------
Total Distributions.......................... (0.86) (0.74)
------- -------
Net asset value, end of year................... $10.85 $10.41
======= =======
Total Return(2).............................. 12.76% 8.35%
------- -------
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net assets........ 1.62% 1.60%
Ratio of expense limitation to average net
assets....................................... (0.18)% (0.25)%
Ratio of net expenses to average net assets.... 1.44% 1.35%
Ratio of net investment income to average net
assets....................................... 4.82% 5.43%
Portfolio turnover............................. 51% 34%
Net Assets, end of year (in thousands)......... $65,437 $26,595
</TABLE>
- ---------------
(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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<PAGE> 58
INVESTMENT OBJECTIVE AND POLICIES
THE FUND SEEKS TO PROVIDE INCOME THAT IS EXCLUDABLE FROM FEDERAL AND
CALIFORNIA TAXES.
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:
(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
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<PAGE> 59
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 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
B-7
<PAGE> 60
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 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
B-8
<PAGE> 61
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.
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 EMPLOY CERTAIN INVESTMENT STRATEGIES TO HELP ACHIEVE ITS
INVESTMENT OBJECTIVE.
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
B-9
<PAGE> 62
economic benchmark. See "Investments, Techniques and Risk Factors" for
additional discussion of derivative instruments.
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.
THE FUND FOLLOWS CERTAIN POLICIES THAT MAY HELP TO REDUCE INVESTMENT RISK.
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.
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
B-10
<PAGE> 63
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 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
B-11
<PAGE> 64
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.
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.
BROKERS ARE CHOSEN ON BEST PRICE AND EXECUTION.
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,
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<PAGE> 65
Inc., which are indirectly owned by the John Hancock Mutual Life Insurance
Company (the "Life Company"), which in turn indirectly owns the Adviser.
ORGANIZATION AND MANAGEMENT OF THE FUND
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.
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.
JOHN HANCOCK ADVISERS, INC. ADVISES INVESTMENT COMPANIES HAVING A TOTAL
ASSET VALUE OF APPROXIMATELY $13 BILLION.
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.
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 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.
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<PAGE> 66
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.
INVESTMENTS IN CLASS A SHARES ARE SUBJECT TO AN INITIAL SALES CHARGE.
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 B SHARES ARE SUBJECT TO A CONTINGENT DEFERRED 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.
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
YOU SHOULD CONSIDER WHICH CLASS OF SHARES WOULD BE MORE BENEFICIAL TO YOU.
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
B-14
<PAGE> 67
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 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
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<PAGE> 68
.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 FUND PAYS DISTRIBUTION AND SERVICE FEES FOR MARKETING AND SALES-RELATED
SHAREHOLDER SERVICING.
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 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.
B-16
<PAGE> 69
DIVIDENDS AND TAXES
THE FUND GENERALLY DECLARES DIVIDENDS DAILY AND DISTRIBUTES THEM MONTHLY.
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.
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' 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
B-17
<PAGE> 70
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.
PERFORMANCE
THE FUND MAY ADVERTISE ITS YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN.
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.
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
B-18
<PAGE> 71
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.
B-19
<PAGE> 72
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
OPENING AN ACCOUNT.
The minimum initial investment in Class A and Class B shares is $1,000 ($250 for
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.
- ---------------------------------------------------------------------------------
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.
- ---------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A AND CLASS B SHARES
MONTHLY 1. Complete the "Automatic Investing" and "Bank Information"
AUTOMATIC sections on the Account Privileges Application, designating a
ACCUMULATION bank account from which funds may be drawn.
PROGRAM 2. The amount you elect to invest will be automatically withdrawn
(MAAP) from your bank or credit union account.
- ---------------------------------------------------------------------------------
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 or 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.
- ---------------------------------------------------------------------------------
</TABLE>
B-20
<PAGE> 73
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
BY CHECK 1. Either complete the detachable stub included on 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.
- ---------------------------------------------------------------------------------
BY WIRE 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
- ---------------------------------------------------------------------------------
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.
- ---------------------------------------------------------------------------------
</TABLE>
YOU WILL RECEIVE ACCOUNT STATEMENTS, THAT YOU SHOULD KEEP TO HELP WITH YOUR
PERSONAL RECORDKEEPING.
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.
SHARE PRICE
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.
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
B-21
<PAGE> 74
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.
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.
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%(***) 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.
B-22
<PAGE> 75
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 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.
YOU MAY QUALIFY FOR A REDUCED SALES CHARGE ON YOUR INVESTMENT IN CLASS A
SHARES.
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
B-23
<PAGE> 76
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:
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."
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.
B-24
<PAGE> 77
- - 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.
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 acquired through dividend
reinvestment (10 X $12) -120
- Minus appreciation on remaining shares, also not
subject to CDSC (40 X $2) -80
------
- 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
B-25
<PAGE> 78
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
YEAR IN WHICH CLASS B SHARES CHARGE AS A PERCENTAGE OF
REDEEMED FOLLOWING PURCHASE DOLLAR AMOUNT SUBJECT TO 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.
UNDER CERTAIN CIRCUMSTANCES, THE CDSC ON CLASS B AND CERTAIN CLASS A SHARE
REDEMPTIONS WILL BE WAIVED.
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.
- 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.
B-26
<PAGE> 79
- 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.
B-27
<PAGE> 80
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).
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.
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION REQUEST, PLEASE FOLLOW THESE
PROCEDURES.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <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, or 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
use 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.
- ---------------------------------------------------------------------------------
</TABLE>
B-28
<PAGE> 81
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
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>
<TABLE>
<CAPTION>
TYPE OF REGISTRATION REQUIREMENTS
--------------------------------- --------------------------------------------
<S> <C> <C> <C>
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 signature(s)
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.
- ---------------------------------------------------------------------------------
WHO MAY GUARANTEE YOUR SIGNATURE.
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 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.
- ---------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT REDEMPTIONS.
THROUGH YOUR BROKER. Your broker may be able to initiate the redemption.
Contact your broker for instructions.
- ---------------------------------------------------------------------------------
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 redemptions 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.
- ---------------------------------------------------------------------------------
</TABLE>
B-29
<PAGE> 82
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
YOU MAY EXCHANGE SHARES OF THE FUND ONLY FOR SHARES OF THE SAME CLASS OF
ANOTHER JOHN HANCOCK FUND.
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.
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.
B-30
<PAGE> 83
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 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.
B-31
<PAGE> 84
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
REINVESTMENT PRIVILEGE
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.
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.
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.
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
YOU CAN PAY ROUTINE BILLS FROM YOUR ACCOUNT, OR MAKE PERIODIC DISBURSEMENTS
OF FUNDS FROM YOUR RETIREMENT ACCOUNT TO COMPLY WITH IRS REGULATIONS.
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.
B-32
<PAGE> 85
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)
YOU CAN MAKE AUTOMATIC INVESTMENTS AND SIMPLIFY YOUR INVESTING.
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.
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
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS MAY ESTABLISH ACCOUNTS.
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.
2. The initial aggregate investment of all participants in the group must be at
least $250.
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.
B-33
<PAGE> 86
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."
B-34
<PAGE> 87
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
B-35
<PAGE> 88
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 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
B-36
<PAGE> 89
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 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.
B-37
<PAGE> 90
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
JOINT RETURN CALIFORNIA IN CALIFORNIA, A TAX-EXEMPT YIELD OF:
---------------- AND FEDERAL ----------------------------------------------------------------------
SINGLE RETURN INCOME TAX
- ----------------
BRACKET*
-------------
(TAXABLE INCOME) 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
- ------------------------------------- ------ ------ ------ ------- ------- ------- -------
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.
B-38
<PAGE> 91
(NOTES)
<PAGE> 92
JOHN HANCOCK
JOHN HANCOCK CALIFORNIA
CALIFORNIA TAX-FREE
TAX-FREE INCOME FUND
INCOME FUND
INVESTMENT ADVISOR
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue CLASS A AND CLASS B SHARES
Boston, Massachusetts 02199-7603 PROSPECTUS
MAY 1, 1995
CUSTODIAN
Investors Bank and Trust Company
24 Federal Street A MUTUAL FUND SEEKING TO OBTAIN
Boston, Massachusetts 02110 AS HIGH A LEVEL OF CURRENT INCOME
EXEMPT FROM BOTH FEDERAL INCOME
TRANSFER AGENT TAXES AND CALIFORNIA PERSONAL
John Hancock Investor Services INCOME TAXES AS IS CONSISTENT
Corporation WITH PRESERVATION OF CAPITAL.
P.O. Box 9116
Boston, Massachusetts 02205-9116
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
HOW TO OBTAIN INFORMATION TELEPHONE 1-800-225-5291
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
T280P 5/95 (LOGO) Printed on Recycled Paper
