Registration No. 33-31675
ICA No. 811-5979
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [X]
Post-Effective Amendment No. 11 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 14 [X]
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
(Formerly Transamerica California Tax-Free Income Fund)
(Exact Name of Registrant as Specified in Articles of Incorporation)
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code
(617) 375-1760
Thomas H. Drohan, Esq.
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of rule 485
Registrant has previously elected, pursuant to Rule 24f-2 under the Investmnet
Company Act of 1940, to register an indefinite number of its shares of
beneficial interest for sale under the Securities Act of 1933 and filed its Rule
24f-2 Notice on February 26, 1996.
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JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
(Formerly Transamerica California Tax-Free Income Fund
CROSS-REFERENCE SHEET
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Form N-1A Item
Part A Caption Prospectus
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1 Cover Page Cover Page
2 Synopsis/Summary of Fund Expenses Expense Information; The Fund's Expenses;
Share Price
3 Condensed Financial Information The Fund's Financial Highlights
4 General Description of Registrant Investment Objective and Policies;
Organization and Management of the Fund
5 Management of the Fund Organization and Management of the Fund;
The Fund's expenses; Back Cover Page
6 Capital Stock and Other Securities Organization and Management of the Fund;
Dividends and Taxes; How to Buy Shares;
How to Redeem Shares; Additional Services
and Programs
7 Purchase of Securities Being Offered How to Buy Shares; Share Price; Additional
Services and Programs; Alternative Purchase
Arrangements; The Fund's Expenses; Back
Cover Page
8 Redemption or Repurchase How to Redeem Shares
9 Pending Legal Proceedings Not Applicable
Part B Caption Statement of Additional Information
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10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and History The Fund and its Management
13 Investment Objectives and Policies Investment Objectives and Policies;
Investment Practices; Investment
Restrictions; Special Investment Techniques
14 Management of the Fund The Fund and its Management; Trustees and
Officers of the Fund
15 Control Persons and Principal The Fund and its Management
Holders of Securities
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16 Investment Advisory and Other The Fund and its Management
Services
17 Brokerage Allocation Portfolio Transactions and Brokerage
18 Capital Stock and Other Securities Additional Information
19 Purchase, Redemption and Purchase of Shares; Determination of
Pricing of Securities Net Asset Value; Shareholder Services;
Being Offered Redemption and Repurchase of Shares
20 Tax Status Tax Status
21 Underwriters Purchase of Shares-Distributors
22 Calculation of Performance Data Additional Information; Performance Information
23 Financial Statements Financial Statements
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Part C
Other Information
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
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JOHN HANCOCK
CALIFORNIA TAX-FREE
INCOME FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1996
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TABLE OF CONTENTS
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PAGE
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Expense Information................................................................... 2
The Fund's Financial Highlights....................................................... 3
Investment Objective and Policies..................................................... 5
Organization and Management of the Fund............................................... 11
Alternative Purchase Arrangements..................................................... 12
The Fund's Expenses................................................................... 14
Dividends and Taxes................................................................... 15
Performance........................................................................... 16
How to Buy Shares..................................................................... 18
Share Price........................................................................... 19
How to Redeem Shares.................................................................. 25
Additional Services and Programs...................................................... 26
Investments, Techniques and Risk Factors.............................................. 30
Appendix A............................................................................ A-1
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This Prospectus sets forth the information about John Hancock California
Tax-Free Income Fund (the "Fund"), a diversified fund, that you should know
before investing. Please read and retain it for future reference.
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the "SEC"). You can obtain a copy of the Fund's Statement
of Additional Information, dated May 1, 1996 and incorporated by reference into
this Prospectus, free of charge by writing or telephoning: John Hancock Investor
Services Corporation, P.O. Box 9116, Boston, Massachusetts 02205-9116,
1-800-225-5291 (1-800-554-6713 TDD).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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EXPENSE INFORMATION
The purpose of the following information is to help you to understand the
various fees and expenses you will bear, directly or indirectly, when you
purchase Fund shares. The operating expenses included in the table and
hypothetical example below are based on actual fees and expenses for the Class A
and Class B shares of the Fund's fiscal year ended December 31, 1995 adjusted to
reflect current fees and expenses. Actual fees and expenses may be greater or
less than those indicated.
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CLASS A CLASS B
SHARES SHARES
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SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as a percentage of offering price)............. 4.50% None
Maximum sales charge imposed on reinvested dividends...................................... None None
Maximum deferred sales charge............................................................. None* 5.00%
Redemption fee+........................................................................... None None
Exchange fee.............................................................................. None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fee (net of reduction)......................................................... 0.40% 0.40%
12b-1 fee (net of reduction, Class B Shares)***........................................... 0.15% 0.90%
Other expenses**.......................................................................... 0.20% 0.20%
Total Fund operating expenses (net of reduction)****...................................... 0.75% 1.50%
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* No sales charge is payable at the time of purchase on investments in Class
A shares 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. 12b-1 fee
for the Class B shares reflects a voluntary reduction by the Fund's
Distributor. Without such reductions, 12b-1 for the Class B Shares would
have been 1.00%.
**** Total Fund Operating expenses reflect a voluntary reduction by the Fund's
Adviser and Fund's distributor. Without such limitation, the Management Fee
and Total Operating expenses of the Class A and Class B shares,
respectively, would have been 0.55% and 0.55%, and 0.90% and 1.75%,
respectively.
+ Redemption by wire fee (currently $4.00) not included.
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1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
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You would pay the following expenses for the indicated period of years on a
hypothetical $1,000 investment, assuming 5% annual return
Class A Shares...................................................................... $ 52 $68 $ 85 $134
Class B Shares
-- Assuming complete redemption at end of period.................................. $ 65 $77 $ 102 $159
-- Assuming no redemption......................................................... $ 15 $47 $ 82 $159
(This example should not be considered a representation of past or future expenses. Actual expenses may be greater or lesser than
those shown.)
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The Fund's payment of a distribution fee may result in a long-term shareholder
indirectly paying more than the economic equivalent of the maximum front-end
sales charge permitted under the National Association of Securities Dealers,
Inc.'s Rules of Fair Practice.
The management and 12b-1 fees referred to above are more fully explained in
this Prospectus under the caption "The Fund's Expenses" and in the Statement of
Additional Information under the captions "Investment Advisory and Other
Services" and "Distribution Contract."
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THE FUND'S FINANCIAL HIGHLIGHTS
The following table of financial highlights has been audited by Ernst & Young
LLP, the Fund's independent auditors, whose unqualified report is included in
the Fund's 1995 Annual Report and is included in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's Annual Report to Shareholders which may be obtained free of charge
by writing or telephoning John Hancock Investor Services Corporation ("Investor
Services") at the address or telephone number listed on the front page of this
Prospectus.
Selected data for each class of shares outstanding throughout each period is
as follows:
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YEAR ENDED DECEMBER 31,
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1995 1994(E) 1993 1992 1991 1990
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CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period...................... $ 9.28 $10.85 $10.41 $10.32 $ 9.91 $10.00(b)
Net Investment Income..................................... 0.57(d) 0.58 0.62 0.66 0.69 0.74
Net Realized and Unrealized Gain (Loss) on Investments.... 1.41 (1.57) 0.76 0.25 0.47 (0.16)
-------- -------- -------- -------- -------- -------
Total from Investment Operations.......................... 1.98 (0.99) 1.38 0.91 1.16 0.58
LESS DISTRIBUTIONS
Dividends from Net Investment Income...................... (0.57) (0.58) (0.62) (0.67) (0.70) (0.67)
Distributions from Net Realized Gains on Investments Sold
and Financial Futures Contracts......................... -- -- (0.32) (0.15) (0.05) --
-------- -------- -------- -------- -------- -------
Total Distributions................................... (0.57) (0.58) (0.94) (0.82) (0.75) (0.67)
-------- -------- -------- -------- -------- -------
Net Asset Value, End of Period............................ $10.69 $ 9.28 $10.85 $10.41 $10.32 $ 9.91
======== ======== ======== ======== ======== =======
Total Investment Return at Net Asset Value(c)............. 21.88% (9.31%) 13.60% 9.15% 12.26% 6.13%
Total Adjusted Investment Return at Net Asset
Value(a)(c)............................................. 21.73% (9.45%) 13.42% 8.90% 11.86% 5.29%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted)................. $309,305 $241,583 $279,692 $217,014 $163,693 $80,200
Ratio of Expenses to Average Net Assets................... 0.75% 0.75% 0.69% 0.58% 0.40% 0.00%
Ratio of Adjusted Expenses to Average Net Assets(a)....... 0.90% 0.89% 0.87% 0.83% 0.80% 0.84%
Ratio of Net Investment Income to Average Net Assets...... 5.76% 5.85% 5.69% 6.36% 6.75% 7.11%
Ratio of Adjusted Net Investment Income to Average Net
Assets(a)............................................... 5.61% 5.71% 5.51% 6.11% 6.35% 6.27%
Portfolio Turnover Rate................................... 37%+ 62% 51% 34% 45% 62%
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(a) On an unreimbursed basis.
(b) Initial price to commence operations.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(d) On average month end shares outstanding.
(e) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the Fund.
+ Portfolio turnover excludes merger activity.
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3
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YEAR ENDED DECEMBER 31,
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1995 1994(E) 1993 1992
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CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period................................................ $ 9.28 $10.85 $10.41 $10.32(b)
Net Investment Income............................................................... 0.50(d) 0.51 0.54 0.58(d)
Net Realized and Unrealized Gain (Loss) on Investments.............................. 1.40 (1.57) 0.76 0.25
-------- -------- -------- --------
Total from Investment Operations.................................................... 1.90 (1.06) 1.30 0.83
LESS DISTRIBUTIONS
Dividends from Net Investment Income................................................ (0.50) (0.51) (0.54) (0.59)
Distributions from Net Realized Gains on Investments Sold and Financial Futures
Contracts......................................................................... -- -- (0.32) (0.15)
-------- -------- -------- --------
Total Distributions............................................................. (0.50) (0.51) (0.86) (0.74)
-------- -------- -------- --------
Net Asset Value, End of Period...................................................... $10.68 $ 9.28 $10.85 $10.41
======== ======== ======== ========
Total Investment Return at Net Asset Value(c)....................................... 20.87% (9.99%) 12.76% 8.35%
Total Adjusted Investment Return at Net Asset Value(a)(c)........................... 20.72% (10.13%) 12.58% 8.10%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted)........................................... $84,673 $77,365 $65,437 $26,595
Ratio of Expenses to Average Net Assets............................................. 1.50% 1.50% 1.44% 1.35%
Ratio of Adjusted Expenses to Average Net Assets(a)................................. 1.65% 1.64% 1.62% 1.60%
Ratio of Net Investment Income to Average Net Assets................................ 4.97% 5.10% 4.82% 5.43%
Ratio of Adjusted Net Investment Income to Average Net Assets(a).................... 4.82% 4.96% 4.64% 5.18%
Portfolio Turnover Rate............................................................. 37%+ 62% 51% 34%
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(a) On an unreimbursed basis.
(b) Initial price to commence operations.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(d) On average month end shares outstanding.
(e) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the Fund.
+ Portfolio turnover excludes merger activity.
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4
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide as high a level of current income
exempt from both federal income taxes and California personal income taxes as is
consistent with preservation of capital. This objective may not be changed
without a vote of shareholders. The Fund pursues its objective by normally
investing substantially all of its assets in the following debt obligations
issued by or on behalf of the state of California, its political subdivisions,
municipalities, agencies, instrumentalities or public authorities and
obligations issued by other governmental entities (for example, certain U.S.
territories or possessions) the interest on which is excluded from gross income
for federal income tax purposes and is exempt from California personal income
taxes (collectively referred to as "California Tax Exempt Securities") subject
to the following quality standards:
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THE FUND SEEKS TO PROVIDE INCOME THAT IS
EXCLUDABLE FROM FEDERAL AND CALIFORNIA
TAXES.
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(1) Bonds which, at the time of purchase, are rated within one of the five
highest ratings by Standard and 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 Ba) or equivalent
ratings. Not more than 20% of the Fund's total assets will be invested in
bonds rated BB or Ba.
(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 John
Hancock Advisers, Inc. (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.
(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 determined to be of comparable quality in the opinion of the
Adviser.
For a description of the tax exempt ratings described above, see Appendix A in
the Statement of Additional Information. Bonds rated BBB or BB by S&P or Fitch,
or Baa or Ba 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. The Adviser will purchase bonds rated
BBB or BB or Baa or Ba where, based upon
5
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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 BB or Baa or Ba, 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 BB or Baa or Ba
will emphasize obligations believed to be consistent with the goal of preserving
capital, these obligations may not provide yields as high as those of other
obligations having these ratings, and the differential in yields between these
bonds and obligations with higher quality ratings may not be as significant as
might otherwise be generally available. Many issuers of securities choose not to
have their obligations rated. Although unrated securities eligible for purchase
by the Fund must be determined to be comparable in quality to securities having
certain specified ratings, the market for unrated securities may not be as broad
as for rated securities since many investors rely on rating organizations for
credit appraisal.
The Fund may invest in any combination of California Tax Exempt Securities;
however, it is expected that during normal investment conditions, a substantial
portion of the Fund's assets will be invested in municipal bonds (without regard
to maturities) and other longer-term obligations. When determined to be
appropriate, based upon market conditions, a substantial portion of the Fund's
holdings of California Tax Exempt Securities will consist of notes and
commercial paper and other shorter-term obligations. The Fund may invest up to
20% of its total assets in "private activity bonds" (meeting the quality
standards noted above), the interest on which may constitute a preference item
for purposes of determining the alternative minimum tax.
While as a fundamental investment policy, the Fund invests at least 80% of its
total assets in California Tax Exempt Securities (except during adverse market
conditions), the balance of its assets may be invested in the following
short-term investments: (1) obligations issued by or on behalf of states (other
than California), or the District of Columbia and their political subdivisions,
agencies or instrumentalities which meet the quality standards described above
but the interest on which is subject to California personal income tax ("Other
Tax Exempt Obligations"); (2) obligations issued or guaranteed by the U.S.
government, or one of its agencies or instrumentalities, the interest on which
is not exempt from federal income tax ("U.S. Government Securities"); (3)
corporate commercial paper meeting the quality standards noted above; (4)
certificates of deposit and bankers acceptances of domestic banks with assets of
$1 billion or more; and (5) repurchase agreements with respect to securities of
the type and quality in which the Fund may invest. The income from the foregoing
short-term investments may be subject to California and/or federal income taxes.
As a result, distributions of the Fund which are attributable to income from
investments in Other Tax Exempt Obligations will be subject to California
personal income tax; distributions attributable to U.S. Government Securities
will be subject to federal income tax; and distributions attributable to income
from repurchase agreements, corporate commercial paper, and certificates of
deposit will be subject to federal and California income
6
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taxes. The circumstances in which the Fund will normally invest in these
short-term investments are (1) pending the investment of California Tax Exempt
Securities or reinvestment of the proceeds of sales of such securities or (2) to
maintain liquidity and avoid the necessity of liquidating portfolio investments
at a disadvantageous time in order to meet redemption requests.
As a defensive measure during times of adverse market conditions including when
sufficient California Tax Exempt Securities appropriate for investment by the
Fund are not available, the Fund may temporarily invest more than 20% of its
total assets in short term investments (previously described as Other Tax Exempt
Obligations, U.S. Government Securities, certificates of deposit and corporate
commercial paper) including investment grade corporate debt securities (which
meet the previously described quality standards), as long as at the end of each
quarter of its taxable year, these investments do not exceed 50% of the Fund's
total assets. The Fund will not be pursuing its objective of obtaining
tax-exempt income to the extent it invests in taxable securities. There can be
no assurance that the Fund will achieve its investment objective.
TAX EXEMPT SECURITIES. "Tax Exempt Securities" are debt obligations generally
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their political subdivisions, agencies or
instrumentalities the interest on which, in the opinion of the bond issuer's
counsel (not the Fund's counsel), is excluded from gross income for federal
income tax purposes and (in the case of California Tax Exempt Securities) exempt
from California personal income taxes. (See Discussion on Taxes.) These
securities consist of municipal bonds, municipal notes and municipal commercial
paper (see "Investment Objective and Policies" in the Statement of Additional
Information) as well as variable or floating rate obligations and participation
interests.
The two principal classifications of municipal obligations are general
obligations and revenue obligations. General obligations are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or in some cases from
the proceeds of a special excise or other tax. For example, industrial
development and pollution control bonds are in most cases revenue obligations
since payment of principal and interest is dependent solely on the ability of
the user of the facilities financed or the guarantor to meet its financial
obligations, and in certain cases, the pledge of real and personal property as
security for payment. The payment of principal and interest by issuers of
certain obligations purchased by the Fund may be guaranteed by a letter of
credit, note, repurchase agreement, insurance or other credit facility agreement
offered by a bank or other financial institution. These guarantees and the
creditworthiness of guarantors will be considered by the Adviser in determining
whether a municipal obligation meets the Fund's investment quality requirements.
No assurance can be given that a municipality or guarantor will be able to
satisfy the payment of principal or interest on a municipal obligation.
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
7
<PAGE>
amended (the "Code"). Interest on certain nonessential or private activity bonds
(including those for housing and student loans) issued after August 7, 1986,
while still tax-exempt, constitutes a tax preference item for taxpayers in
determining their alternative minimum tax: as a result, the Fund's distributions
attributable to such interest also constitute tax preference items. The Code
also imposes certain limitations and restrictions on the use of tax-exempt bond
financing for non-governmental business activities, such as industrial
development bonds.
FUND CHARACTERISTICS. Because the Fund will ordinarily invest at least 80% of
its assets in California Tax Exempt Securities, its portfolio is more
susceptible to factors affecting these securities than is a tax-exempt mutual
fund not investing primarily in the obligations of a single state. (See "Risk
Factors" and "Investments, Techniques and Risk Factors".)
The Fund may write (sell) covered call and put options on debt securities in
which it may invest and on indices composed of debt securities in which it may
invest. It may purchase call and put options on these securities and indices. It
may also write straddles, which are combinations of put and call options on the
same security. The Fund may buy and sell interest rate and municipal bond index
futures contracts, and options on these futures contracts, to hedge against
changes in securities prices and interest rates. The Fund may invest in variable
rate and floating rate obligations, including inverse floating rate obligations,
on which the interest rate is adjusted at predesignated periodic intervals or
when there is a change in the market rate of interest on which the interest rate
payable on the obligation is met is based. Options, futures contracts and
variable and floating rate instruments are generally considered to be
"derivative" instruments, because they derive their value from the performance
of an underlying asset, index or other economic benchmark. See "Investments,
Techniques and Risk Factors" for additional discussion of derivative
instruments.
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THE FUND MAY EMPLOY CERTAIN INVESTMENT
STRATEGIES TO HELP ACHIEVE ITS INVESTMENT
OBJECTIVE.
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The Fund will not concentrate in any one industry (governmental issuers are not
considered to be part of any "industry"). While the Fund may invest more than
25% of its total assets in industrial development or pollution control bonds, it
may not invest more than 25% of its assets in industrial development or
pollution control bonds which are dependent, directly or indirectly, on the
revenues or credit of private entities in any one industry.
The Fund may purchase tax exempt participation interests and municipal lease
obligations, may lend its portfolio securities, enter into repurchase
agreements, purchase restricted and illiquid securities and purchase securities
on a when-issued or forward commitment basis.
See "Investments, Techniques and Risk Factors" for more information about the
Fund's investments.
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
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THE FUND FOLLOWS CERTAIN POLICIES THAT MAY
HELP TO REDUCE INVESTMENT RISK.
- -------------------------------------------------------------------------------
8
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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 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.
Orange County, California still remains under court supervision after filing for
protection under Chapter 9 of the Federal Bankruptcy Code in December 1994. This
fiscal crisis caused the County to default on note obligations and involved it
in numerous legal proceedings which could continue over the next several years.
The aftermath still continues in fiscal year 1996 with the County having reduced
staff, reorganized departments, cut discretionary spending and services,
initiated a program to increase solid waste revenues and issued recovery notes
to meet cashflow needs and begin repaying Investment Pool participants. Failure
by the voters to approve a one-half cent increase in the County Sales Tax
prompted the County to cut additional services and examine alternative plans for
meeting the county's obligations. Local Orange County governments have also had
to adjust budgets and reduce spending in some instances to compensate for their
investment pool losses and county service cuts. A Recovery Plan which includes
the diversion of public transit revenues to the General Fund was adopted by the
County and approved by the State Legislature in the fall of 1995. The most
recent plan calls for the county to pay for investment losses to the Investment
Pool Participants (approximately 23% of their principal investments in the pool)
over
9
<PAGE>
15 years. Before the plan can be submitted to the bankruptcy court for approval,
the proposal must be unanimously approved by the investment pool participants.
The County anticipates receiving court approval of the plan and emerging for
bankruptcy by the end of fiscal year 1996.
The County of Los Angeles entered fiscal year 1996 with a projected budget
shortfall of $1.2 billion. After several years of closing prospective gaps
through deficit financing and the use of non-recurring revenues, significant
concern exists over the ability of County to meet this challenge. Even after the
infusion of Federal aid for health care, the County was still required to close
clinic offices, cut expenditures and significantly reduce staff. It is
anticipated that the county may have to enact additional cuts during the year
and endorse a similar program to balance the fiscal year 1997 budget. The
recovery plan approved by the State Legislature would allow the County to divert
transit revenues to the General Fund. Concerns over the longer term effects of
the current imbalance caused Moody's and S&P to downgrade various securities of
the County. The General Obligation debt of the County was lowered from A1 to A
and from A+ to A- by Moody's and S&P, respectively.
The State of California has no existing obligation with respect to any
obligations or securities of the Counties or other local entities. State
legislation passed to facilitate the recovery plans for Orange County and Los
Angeles County permits the counties to transfer funds designated for specific
purposes to general purpose funds but does not commit any state funds to
resolving these situations. 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.
Until the signs of recovery appeared in 1994, California remained mired in the
state's deepest and longest recession since the 1930's. 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 five years has required the Governor and the Legislature
to undertake multi-billion 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. Again in
1995, the State experienced difficulties in obtaining a consensus on the budget
which produced a two-month delay in passage. The final fiscal year 1996 budget
proposes to eliminate the budget deficit including all short-term borrowings and
generate a small surplus.
The persistent 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 had to resort to repeated external
borrowing to meet cash needs since 1992. In order to meet cash flow requirements
for the 1994-95 fiscal year and to defer a partial payment on the budget
deficit, the State issued $7 billion of short-term securities in 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
10
<PAGE>
expenditures in fiscal year 1996 if cash projections made in October 1995 show
deterioration form the original 1994 borrowing projections. This plan places the
burden upon the Legislature to maintain ongoing control over the annual budget,
and could exert additional pressure on local governments reliant on appropriated
program expenditures.
In 1995, the California economy continued the recovery stated a year earlier.
After four consecutive years of on-going job losses, company relocations out of
state, and unemployment rates in excess of 9% at times, the State has registered
two consecutive years of job growth and declining unemployment rates. The
expansion has produced additional tax revenues which have outpaced projections
over the first half of fiscal year 1996. Due to the growth in tax revenues, the
State met the October 1995 cash flow projection and did not have to initiate
mandatory cuts in program expenditures. The additional revenues should also
facilitate meeting the original budget forecast calling for the retirement of
all short-term securities including the $4 billion issued in 1994 and the
generation of a small surplus by end of the Fiscal Year. Over the next two
years, growth in employment and personal income is forecast to outpace the
growth of the national economy. Any setbacks to this recovery or future
breakdowns in fiscal discipline could lead to additional budgetary pressures on
State and local governments.
When choosing brokerage firms to carry out the Fund's transactions, the Adviser
gives primary consideration to 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. These brokers include Tucker Anthony Incorporated, Sutro & Company,
Inc. and John Hancock Distributors, Inc., which are indirectly owned by the John
Hancock Mutual Life Insurance Company (the "Life Company"), which in turn
indirectly owns the Adviser.
- -------------------------------------------------------------------------------
BROKERS ARE CHOSEN ON BEST PRICE AND
EXECUTION.
- -------------------------------------------------------------------------------
ORGANIZATION AND MANAGEMENT OF THE FUND
The Fund is a diversified open-end management investment company organized as a
Massachusetts business trust in 1990. The Fund reserves the right to create and
issue a number of series of shares, or funds or classes thereof, which are
separately managed and have different investment objectives. The Trustees may
also classify or reclassify any series into one or more classes. Accordingly,
the Trustees have authorized the issuance of two classes of shares of the Fund,
designated as Class A and Class B shares. The shares of each class represent an
interest in the same portfolio of investments of the Fund and have equal rights
as to voting, redemption, dividends and liquidation. However, each class of
shares bears different distribution fees, and Class A and Class B shareholders
have exclusive voting rights with respect to their distribution plans. 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,
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
11
<PAGE>
under certain circumstances, will assist in shareholder communications
with other shareholders.
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.
- -------------------------------------------------------------------------------
JOHN HANCOCK ADVISERS, INC. ADVISES
INVESTMENT COMPANIES HAVING A TOTAL ASSET
VALUE OF APPROXIMATELY $16 BILLION.
- -------------------------------------------------------------------------------
Dianne Sales-Singer is responsible for the day-to-day management of the Fund.
She is assisted by a team of portfolio managers and analysts. Ms. Sales-Singer
has been with the Adviser since 1989. Prior to joining the Adviser, she was
employed at Bear Stearns & Co. Inc.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
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.
ALTERNATIVE PURCHASE ARRANGEMENTS
You can purchase shares of the Fund at a price equal to their net asset value
per share plus a sales charge. At your election, this charge may be imposed
either at the time of the purchase (see "Initial Sales Charge Alternative,"
Class A Shares) or on a contingent deferred basis (the "Contingent Deferred
Sales Charge Alternative," Class B Shares). If you do not specify on your
account application the class of shares you are purchasing, it will be assumed
that you are investing in Class A shares.
CLASS A SHARES. If you elect to purchase Class A shares, you will incur an
initial sales charge unless the amount you purchase is $1 million or more. If
you purchase $1 million or more of Class A shares, you will not be subject to an
initial sales charge, but you will incur a sales charge if you redeem your
shares within one year of purchase. Class A shares are subject to ongoing
distribution and service fees at a combined annual rate of up to 0.15% of the
Fund's average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Share Price -- Qualifying for a Reduced Sales Charge."
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS A SHARES ARE SUBJECT
TO AN INITIAL SALES CHARGE.
- -------------------------------------------------------------------------------
CLASS B SHARES. You will not incur a sales charge when you purchase Class B
shares, but the shares are subject to a sales charge if you redeem them within
six years of purchase (the "contingent deferred sales charge" or the "CDSC").
Class B shares are subject to ongoing distribution and service fees at a
combined annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS B SHARES ARE SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE.
- -------------------------------------------------------------------------------
12
<PAGE>
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 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
The alternative purchase arrangement allows you to choose the most beneficial
way to buy shares, given the amount of your purchase, the length of time you
expect to hold your shares and other circumstances. You should consider whether,
during the anticipated life of your Fund investment, the CDSC and accumulated
fees on Class B shares would be less than the initial sales charge and
accumulated fees on Class A shares purchased at the same time, and to what
extent this differential would be offset by the Class A shares' lower expenses.
To help you make this determination, the table under the caption "Expense
Information" on the 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."
- -------------------------------------------------------------------------------
YOU SHOULD CONSIDER WHICH CLASS OF SHARES
WOULD BE MORE BENEFICIAL TO YOU.
- -------------------------------------------------------------------------------
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.
13
<PAGE>
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 its own
distribution and service fees, shareholder meeting expenses. See "Dividends and
Taxes."
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a fee to the
Adviser which for the 1995 fiscal year was 0.40% of the Fund's average daily net
assets. The Adviser has voluntarily agreed to continue to limit the Fund's
operating expenses to 0.75% and 1.50% of the average net assets attributable to
Class A and Class B shares, respectively.
The Class A and Class B shareholders have adopted distribution plans (each a
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"). Under these Plans, the Fund will pay distribution and service fees
at an aggregate annual rate of up to 0.15% of the Class A shares' average daily
net assets and an aggregate annual rate of 1.00% of the Class B shares' average
daily 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 and others
for providing personal and account maintenance services to shareholders.
- -------------------------------------------------------------------------------
THE FUND PAYS DISTRIBUTION AND SERVICE
FEES FOR MARKET-
ING AND SALES-RELATED
SHAREHOLDER SERVICING.
- -------------------------------------------------------------------------------
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, 1995, an
aggregate of $3,275,187 of distribution expenses or 4.0% 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.
14
<PAGE>
DIVIDENDS AND TAXES
DIVIDENDS. The Fund generally declares dividends daily and distributes them
monthly, representing all or substantially all of its net investment income. The
Fund may distribute net realized long-term and short-term capital gains, if any,
at least annually.
- -------------------------------------------------------------------------------
THE FUND GENERALLY DECLARES DIVIDENDS
DAILY AND DISTRIBUTES THEM MONTHLY.
- -------------------------------------------------------------------------------
Dividends are reinvested in additional shares of your class unless you elect the
option to receive 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 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 back-up withholding of Federal income tax. If you do not
provide this information or are otherwise subject to this withholding, the Fund
may be required
15
<PAGE>
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
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30-day period by the maximum
offering price per share on the last day of that period. Yield is also
calculated according to accounting methods that are standardized for all stock
and bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the Fund's yield may not equal the income paid on
shares or the income reported in the Fund's financial statements. The Fund may
also utilize tax equivalent yields of its Class A and Class B shares computed in
the same manner, with adjustment for assumed Federal income tax and California
income tax rates. For a comparison of yields on municipal securities and taxable
securities, see the Taxable Equivalent Yield Table in Appendix A.
- -------------------------------------------------------------------------------
THE FUND MAY ADVERTISE ITS YIELD, TAX
EQUIVALENT YIELD AND TOTAL RETURN.
- -------------------------------------------------------------------------------
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 of the respective
class of shares of the Fund divided by 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.
Both total return and yield calculations for Class A shares generally include
the effect of paying the maximum sales charge (except as shown in "The Fund's
Financial Highlights"). Investments at lower sales charges would result in
higher performance figures. Yield and total return for the Class B shares
reflect deduction of the applicable contingent deferred sales charge imposed on
a redemption of shares held for the applicable period. All calculations assume
that all dividends are
16
<PAGE>
reinvested at net asset value on the reinvestment dates during the periods.
Yield and total return of Class A and Class B shares will be calculated
separately and, because each class is subject to certain different expenses, the
yield and total return may differ with respect to that class for the same
period. The relative performance of the Class A and Class B shares will be
affected by a variety of factors, including the higher operating expenses
attributable to the Class B shares, whether the Fund's investment performance is
better in the earlier or later portions of the period measured and the level of
net assets of the classes during the period. The Fund will include the total
return of both Class A and Class B shares in any advertisement or promotional
materials including Fund performance data. The value of Fund's 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. See "Factors to Consider in Choosing an Alternative."
17
<PAGE>
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
The minimum initial investment 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.
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
BY CHECK 1. Make your check payable to John Hancock Investor Services
Corporation ("Investor Services") P.O. Box 9115, Boston, MA
02205-9115.
2. Deliver the completed application and check to your registered
representative or a broker with an agreement with John Hancock
Funds ("Selling Broker") or mail it directly to Investor
Services.
- ---------------------------------------------------------------------------------
BY WIRE 1. Obtain an account number by contacting your registered
representative or Selling Broker, or by calling 1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock California Tax-Free Income Fund
(Class A or Class B shares)
Your Account Number
Name(s) under which account is registered
3. Deliver the completed application to your registered
representative or Selling Broker or mail it directly to
Investor Services.
- ----
1. Complete the "Automatic Investing" and "Bank Information" sections on
MONTHLY the Account Privileges Application, designating a bank account from
AUTOMATIC which funds may be drawn.
ACCUMULATION 2. The amount you elect to invest will be withdrawn automatically from
PROGRAM your
(MAAP) bank or credit union account.
</TABLE>
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A
AND CLASS B SHARES.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
BY TELEPHONE 1. Complete the "Invest-by-Phone" and "Bank Information" sections
on the Account Privileges Application, designating a bank
account from which your funds may be drawn. Note that in order
to invest by phone, you must be in a bank or credit union that
is a member of the Automated Clearing House system (ACH).
2. After your authorization form has been processed, you may
purchase additional Class A and Class B shares by calling
Investor Services toll-free at 1-800-225-5291.
3. Give the Investor Services representative the name in which
your account is registered, the Fund name, the class of shares
you own, your account number, and the amount you wish to
invest.
4. Your investment normally will be credited to your account the
business day following your phone request.
- ---------------------------------------------------------------------------------
BY CHECK 1. Either complete the detachable stub included in your account
statement or include a note with your investment listing the
name of the Fund, the class of shares you own, your account
number and the name(s) in which the account is registered.
2. Make your check payable to John Hancock Investor Services
Corporation.
3. Mail the account information and check to:
John Hancock Investor Services Corporation
P.O. Box 9115
Boston, MA 02205-9115
or deliver it to your registered representative or Selling
Broker.
- ---------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
BY WIRE Instruct your bank to wire funds to:
</TABLE>
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A AND CLASS B
SHARES.
(CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock California Tax-Free Income Fund
(Class A or Class B shares)
Your Account Number
Name(s) under which account is registered
- ---------------------------------------------------------------------------------
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 a statement of your account after any transaction that affects
your share balance or registration (statements related to reinvestment of
dividends and automatic investment/withdrawal plans will be sent to you
quarterly). A tax information statement will be mailed to you by January 31 of
each year.
- -------------------------------------------------------------------------------
YOU WILL RECEIVE ACCOUNT STATEMENTS THAT
YOU SHOULD KEEP TO HELP WITH YOUR
PERSONAL RECORDKEEPING.
- -------------------------------------------------------------------------------
SHARE PRICE
The net asset value per share ("NAV") is the value of one share. The NAV is
calculated by dividing the net assets of each class by the number of outstanding
shares of that class. The NAV of each class can differ. Securities in the Fund's
portfolio are valued on the basis of market quotations, valuations provided by
independent pricing services or, at fair value as determined in good faith
according to procedures approved by the Trustees. Short-term debt investments
maturing within 60 days are valued at amortized cost which the Trustees has
determined to approximate market value. If quotations are not readily available,
assets are valued by a method that the Trustees believe accurately reflects fair
value. The NAV is calculated once daily as of the close of regular trading on
the New York Stock Exchange (the "Exchange") (generally at 4:00 P.M., New York
time) on each day that the Exchange is open.
- -------------------------------------------------------------------------------
THE OFFERING PRICE OF YOUR SHARES IS THEIR
NET ASSET VALUE PLUS A SALES CHARGE,
IF APPLICABLE, WHICH WILL
VARY WITH THE PURCHASE
ALTERNATIVE YOU CHOOSE.
- -------------------------------------------------------------------------------
Shares of the Fund are sold at the offering price based on the NAV computed
after your investment request is received in good order by John Hancock Funds.
If you buy shares of the Fund through a Selling Broker, the Selling Broker must
receive your investment before the close of regular trading on the Exchange and
transmit it to John Hancock Funds before its close of business to receive that
day's offering price.
19
<PAGE>
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The offering price you pay
for Class A shares of the Fund equals the NAV plus a sales charge as follows:
<TABLE>
<CAPTION>
COMBINED REALLOWANCE
REALLOWANCE TO SELLING
AND SERVICE BROKERS AS A
FEE AS A PERCENTAGE
SALES CHARGE AS SALES CHARGE AS PERCENTAGE OF THE
AMOUNT INVESTED A PERCENTAGE OF A PERCENTAGE OF OF OFFERING OFFERING
(INCLUDING SALES CHARGE) OFFERING PRICE THE AMOUNT INVESTED PRICE(+) PRICE(*)
- ----------------------------------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C>
Less than $100,000........ 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999...... 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999...... 2.75% 2.83% 2.30% 2.06%
$500,000 to $999,999...... 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over....... 0.00%(**) 0.00%(**) (***) 0.00%(***)
</TABLE>
(*) Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales
charge. 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 made within one year of purchase.
(***) John Hancock Funds may pay a commission and the first year's service fee
(as described in (+) below) to Selling Brokers who initiate and are
responsible for purchases of $1 million or more in the aggregate as
follows: 1% on sales to $4,999,999, 0.50% on the next $5 million and 0.25%
on amounts of $10 million and over.
(+) At the time of sale, John Hancock Funds pays to Selling Brokers the first
year's service fee in advance in an amount equal to 0.25% of the net
assets invested in the Fund. Thereafter, it pays the service fee
periodically in arrears in an amount up to 0.25% of the Fund's average
annual net assets. Selling Brokers receive the fee as compensation for
providing personal and account maintenance services to shareholders.
Sales charges ARE NOT APPLIED to any dividends that are reinvested in additional
Class A shares of the Fund.
John Hancock Funds will pay certain affiliated Selling Brokers at an annual rate
of up to 0.05% of the daily net assets of accounts attributable to these
brokers.
Under certain circumstances described below, investors in Class A shares may be
entitled to pay reduced sales charges. See "Qualifying for a Reduced Sales
Charge" below.
20
<PAGE>
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.
QUALIFYING FOR A REDUCED SALES CHARGE. If you invest more than $100,000 in
Class A shares of the Fund or a combination of John Hancock funds (except money
market funds), you may qualify for a reduced sales charge on your investments in
Class A shares through a LETTER OF INTENTION. You may also be able to use the
ACCUMULATION PRIVILEGE and the COMBINATION PRIVILEGE to take advantage of the
value of your previous investments in Class A shares of the John Hancock funds
in meeting the breakpoints for a reduced sales charge. For the ACCUMULATION
PRIVILEGE and COMBINATION PRIVILEGE, the applicable sales charge will be based
on the total of:
- -------------------------------------------------------------------------------
YOU MAY QUALIFY FOR A
REDUCED SALES CHARGE ON
YOUR INVESTMENT IN CLASS A SHARES.
- -------------------------------------------------------------------------------
1. Your current purchase of Class A shares of the Fund;
2. The net asset value (at the close of business on the previous day) of (a) all
Class A shares of the Fund you hold, and (b) all Class A shares of any other
John Hancock funds you hold; and
3. The net asset value of all shares held by another shareholder eligible to
combine his or her holdings with you into a single "purchase."
21
<PAGE>
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%. This is 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, financial planner, consultant 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 or
services made available to their clients.
- - A former participant in an employee benefit plan with John Hancock Funds, when
he or she withdraws from his or her plan and transfers any or all of his/her
plan distributions directly to the Fund.
- - A member of an approved affinity group financial services plan.*
- ---------------
* 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 an initial sales charge so that
your entire 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. The 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
22
<PAGE>
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 -120
acquired through dividend reinvestment (10 X $12)
- - 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
them to defray its expenses related to providing the Fund with distribution
services connected to the sale of Class B shares, such as compensating Selling
Brokers for selling these shares. The combination of the CDSC and the
distribution and service fees makes it possible for the Fund to sell Class B
shares without an initial sales charge.
The amount of the CDSC, if any, will vary depending on the number of years from
the time you purchase your Class B shares until the time you redeem them. Solely
for the purposes of determining the holding period, any payments you make during
the month will be aggregated and deemed to have been made on the last day of the
month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR IN WHICH CLASS B SHARES DOLLAR AMOUNT SUBJECT TO
REDEEMED FOLLOWING PURCHASE CDSC
- ---------------------------------------------------- ---------------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
A commission equal to 3.75% of the amount invested and a first year's service
fee equal to 0.25% of the amount invested are paid to Selling Brokers. The
initial service fee is paid in advance at the time of sale for the provision of
personal and account maintenance services to shareholders during the twelve
months following the sale, and thereafter the service fee is paid in arrears.
23
<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGES. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in these circumstances:
- - Redemptions of Class B shares made under Systematic Withdrawal Plan (see "How
to Redeem Shares"), as long as your annual redemptions do not exceed 10% of
your account value at the time you established your Systematic Withdrawal
Plan, and 10% of the value of your subsequent investments (less redemptions)
in that account at the time you notify Investor Services. This waiver does not
apply to Systematic Withdrawal Plan redemptions of Class A shares that are
subject to a CDSC.
- -------------------------------------------------------------------------------
UNDER CERTAIN CIRCUMSTANCES, THE CDSC ON
CLASS B AND CERTAIN CLASS A SHARE
REDEMPTIONS WILL BE WAIVED.
- -------------------------------------------------------------------------------
- - Redemptions made to effect distributions from an Individual Retirement Account
either before or after age 59 1/2, as long as the distributions are based on
the life expectancy of the joint-and-last survivor life expectancy of you and
your beneficiary. These distributions must be free from penalty under the
Code.
- - Redemptions made to effect mandatory distributions under the Code after age
70 1/2 from a tax-deferred retirement plan.
- - Redemptions made to effect distributions to participants or beneficiaries from
certain employer-sponsored retirement plans, including those qualified under
Section 401(a) of the Code, custodial accounts under Section 403(b)(7) of the
Code and deferred compensation plans under Section 457 of the Code. The waiver
also applies to certain returns of excess contributions made to these plans.
In all cases, the distributions must be free from penalty under the Code.
- - Redemptions due to death or disability.
- - Redemptions made under the Reinvestment Privilege, as described in "Additional
Services and Programs" of this Prospectus.
- - Redemptions made pursuant to the Fund's right to liquidate your account if you
have less than $100 invested in the Fund.
- - Redemptions made in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
- - Redemptions from certain IRA and retirement plans that purchased shares prior
to October 1, 1992.
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to it.
CONVERSION OF CLASS B 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 this 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 your tax basis or tax holding period for the converted shares.
24
<PAGE>
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services, less any applicable CDSC. The Fund
may hold payment until it is reasonably satisfied that investments recently made
by check or Invest-by-Phone have been collected (which may take up to 10
calendar days).
- -------------------------------------------------------------------------------
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION
REQUEST, PLEASE FOLLOW THESE PROCEDURES.
- -------------------------------------------------------------------------------
Once your shares are redeemed, the Fund generally sends you payment on the next
business day. When you redeem your shares, you may realize a taxable gain or
loss depending usually on the difference between what you paid for them and what
you receive for them, subject to certain tax rules. Under unusual circumstances,
the Fund may suspend redemptions or postpone payment for up to three business
days or longer, as permitted by Federal securities laws.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
BY TELEPHONE All Fund shareholders are eligible automatically 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 according to the telephone
transaction procedures mentioned above.
Telephone redemption is not available for IRAs, other
tax-qualified retirement plans or Fund shares that are in
certificated form.
During periods of extreme economic conditions or market
changes, telephone requests may be difficult to implement
due to a large volume of calls. During these times you
should consider placing redemption requests in writing or
using EASI-Line. EASI-Line's telephone number is
1-800-338-8080.
- ---------------------------------------------------------------------------------
BY WIRE If you have a telephone redemption form on file with the
Fund, redemption proceeds of $1,000 or more can be wired on
the next business day to your designated bank account and a
fee (currently $4.00) will be deducted. You may also use
electronic fund transfer to your assigned bank account and
the funds are usually collectible after two business days.
Your bank may or may not charge for this service.
Redemptions of less than $1,000 will be sent by check or
electronic funds transfer.
This feature may be elected by completing the "Telephone
Redemption" section on the Account Privileges Application
included with this Prospectus.
- ---------------------------------------------------------------------------------
IN WRITING Send a stock power or "letter of instruction" specifying
the name of the Fund, the dollar amount or the number of
shares to be redeemed, your name, class of shares, your
account number, and the additional requirements listed
below that apply to your particular account.
- ---------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
TYPE OF REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Sole A letter of instruction signed (with titles,
Proprietorship, Custodial where applicable) by all persons authorized
(Uniform Gifts or Transfer to to sign for the account, exactly as it is
Minors Act), General Partners registered with the signature(s) guaran-
teed.
Corporation, Association A letter of instruction and a corporate
resolution, signed by person(s) authorized
to act on the account with the signatures
guaranteed.
Trusts A letter of instruction signed by the
Trustee(s), with the signature(s)
guaranteed. (If the Trustee's name is not
registered on your account, also provide a
copy of the trust document, certified within
the last 60 days.)
If you do not fall into any of these registration categories, please call
1-800-225-5291 for further instructions.
</TABLE>
- --------------------------------------------------------------------------------
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the signature on your request. It may not be provided by a notary
public. If the net asset value of the shares redeemed is $100,000 or less,
John Hancock Funds may guarantee the signature. The following institutions may
provide you with a signature guarantee, provided that any such institution
meets credit standards established by Investor Services: (i) a bank; (ii) a
securities broker or dealer, including a government or municipal securities
broker or dealer, that is a member of a clearing corporation or meets certain
net capital requirements; (iii) a credit union having authority to issue
signature guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association; or (v)
a national securities exchange, a registered securities exchange or a clearing
agency.
- --------------------------------------------------------------------------------
WHO MAY GUARANTEE YOUR
SIGNATURE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH YOUR BROKER. Your broker may be able to initiate the redemption.
Contact your broker for instructions.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT
REDEMPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If you have certificates for your shares, you must submit them with your stock
power or a letter of instruction. Unless you specify to the contrary, any
outstanding Class A shares will be redeemed before Class B shares. You may not
redeem certificated shares by telephone.
Due to the proportionately high cost of maintaining small accounts, the Fund
reserves the right to redeem at net asset value all shares in an account which
holds less than $100 and to mail the proceeds to the shareholder, or the
transfer agent may impose an annual fee of $10.00. No account will be
involuntarily redeemed or additional fee imposed if the value of the account
falls below the required minimum as a result of market action. No CDSC will be
imposed on involuntary redemption of shares.
Shareholders will be notified before these redemptions are to be made or this
fee is imposed, and will have 30 days to purchase additional shares to bring
their account balance up to the required minimum. Unless the number of shares
acquired by additional purchases and dividend reinvestments exceeds the number
of shares redeemed, repeated redemptions from a smaller account may eventually
trigger this policy.
- -------------------------------------------------------------------------------
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
If your investment objective changes, or you wish to achieve further
diversification, John Hancock offers other funds with a wide range of investment
goals. Contact your registered representative or Selling Broker and request a
prospectus for the John Hancock funds that interest you. Read the prospectus
carefully before exchanging your shares. You can exchange shares of each class
of the Fund only for shares of the same class of another John Hancock fund. For
this purpose, John Hancock funds with only one class of shares will be treated
as Class A, whether or not they have been so designated.
- -------------------------------------------------------------------------------
YOU MAY EXCHANGE SHARES OF THE FUND ONLY
FOR SHARES OF THE SAME CLASS OF ANOTHER
JOHN HANCOCK FUND.
- -------------------------------------------------------------------------------
26
<PAGE>
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 Intermediate
Maturity Government Fund 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.
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 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 of another for Federal income tax purposes. An exchange may
result in a taxable gain or loss.
When you make an exchange, your account registration in both the existing and
new account must be identical. The exchange privilege is available only in
states where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
Because Fund performance and shareholders can be hurt by excessive trading, the
Fund reserves the right to terminate the exchange privilege for any person or
group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely. The
Fund may also temporarily or permanently terminate the exchange privilege for
any person who makes seven or more exchanges out of the Fund per calendar year.
Accounts under common control or ownership will be aggregated for this purpose.
Although the Fund will attempt to give prior notice whenever it is reasonably
able to do so, it may impose these restrictions at any time.
27
<PAGE>
BY TELEPHONE
1. When you complete the application for your initial purchase of Fund shares,
you automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to authorize telephone exchanges.
2. Call 1-800-225-5291. Have the account number of your current Fund and the
exact name in which it is registered available to give to the telephone
representative.
3. Your name, the account number, taxpayer identification number applicable to
the account and other relevant information may be requested. In addition,
telephone instructions are recorded.
IN WRITING
1. In a letter, request an exchange and list the following:
--the name and class of the Fund whose shares you currently own
--your account number
--the name(s) in which the account is registered
--the name of the fund in which you wish your exchange to be invested
--the number of shares, all shares or dollar amount you wish to exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
REINVESTMENT PRIVILEGE
1. You will not be subject to a sales charge on Class A shares that you reinvest
in a 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. The holding period of the shares
acquired through reinvestment for the purpose of computing the CDSC payment
upon a subsequent redemption will include the holding period of the redeemed
shares.
- -------------------------------------------------------------------------------
IF YOU REDEEM SHARES OF THE
FUND, YOU MAY BE ABLE TO
REINVEST ALL OR PART OF THE
PROCEEDS IN SHARES OF THIS
FUND OR ANOTHER JOHN
HANCOCK FUND WITHOUT
PAYING AN ADDITIONAL
SALES CHARGE.
- -------------------------------------------------------------------------------
2. Any portion of your redemption may be reinvested in the Fund shares or in
shares of 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.
28
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
1. You can elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
also obtain this application from your registered representative or by
calling 1-800-225-5291.
2. To be eligible, you must have at least $5,000 in your account.
3. Payments from your account can be made monthly, quarterly, semi-annually or
annually or on a selected monthly basis to yourself or any other designated
payee.
- -------------------------------------------------------------------------------
YOU CAN PAY ROUTINE BILLS FROM YOUR
ACCOUNT, OR MAKE PERIODIC DISBURSEMENTS OF
FUNDS FROM YOUR RETIREMENT ACCOUNT TO
COMPLY WITH IRS REGULATIONS.
- -------------------------------------------------------------------------------
4. There is no limit on the number of payees you may authorize, but all payments
must be made at the same time or intervals.
5. It is not advantageous to maintain a Systematic Withdrawal Plan concurrently
with purchases of additional Class A or Class B shares, because you may be
subject to initial sales charges on your purchases of Class A shares or to a
CDSC on your redemptions of Class B shares. In addition, your redemptions are
taxable events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks or if deposits to a bank account are returned for any reason.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP)
1. You can authorize an investment to be withdrawn automatically each month from
your bank, for investment in Fund shares under the "Automatic Investing" and
"Bank Information" sections of the Account Privileges Application.
- -------------------------------------------------------------------------------
YOU CAN MAKE AUTOMATIC INVESTMENTS AND
SIMPLIFY YOUR INVESTING.
- -------------------------------------------------------------------------------
2. You can also authorize automatic investment through payroll deduction by
completing the "Direct Deposit Investing" section of the Account Privileges
Application.
3. You can terminate your Monthly Automatic Accumulation Program plan at any
time.
4. There is no charge to you for this program, and there is no cost to the Fund.
5. If you have payments withdrawn from a bank account and we are notified that
the account has been closed, your withdrawals will be discontinued.
GROUP INVESTMENT PROGRAM
1. An individual account will be established for each participant, but the
initial sales charge for Class A shares will be based on the aggregate dollar
amount of all participants' investments. To determine how to qualify for this
program, contact your registered representative or call 1-800-225-5291.
- -------------------------------------------------------------------------------
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS
MAY ESTABLISH ACCOUNTS.
- -------------------------------------------------------------------------------
2. The initial aggregate investment of all participants in the group must be at
least $250.
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.
29
<PAGE>
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."
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
30
<PAGE>
rates and security prices. Some options and futures strategies, including
selling futures, buying puts and writing calls, tend to hedge a Fund's
investment against price fluctuations. Other strategies, including buying
futures, writing puts, and buying calls, tend to increase market exposure.
Options and futures may be combined with each other or with forward contracts in
order to adjust the risk and return characteristics of the overall strategy. The
Fund may invest in options and futures based on debt securities and municipal
bond indices (securities indices).
Options and futures can be volatile investments and involve certain risks. If
the Adviser applies a hedge at an inappropriate time or judges market conditions
incorrectly, options and futures strategies may lower the Fund's return. The
Fund could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. Options and
futures do not pay interest, but may produce capital gains or losses,
distributions of which will be taxable to shareholders.
The Fund will not engage in a transaction in futures or options on futures if,
immediately thereafter, the sum of initial margin deposits and premiums required
to establish positions in futures contracts and options on futures would exceed
5% of the Fund's net assets. The loss incurred by the Fund investing in futures
contracts and in writing options on futures is potentially unlimited and may
exceed the amount of any premium received. The Fund's transactions in options
and futures contracts may be limited by the requirements of the Code for
qualification as a regulated investment company. See the Statement of Additional
Information for further discussion of options and futures transactions,
including tax effects and investment risks.
MUNICIPAL LEASE OBLIGATIONS. The Fund may purchase participation interests
which give the Fund an undivided pro rata interest in the tax exempt security.
For certain participation interests, the Fund will have the right to demand
payment, on a specified number of days' notice for all or any part of the Fund's
participation interest in the tax exempt security plus accrued interest.
Participation interests that are determined to be not readily marketable, will
be considered illiquid for purposes of the Fund's 10% restriction on investment
in securities.
The Fund may also invest in Certificates of Participation ("COP's") which
provide participation interests in lease revenues. Each COP represents a
proportionate interest in or right to the lease-purchase payment made under
municipal lease obligations or installment sales contracts. Municipal lease
obligations are issued by a state or municipal financing authority to provide
funds for the construction of facilities (e.g., schools, dormitories, office
buildings or prisons) or the acquisition of equipment. In certain states, such
as California, COP's constitute a majority of new municipal financing issues.
Certain municipal lease obligations may trade infrequently. Accordingly, COPs
will be purchased and monitored pursuant to 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
31
<PAGE>
for such securities. An investment in COPs is subject to the risk that a
municipality may not appropriate sufficient funds to meet payments on the
underlying lease obligation. See the Statement of Additional Information for
additional discussion of participation interests and municipal lease
obligations.
DERIVATIVE INSTRUMENTS. The Fund may purchase or enter into derivative
instruments to enhance return, to hedge against fluctuations in interest rates
or securities prices, to change the duration of the Fund's fixed income
portfolio or as a substitute for the purchase or sale of securities. The Fund's
investments in derivative securities may include certain floating rate and
indexed securities. The Fund's transactions in derivative contracts may include
the purchase or sale of futures contracts on securities or indices; options on
futures contracts; and options on securities or indices and forward contracts to
purchase or sell securities.
All of the Funds' transactions in derivative instruments involve a risk of loss
or depreciation due to unanticipated adverse changes in interest rates or
securities prices. The loss on derivative contracts may exceed the Fund's
initial investment in these contracts. In addition, the Fund may lose the entire
premium paid for purchased options that expire before they can be profitably
exercised by the Fund.
Indexed Securities. The Fund may invest in indexed securities, including
floating rate securities that are subject to a maximum interest rate ("capped
floaters") and leveraged inverse floating rate securities ("inverse floaters")
(up to 10% of the Fund's total assets). The interest rate or, in some cases, the
principal payable at the maturity of an indexed security may change positively
or inversely in relation to one or more interest rates, financial indices or
other financial indicators ("reference prices"). An indexed security may be
leveraged to the extent that the magnitude of any change in the interest rate or
principal payable on an indexed security is a multiple of the change in the
reference price. Thus, indexed securities may decline in value due to adverse
market changes in interest rates or other reference prices.
Risks Associated With Derivative Securities and Contracts. The risks associated
with the Fund's transactions in derivative securities and contracts may include
some or all of the following:
Market Risk. Investments in floating rate and indexed securities are subject to
the interest rate and other market risks described above. Entering into a
derivative contract involves a risk that the applicable market will move against
the Fund's position and that the Fund will incur a loss. For derivative
contracts other than purchased options, this loss may exceed the amount of the
initial investment made or the premium received by the Fund.
Leverage and Volatility Risk. Derivative instruments may sometimes increase or
leverage the Fund's exposure to a particular market risk. Leverage enhances the
price volatility of derivative instruments held by the Fund. The Fund may
partially 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.
32
<PAGE>
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.
33
<PAGE>
APPENDIX A
EQUIVALENT YIELDS:
TAX EXEMPT VERSUS TAXABLE INCOME FOR 1995
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 10.0%.
<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% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------
IS EQUIVALENT TO A TAXABLE YIELD OF:
$ 0-4,831 $ 0-9,662 15.85% 4.75% 5.94% 7.13% 8.32% 9.51% 10.70% 11.88%
$ 4,832-11,449 $ 9,663-22,898 16.70% 4.80% 6.00% 7.20% 8.40% 9.60% 10.80% 12.00%
$ 11,450-18,068 $ 22,899-36,136 18.40% 4.90% 6.13% 7.35% 8.58% 9.80% 11.03% 12.25%
$ 18,069-23,350 $ 36,137-39,000 20.10% 5.01% 6.26% 7.51% 8.76% 10.01% 11.26% 12.52%
$ 23,351-25,083 $ 39,001-50,166 32.32% 5.91% 7.39% 8.87% 10.34% 11.82% 13.30% 14.78%
$ 25,084-31,700 $ 50,167-63,400 33.76% 6.04% 7.55% 9.06% 10.57% 12.08% 13.59% 15.10%
$ 31,701-56,550 $ 63,401-94,250 34.70% 6.13% 7.66% 9.19% 10.72% 12.25% 13.78% 15.31%
$ 56,551-109,936 $ 94,251-143,600 37.42% 6.39% 7.99% 9.59% 11.19% 12.78% 14.38% 15.98%
$109,937-117,950 $ - 37.90% 6.44% 8.05% 9.66% 11.27% 12.88% 14.49% 16.10%
$ - $143,601-219,872 41.95% 6.89% 8.61% 10.34% 12.06% 13.78% 15.50% 17.23%
$117,951-219,872 $219,873-256,500 42.40% 6.94% 8.68% 10.42% 12.15% 13.89% 15.63% 17.36%
$219,873-256,500 $ - 43.04% 7.02% 8.78% 10.53% 12.29% 14.04% 15.80% 17.56%
$ - $256,501-439,744 45.64% 7.36% 9.20% 11.04% 12.88% 14.72% 16.56% 18.40%
$ 256,501-OVER $ 439,745 -OVER 46.24% 7.44% 9.30% 11.16% 13.02% 14.88% 16.74% 18.60%
</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 1996.
This may result in higher or lower actual rates. The above chart is intended for
estimation only.
A-1
<PAGE>
(NOTES)
<PAGE>
(NOTES)
<PAGE>
(NOTES)
<PAGE>
JOHN HANCOCK CALIFORNIA TAX-FREE
INCOME FUND
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services
Corporation
P.O. Box 9116
Boston Massachusetts 02205-9116
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For Service Information
For Telephone Exchange
For Investment-by-Phone call 1-800-225-5291
For Telephone Redemption
For TDD call 1-800-554-6713
JHD 5300P 5/96 (RECYCLE LOGO) Printed on Recycled Paper
JOHN HANCOCK
CALIFORNIA
TAX-FREE INCOME
FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1996
A MUTUAL FUND SEEKING TO OBTAIN 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.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
TELEPHONE 1-800-225-5291
<PAGE>
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
CLASS A AND CLASS B SHARES
Statement Of Additional Information
May 1, 1996
This Statement of Additional Information provides information about John
Hancock California Tax-Free Income Fund (the "Fund") in addition to the
information that is contained in the Fund's Class A and Class B Prospectus (the
"Prospectus"), dated May 1, 1996.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-5291
1-800-225-5291
TABLE OF CONTENTS
Organization of the Fund........................................... 2
Investment Objective and Policies.................................. 2
Certain Investment Practices....................................... 10
Investment Restrictions............................................ 15
Those Responsible for Management................................... 17
Investment Advisory and other Services............................. 26
Initial Sales Charge on Class A Shares............................. 29
Distribution Contract.............................................. 30
Deferred Sales Charge on Class B Shares............................ 32
Special Redemptions................................................ 33
Additional Services and Programs................................... 33
Description of the Fund's Shares................................... 35
Net Asset Value.................................................... 37
Tax Status......................................................... 37
Calculation of Performance......................................... 41
Brokerage Allocation............................................... 43
Transfer Agent Services............................................ 45
Independent Auditors............................................... 45
Custody of Portfolio............................................... 46
Appendix A......................................................... 47
Financial Statements............................................... F1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a diversified open-end management investment company organized
as a business trust under the laws of The Commonwealth of Massachusetts pursuant
to a Declaration of Trust dated October 17, 1989. Prior to the approval of John
Hancock Advisers, Inc. (the "Investment Adviser") an indirect wholly-owned
subsidiary of John Hancock Mutual Life Insurance Company (the "Life Company"), a
Massachusetts life insurance company chartered in 1862, with national
headquarters at John Hancock Place, Boston, Massachusetts, as the Fund's adviser
effective December 22, 1994, the Fund was known as Transamerica California
Tax-Free Income Fund.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. As discussed under "Investment Objective and
Policies" in the Prospectus, the investment objective of the Fund is to provide
as high a level of current income exempt from both federal income taxes and
California personal income taxes, as is consistent with preservation of capital.
Description of Tax-Exempt Securities. As described under "Investment
Objective and Policies" in the Prospectus, in seeking to achieve its investment
objective, the Fund invests in a variety of Tax-Exempt Securities.
Municipal Bonds. Municipal bonds at the time of issuance are generally
long-term securities with maturities of as much as twenty years or more but may
have remaining maturities of shorter duration at the time of purchase by the
Fund. Municipal bonds are issued to obtain funds for various public purposes
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which Municipal
Bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses and obtaining funds to lend to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds for many types of local, privately operated facilities. Such debt
instruments are considered municipal obligations if the interest paid on them is
excluded from gross income for federal income tax purposes.
Municipal Notes. Municipal Notes are short-term obligations of
municipalities, generally with a maturity ranging from six months to three
years. The principal types of such Notes include tax, bond and revenue
anticipation notes and project notes.
Municipal Commercial Paper. Municipal Commercial Paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued to meet seasonal working
capital needs of a municipality or interim construction financing. Municipal
Commercial Paper is backed in many cases by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks and other institutions. The yields of Municipal Bonds depend
upon, among other things,
-2-
<PAGE>
general money market conditions, general conditions of the Municipal Bond
market, size of a particular offering, the maturity of the obligation and rating
of the issue.
Variable or Floating Rate Obligations. As discussed under "Investment
Objective and Policies" in the Prospectus, certain of the obligations in which
the Fund may invest may be variable or floating rate obligations on which the
interest rate is adjusted at predesignated periodic intervals (variable rate) or
when there is a change in the market rate of interest on which the interest rate
payable on the obligation is met is based (floating rate). Variable or floating
rate obligations may include a demand feature which entitles the purchaser to
demand prepayment of the principal amount prior to stated maturity. Also, the
issuer may have a corresponding right to prepay the principal amount prior to
maturity. As with any other type of debt security, the marketability of variable
or floating rate instruments may vary depending upon a number of factors,
including the type of issuer and the terms of the instruments. The Fund may also
invest in more recently developed floating rate instruments which are created by
dividing a municipal security's interest rate into two or more different
components. Typically, one component ("floating rate component" or "FRC") pays
an interest rate that is reset periodically through an auction process or by
reference to an interest rate index. A second component ("inverse floating rate
component" or "IFRC") pays an interest rate that varies inversely with changes
to market rates of interest, because the interest paid to the IFRC holders is
generally determined by subtracting a variable or floating rate from a
predetermined amount (i.e., the difference between the total interest paid by
the municipal security and that paid by the FRC). The Fund may purchase FRC's
without limitation. Up to 10% of the Fund's total assets may be invested in
IFRC's in an attempt to protect against a reduction in the income earned on the
Fund's other investments due to a decline in interest rates. The extent of
increases and decreases in the value of an IFRC generally will be greater than
comparable changes in the value of an equal principal amount of a fixed-rate
municipal security having similar credit quality, redemption provisions and
maturity. To the extent that such instruments are not readily marketable, as
determined by the Investment Adviser pursuant to guidelines adopted by the Board
of Trustees, they will be considered illiquid for purposes of the Fund's 10%
investment restriction on investment in non-readily marketable securities.
Participation Interests. The Fund may purchase from financial institutions
tax exempt participation interests in tax exempt securities. A participation
interest gives the Fund an undivided interest in the tax exempt security in the
proportion that the Fund's participation interest bears to the total amount of
the tax exempt security. For certain participation interests, the Fund will have
the right to demand payment, on a specified number of days' notice, for all or
any part of the Fund's participation interest in the tax exempt security plus
accrued interest. Participation interests that are determined to be not readily
marketable will be considered as such for purposes of the Fund's 10% investment
restriction on investment in non-readily marketable illiquid securities. The
Fund may also invest in Certificates of Participation (COP's) which provide
participation interests in lease revenues. Each Certificate represents a
proportionate interest in or right to the lease- purchase payment made under
municipal lease obligations or installment sales contracts. Typically, municipal
lease obligations are issued by a state or municipal financing authority to
provide funds for the construction of facilities (e.g., schools, dormitories,
office buildings or prisons) or the acquisition of equipment. The facilities are
typically used by the state
-3-
<PAGE>
or municipality pursuant to a lease with a financing authority. Certain
municipal lease obligations may trade infrequently. Participation interests in
municipal lease obligations will not be considered illiquid for purposes of the
Fund's 10% limitation on illiquid securities provided the Investment Adviser
determines that there is a readily available market for such securities. In
reaching liquidity decisions, the Investment Adviser will consider, among
others, the following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the security and
the number of other potential purchasers; (3) dealer undertakings to make a
market in the security and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer.) With respect to
municipal lease obligations, the Investment Adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease; (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease; (3) an analysis of factors similar to that performed by
nationally recognized statistical rating organizations in evaluating the credit
quality of a municipal lease obligation, including (i) whether the lease can be
canceled; (ii) if applicable, what assurance there is that the assets
represented by the lease can be sold; (iii) the strength of the lessee's general
credit (e.g., its debt, administrative, economic and financial characteristics);
(iv) the likelihood that the municipality will discontinue appropriating funding
for the leased property because the property is no longer deemed essential to
the operations of the municipality (e.g., the potential for an event of
nonappropriation); and (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the Investment Adviser.
Callable Bonds. The Fund may purchase and hold callable municipal bonds
which contain a provision in the indenture permitting the issuer to redeem the
bonds prior to their maturity dates at a specified price which typically
reflects a premium over the bonds' original issue price. These bonds generally
have call-protection (a period of time during which the bonds may not be called)
which usually lasts for 7 to 10 years, after which time such bonds may be called
away. An issuer may generally be expected to call its bonds, or a portion of
them during periods of relatively declining interest rates, when borrowings may
be replaced at lower rates than those obtained in prior years. If the proceeds
of a bond called under such circumstances are reinvested, the result may be a
lower overall yield due to lower current interest rates. If the purchase price
of such bonds included a premium related to the appreciated value of the bonds,
some or all of that premium may not be recovered by bondholders, such as the
Fund, depending on the price at which such bonds were redeemed.
Special Considerations relating to California Tax-Exempt Securities. Since
the Fund concentrates its investments in California Tax-Exempt Securities, the
Fund will be affected by any political, economic or regulatory developments
affecting the ability of California issuers to pay interest or repay principal.
General. From mid-1990 until late 1993, California has endured a prolonged
recession coupled with deteriorating fiscal and budget conditions. During this
period, the state has also contended with natural disasters including fires, a
prolonged drought and a major earthquake in the Los Angeles area (January 1994),
rapidly growing population, and increasing
-4-
<PAGE>
social service requirements. Over the past years, the economy has begun to show
signs of renewed economic growth, albeit at a modest pace. However, it is
unlikely that the California economy will stage a major turnaround or expand at
rates equal to the mid-1980's. Economic growth in the 1990's is likely to occur
at a more subdued rate that in California's past than in the 1980's.
In 1995, the California economy continued the recovery started a year
earlier. After four consecutive years of on-going job losses, company
relocations out of state, and at times, unemployment rates in excess of 9%, the
State has registered two consecutive years of job growth and declining
unemployment rates. During 1994 and throughout most of 1995, California posted
non-farm employment gains of 1.3% and 2.3%. Sectors exhibiting employment growth
have been the construction and related manufacturing, wholesale, and retail
trade industries, transportation and recreation, business, and management
consulting. This period has also seen personal income growth exceeding 3%
annually, increasing retail sales, and increased international trade,
particularly manufactured goods. Over the next two years, non-farm employment is
projected to annually expand at rates above 2% . These trends are expected to
continue and allow the State's recovery to gain momentum over the next two
years.
The prolonged recession has seriously impacted California tax revenues and
produced the need for additional expenditures on health and welfare services.
Since the late 1980's, the State's Administrations have recognized that its
budget problems stem in part from a structural imbalance. The largest General
Fund programs - K-12 schools and community colleges, health and welfare, and
corrections - have been increasing faster than the revenue base, driven by the
State's rapid population growth. These structural concerns will be exacerbated
in coming years by the expected need to substantially increase capital and
operating funds for corrections as a result of a "Three Strikes" law enacted in
1994.
The principal sources of the State's General Fund revenues are the
California personal income tax (44% of total revenues) sales and use tax (35%)
and bank and corporation taxes (12%). The State maintains a Special Fund for
Economic Uncertainties (the "SFEU") derived from General Fund revenues as a
reserve to meet cash needs of the General Fund but which is required to be
replenished as soon as sufficient revenues are available. Because of the
recession, the SFEU has had a negative balance since 1991; the Administration
projects a positive balance of about $92 million in the SFEU by June 30, 1996.
Recent Budgets. The State failed to enact its 1992-93 budget by July 1,
1992. Starting on July 1, 1992, the Controller was required to issue "registered
warrants' in lieu of normal warrants backed by cash to pay many State
obligations. Available cash was used to pay constitutionally mandated and
priority obligations. Between July 1 and September 3, 1992, the Controller
issued an aggregate of approximately $3.8 billion of registered warrants all of
which were called for redemption by September 4, 1992 following enactment of the
1992-93 Budget Act and issuance by the State of short-term notes.
-5-
<PAGE>
The 1992-93 Budget Act, when finally adopted, was projected to eliminate
the State's accumulated deficit, with additional expenditure cuts and a $1.3
billion transfer of State education funding costs to local governments by
shifting local property taxes to school districts. However, as the recession
continued, forcing the State to continued to carry its $2.8 billion budget
deficit as of June 30, 1993.
The 1993-94 Budget Act also relied on expenditure cuts and an additional
$2.6 billion transfer of costs to local government, particularly counties. A
major feature of the budget was a two- year plan to eliminate the accumulated
deficit by borrowing into the 1994-95 fiscal year. With the recession continuing
longer than expected, revenues only exceeded expenditures by about $500 million.
However, this was the first operating surplus in four years and reduced the
accumulated deficit to $2.0 billion, after taking into account certain other
accounting reserves.
The 1994-95 Budget Act was passed on July 8, 1994, and provided for an
estimated $41.9 billion of General Fund revenues, and $40.9 billion of
expenditures. The budget assumed receipt of about $750 million of new federal
assistance for the costs of undocumented immigrants, as well as a plan to defer
retirement of $1 billion of the accumulated budget deficit until the 1995-96
fiscal year. The Federal government has apparently budgeted only $33 million of
this immigration aid. However, this shortfall is expected to be almost fully
offset by higher than projected revenues, and lower than projected caseload
growth as the economy improves.
Because of the accumulated budget deficit over the past several years, the
payment of certain unbudgeted expenditures to schools to maintain constant
per-pupil aid levels, and a reduction of the level of available internal
borrowing, the State's cash resources have been significantly depleted. This has
required the State to rely on a series of external borrowings for the past
several years to pay its normal expenses, including borrowings which have gone
past the end of the fiscal year. In February 1994, the State borrowed $3.2
billion, maturing by December, 1994. In July 1994, the State borrowed a total of
$7.0 billion to meet its cash flow requirements for the 1994-95 fiscal year and
to fund part of its deficit into the 1995-96 fiscal year. A total of $4.0
billion of this borrowing matures in April, 1996. The State will continue to
utilize external borrowing to meet its cash needs to the foreseeable future.
In order to assure repayment of the $4 billion, 22-month borrowing, the
State enacted legislation (the "Trigger Law") which can lead to automatic,
across-the-board cuts in General Fund expenditures in either the 1994-95 or
1995-96 fiscal years if cash flow projections made at certain times during those
years show deterioration from the projections made in July 1994, when the
borrowings were made. On November 15, 1994, the State Controller as part of the
Trigger Law reported that the cash position of the General Fund on June 30, 1995
would be about $580 million better than earlier projected, so no automatic
budget adjustments were required in 1994-95. The Controller's report showed that
loss of federal funds was offset by higher revenues, lower expenditures, and
certain other increases in cash resources.
Again in 1995, the State experienced difficulties in obtaining a consensus
on the Budget which produced a two-month delay in passage. The enacted FY1995-96
Budget projects General Fund revenues of $44.1 billion and expenditures of $43.4
billion. Key components
-6-
<PAGE>
built into the budget included the receipt of about $830 million of new Federal
aid for undocumented aliens' costs and the successful resolution of litigation
concerning previous budget actions. This Budget proposes to eliminate the
outstanding deficit including all short-term borrowings and generate a small
surplus of $289 million by year end. On October 16, 1995, the State Controller
indicated that the cash position of the General Fund exceeded requirements for
enacting the Trigger Law. Initial results show that the major tax sources
(Income, Sales and Corporation Taxes) of the state are exceeding projections by
$440 million. The tax revenue growth provides some evidence of the breadth of
California's economic rebound and offsets some reductions in anticipated Federal
aid during 1995. Attainment of FY1995-96 Budget projections hinge on the
continuation of the economic recovery into 1996 and the maintenance of fiscal
discipline by the state.
The FY1996-97 budget as currently proposed by the Governor calls for
General Fund expenditures of $44.28 billion against expected revenues of $44.99
billion, a general increase of 5% over FY1995-96. Specific features of the
proposal include additional investments in infrastructure, educational
technology and programs, reductions in welfare expenditures and renter tax
credits, and a 15% tax cut for individuals and corporations to be phased in over
3 years. The final form of the FY1996-97 Budget remains to be shaped through
negotiations with the California Legislature.
Rating Agencies. The ongoing structural imbalances, growing accumulated
deficits, and sluggish recovery of the California economy have placed the State
under ongoing scrutiny from the municipal credit rating agencies. In July 1994,
both Moody's and S&P's lowered their ratings on the State's general obligation
debt. Moody's dropped the State from a rating of Aa to A1 and S&P reduced the
rating from A+ to A. Fitch lowered its rating from Aa to A. Despite the progress
in producing break-even financial operations and initiation deficit reduction,
the agencies remain cautions as the State confronts a continuing fiscal
challenge.
Constitutional Considerations. Changes in California laws during the last
two decades have limited the ability of California State and municipal issuers
to obtain sufficient revenue to pay their bond obligations.
In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13. Proposition 13 limits ad valorem
(according to value) taxes on real property and restricts the ability of taxing
entities to increase real property taxes and assessments, and limits the ability
of local governments to raise other taxes.
Article XIII B of the California Constitution (the "Appropriation Limit")
imposes a limit on annual appropriations. Originally adopted in 1979, Article
XIII B was modified by Proposition 98 in 1988 and Proposition 111 in 1990. The
appropriations subject to the Article consist of tax proceeds which include tax
revenues and certain other funds. Excluded from the Appropriation Limits are
prior (pre 1979) debt service and subsequent debt incurred as the result of
voter authorizations, court mandates, qualified capital outlay projects and
certain increases in gasoline taxes and motor vehicle weight fees. Certain civil
disturbance emergencies declared by the Governor and appropriations approved by
a two-thirds vote of the legislature are excluded from
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the determination of excess appropriations, and the appropriations limit may be
overridden by local voter approval for up to a four-year period.
On November 8, 1988, California voters approved Proposition 98, a combined
initiative constitutional amendment and statute called "the Classroom
Instruction Improvement and Accountability Act." This amendment changed school
funding below the University level by guaranteeing K-14 schools a minimum share
of General Fund Revenues. Suspension of the Proposition 98 funding formula
requires a two-thirds vote of Legislature and the Governor's concurrence.
Proposition 98 also contains provisions transferring certain funds in excess of
the Article III B limit to K-14 schools.
As amended by Proposition 111, the Appropriation Limit recalculated
annually by taking the actual Fiscal Year 1986-1987 limit and applying the
Proposition 111 cost of living and population adjustments as if that limit had
been in effect. The Appropriations Limit is tested over consecutive two-year
periods under this amendment. Any excess "proceeds of taxes" received over such
two-year period above the Appropriation Limits for the two-year period is
divided equally between transfers to K-14 and taxpayers.
Throughout the next few fiscal years, the State's financial difficulties
are expected to remain serious. As more operational and fiscal responsibilities
are shifted to local governments, there will be additional pressure exerted upon
local governments, especially counties and school districts which rely upon
State aid.
Certain debt obligations held by the Fund may be payable solely from lease
payments on real property leased to the State, counties, cities or various
public entities structured in such a way as to not constitute a debt to the
leasing entity. To ensure that a debt is not technically created, California law
requires that the lessor can proportionally reduce its lease payments equal to
its loss of beneficial use and occupancy. Moreover, the lessor does not agree to
pay lease payments beyond the current period; it only agrees to include lease
payments in its annual budget every year. In the event of a default, the only
remedy available against the lessor is that of reletting the property or suing
annually for the rents due; no acceleration of lease payments is permitted.
The Fund also holds debt obligations payable solely from the revenues of
health care institutions. Certain provisions under California state law may
adversely affect these revenues and, consequently, payment of those debt
obligations.
The Federally sponsored Medicaid program for health care services to
eligible welfare recipients is known as the Medi-Cal program. In the past, the
Medi-Cal program has provided a cost-based system of reimbursement for impatient
care furnished to Medi-Cal beneficiaries by any eligible hospital. The State now
selectively contracts by county with California hospitals to provide
reimbursement for non-emergency inpatient services to Medi-Cal beneficiaries,
generally on a flat per-diem payment basis regardless of cost. California law
also permits private health plans and insurers to contract selectively with
hospitals for services to beneficiaries on negotiated terms, generally at rates
lower than standard charges.
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Debt obligations payable solely from revenues of health care institutions
may also be insured by the state pursuant to an insurance program operated by
the Office of Statewide Health Planning and Development (the "Office"). Most of
such debt obligations are secured by a mortgage of real property in favor of the
Office and the holders. If a default occurs on such insured debt obligations,
the Office has the option of either continuing to meet debt service obligations
of foreclosing the mortgage and requesting the State Treasurer to issue
debentures payable from a reserve fund established under the insurance fund or
payable from appropriated state funds.
Security for certain debt obligations held by the Fund may be in form of a
mortgage or deed of trust on real property. California has statutory provisions
which limit the remedies of a creditor secured by a mortgage or deed of trust.
Principally, the provisions establish conditions governing the limits of a
creditor's right to a deficiency judgment. In the case of a default, the
creditor's rights under the mortgage or deed of trust are subject to constraints
imposed by California real property law upon transfers of title to real property
by private power of sale. These laws require that the loan must have been in
arrears for at least seven months before foreclosure proceedings can begin.
Under California's anti-deficiency legislation, there is no personal recourse
against a mortgagor of single-family residence regardless of whether the
creditor chooses judicial or non-judicial foreclosure. These disruptions could
disrupt the stream of revenues available to the issuer for paying debt service.
Under California law, mortgage loans secured by single-family owner-
occupied dwellings may be prepaid at any time. Prepayment changes on such
mortgage loans may be imposed only with respect to voluntary payments made
during the first five years of the mortgage loan, and cannot in any event exceed
six months advance interest on the amount prepaid in excess of 20% of the
original principal amount of the mortgage loan. This limitation could affect the
flow of revenues available to the issuer for debt service on these outstanding
debt obligations.
Substantially all of California is located within an active geologic region
subject to major seismic activity. Any California municipal obligation in the
Fund could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (1) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (2) an issuer to perform on its contract
of insurance in the event of widespread losses; or (3) the Federal or State
government to appropriate sufficient funds within their respective budget
limitations.
The January 1994 major earthquake in greater Los Angeles (Northridge) was
estimated to have resulted in up to $20 billion in property damage. Significant
damage was incurred by public and private facilities in four counties. Los
Angeles, Ventura, Orange and San Bernadino Counties were declared State and
Federal disasters. The Federal government approved a total of $9.5 billion in
earthquake relief funds for assistance to homeowners and small businesses, as
well as repair of damaged public facilities.
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As described in the summary above, the Fund's investments are susceptible
to possible adverse effects of the complex political, economic and regulatory
matters affecting California issuers. As stated in the Prospectus, in the view
of the Investment Adviser, it is impossible to determine the impact of any
legislation, voter initiatives or other similar measures which have been or may
be introduced to limit or increase the taxing or spending authority of state and
local governments or to predict such governments' abilities to pay the interest
on, or repay the principal of, its obligations.
CERTAIN INVESTMENT PRACTICES
When-Issued and Forward Commitment Securities. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time. When the Fund engages in forward commitment and
when-issued transactions, it relies on the seller to consummate the transaction.
The failure of the issuer or seller to consummate the transaction may result in
the Fund losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when-issued and forward commitment
basis also involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash or
securities will be segregated in a separate account to the extent that the total
value of the assets in the account declines below the amount of the when-issued
commitments. Alternatively, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
Repurchase Agreements. The Fund may enter into repurchase agreements. A
repurchase agreement is a contract under which the Fund would acquire a security
for a relatively short period (generally not more than 7 days) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). The Fund will
enter into repurchase agreements only with member banks of the Federal Reserve
System and with securities dealers. The Investment Adviser will continuously
monitor the creditworthiness of the parties with whom the Fund enters into
repurchase agreements. The Fund has established a procedure providing that the
securities serving as collateral for each repurchase agreement must be delivered
to the Fund's custodian either physically or in book-entry form and that the
collateral must be marked to market daily to ensure that each repurchase
agreement is fully collateralized at all times. In the event of bankruptcy or
other default by a seller
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of a repurchase agreement, the Fund could experience delays in liquidating the
underlying securities and could experience losses, including the possible
decline in the value of the underlying securities during the period which the
Fund seeks to enforce its rights thereto, possible subnormal levels of income
and lack of access to income during this period, and the expense of enforcing
its rights.
The Fund is permitted to engage in certain hedging techniques involving
options and futures transactions in order to reduce the effect of interest rate
movements affecting the market values of the investments held, or intended to be
purchased, by the Fund.
Options on Debt Securities. The Fund may purchase and write put and call
options on debt securities which are traded on a national securities exchange
(an "Exchange") to protect its holdings in municipal bonds against a substantial
decline in market value. Securities are considered related if their price
movements generally correlate to one another. The purchase of put options on
debt securities which are related to securities held in its portfolio will
enable the Fund to protect, at least partially, unrealized gains in an
appreciated security in its portfolio without actually selling the security. In
addition, the Fund may continue to receive tax-exempt interest income on the
security. However, under certain circumstances the Fund may not be treated as
the tax owner of a security held subject to a put option, in which case interest
with respect to such security would not be tax-exempt for the Fund. The purchase
of call options on debt securities may help to protect against substantial
increases in prices of securities the Fund intends to purchase pending its
ability to invest in such securities in an orderly manner.
The Fund may sell put and call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid in
connection with the option which is sold.
In order to protect partially against declines in the value of its
portfolio securities, the Fund may sell (write) call options on debt securities.
A call option gives the purchaser of such option in return for a premium paid,
the right to buy, and the seller has the obligation to sell, the underlying
security at the exercise price if the option is exercised during the option
period. The writer of the call option who receives the premium has the
obligation to sell the underlying security to the purchaser at the exercise
price during the option period if assigned an exercise notice. The Fund will
write call options only on a covered basis, which means that it will own the
underlying security subject to a call option at all times during the option
period. The exercise price of a call option may be below, equal to or above the
current market value of the underlying security at the time the option is
written.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier point in time when the writer effects a closing
purchase transaction.
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Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, in conjunction with the sale of the underlying security or to
enable the Fund to write another call option on the underlying security with a
different exercise price or different expiration date or both.
The Fund will write cash secured put options in order to facilitate its
ability to purchase a security at a price lower than the current market price of
such security. The Fund will write put options only on a "cash secured" basis
which means that if the Fund writes a "put" it will segregate cash obligations
in the event the "put" is exercised. "Puts" will only be written in furtherance
of the basic investment objectives of the Fund relating to the acquisition of
tax exempt securities and will not be written with the primary intent of
generating income from premiums paid to the Fund in connection with the sale of
the "put."
The purchase and writing of put and call options involves certain risks.
During the option period, the covered call writer has, in return for the premium
on the option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss in the event the price of
the underlying security declines. A secured put writer assumes the risk that the
underlying security will fall below the exercise price in which case the writer
could be required to purchase the security at a higher price than the then
current market price of the security. In either instance, the writer has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities, in the
case of a call, or acquire the contract securities, in the case of a put, at the
exercise price. If a put or call option purchased by the Fund is not sold when
it has remaining value, and if the market price of the underlying security
remains equal to or greater than the exercise price, in the case of a put, or
equal to or less than the exercise price, in the case of a call, the Fund will
lose its entire investment in the option. Also, where a put or a call option on
a particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security.
The Fund will not invest in a put or a call option if as a result the
amount of premiums paid for such options then outstanding, when added to the
premiums paid for financial and index futures and put and call options on such
futures, would exceed 10% of the Fund's total assets.
Futures Contracts and Related Options. The Fund may engage in the purchase
and sale of interest rate futures contracts ("financial futures") and tax-exempt
bond index futures contracts ("index futures") and the purchase and writing of
put and call options thereon, as well as put and call options on tax-exempt bond
indexes (if and when they are traded) only as a hedge against changes in the
general level of interest rates in accordance with strategies more specifically
described below.
The purchase of a financial futures contract obligates the buyer to accept
and pay for the specific type of debt security called for in the contract at a
specified future time and at a specified price. The Fund would purchase a
financial futures contract when it is not fully invested in long-
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term debt securities but wishes to defer its purchases for a time until it can
invest in such securities in an orderly manner or because short-term yields are
higher than long-term yields. Such purchases would enable the Fund to earn the
income on a short-term security while at the same time minimizing the effect of
all or part of an increase in the market price of the long-term debt security
which the Fund intends to purchase in the future. A rise in the price of the
long-term debt security prior to its purchase either would generally be offset
by an increase in the value of the futures contract purchased by the Fund or
avoided by taking delivery of the debt securities under the futures contract.
The sale of a financial futures contract obligates the seller to deliver
the specific type of debt security called for in the contract at a specified
future time and at a specified price. The Fund would sell a financial futures
contract in order to continue to receive the income from a long-term debt
security, while endeavoring to avoid part or all of the decline in market value
of that security which would accompany an increase in interest rates. If
interest rates did rise, a decline in the value of the debt security held by the
Fund would be substantially offset by an increase in the value of the futures
contract sold by the Fund. While the Fund could sell a long-term debt security
and invest in a short-term security, ordinarily the Fund would give up income on
its investment, since long-term rates normally exceed short-term rates.
In addition, the Fund may purchase and write put and call options on
financial futures contracts which are traded on an Exchange or a Board of Trade
and enter into closing transactions with respect to such options to terminate an
existing position. Options on financial futures contracts are similar to options
on securities except that a put option on a financial futures contract gives the
purchaser the right in return for the premium paid to assume a short position in
a financial futures contract and a call option on a financial futures contract
gives the purchaser the right in return for the premium paid to assume a long
position in a financial futures contract.
The Fund anticipates purchasing and selling tax-exempt bond index futures
as a hedge against changes in the market value of the tax exempt bonds which it
holds. A tax-exempt bond index fluctuates with changes in the market values of
the tax-exempt bonds included in the index. An index future has similar
characteristics to a financial future except that settlement is made through
delivery of cash rather than the underlying securities. The sale of an index
future obligates the seller to deliver at settlement an amount of cash equal to
a specified dollar amount multiplied by the difference between the value of the
index at the close of the last trading day of the contract and the price at
which the future was originally written.
The Fund may also purchase and write put and call options on tax-exempt
bond indexes (if and when such options are traded) and enter into closing
transactions with respect to such options. An option on an index future is
similar to an option on a debt security except that an option on an index future
gives the holder the right to assume a position in an index future. The Fund
will use options on futures contracts and options on tax-exempt bond indexes (if
and when they are traded) in connection with hedging strategies. Generally,
these strategies would be employed under the same market conditions in which the
Fund would use put and call options on debt securities.
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The Fund may hedge up to the full value of its portfolio through the use of
options and futures. At the time the Fund purchases a futures contract, an
amount of cash or U.S. Government securities at least equal to the market value
of the futures contract will be deposited in a segregated account with the
Fund's Custodian to collateralize the position and thereby insure that such
futures contract is unleveraged. The Fund may not purchase or sell futures
contracts or purchase or write related put or call options if immediately
thereafter the sum of the amount of margin deposits on the Fund's existing
futures and related options positions and the amount of premiums paid for
related options (measured at the time of investment) would exceed 5% of the
Fund's total assets.
While the Fund's hedging transactions may protect the Fund against adverse
movements in the general level of interest rates, such transactions could also
preclude the opportunity to benefit from favorable movements in the level of
interest rates. Due to the imperfect correlation between movements in the prices
of futures contracts and movements in the prices of the related securities being
hedged, the price of a futures contract may move more than or less than the
price of the securities being hedged. There is an increased likelihood that this
will occur when a tax-exempt security is hedged by a futures contract on a
taxable security. Options on futures contracts are generally subject to the same
risks applicable to all option transactions. In addition, the Fund's ability to
use this technique will depend in part on the development and maintenance of a
liquid secondary market for such options. For a discussion of the inherent risks
involved with futures contracts and options thereon, see "Risks Relating to
Transactions in Futures Contracts and Related Options" below.
The Fund's policies permitting the purchase and sale of futures contracts
and the purchase and writing of related put or call options for hedging purposes
only may not be changed without the approval of shareholders holding a majority
of the Fund's outstanding voting securities. The Trustees may authorize
procedures, including numerical limitations, with regard to such transactions in
furtherance of the Fund investment objectives. Such procedures are not deemed to
be fundamental and may be changed by the Trustees without the vote of the Fund's
shareholders.
Risks Relating to Transactions in Futures Contracts and Related Options.
Positions in futures contracts may be closed out only on an exchange or board of
trade which provides a market for such futures. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract or at
any particular time. In the event a liquid market does not exist, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
maintenance margin. In addition, limitations imposed by an exchange or board of
trade on which futures contracts are traded may compel or prevent the Fund from
closing out a contract which may result in reduced gain or increased loss to the
Fund. The absence of a liquid market in futures contracts might cause the Fund
to make or take delivery of the underlying securities at a time when it may be
disadvantageous to do so. The purchase of put options on futures contracts
involves less potential dollar risk to the Fund than an investment of equal
amount in futures contracts, since the premium is the maximum amount of risk the
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purchaser of the option assumes. The entire amount of the premium paid for an
option can be lost by the purchaser, but no more than that amount.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions upon its
investments set forth below which may not be changed without the approval by the
holders of a majority of the outstanding shares of the Fund. A majority for this
purpose means: (a) more than 50% of the outstanding shares of the Fund or (b)
67% or more of the shares represented at a meeting where more than 50% of the
outstanding shares of the Fund are represented, whichever is less. Under these
restrictions, the Fund may not:
1. Borrow money except from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests that
might otherwise require the untimely disposition of securities, in an
amount up to 15% of the value of the Fund's total assets (including the
amount borrowed) valued at market less liabilities (not including the
amount borrowed) at the time the borrowing was made. While borrowings
exceed 5% of the value of the Fund's total assets, the Fund will not
purchase any additional securities. Interest paid on borrowings will reduce
the Fund's net investment income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 10% of the value of its total assets but only to secure
borrowings for temporary or emergency purposes or as may be necessary in
connection with maintaining collateral in connection with writing put and
call options or making initial margin deposits in connection with the
purchase or sale of financial futures, index futures contracts and related
options.
3. With respect to 75% of its total assets, purchase securities (other than
obligations issued or guaranteed by the United States government, its
agencies or instrumentalities and shares of other investment companies) of
any issuer if the purchase would cause immediately thereafter more than 5%
of the value of the Fund's total assets invested in the securities of such
issuer or the Fund would own more than 10% of the outstanding voting
securities of such issuer.
4. Make loans to others, except through the purchase of obligations in
which the Fund is authorized to invest, entering in repurchase agreements
and lending portfolio securities in an amount not exceeding one third of
its total assets.
5. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 or securities which are not readily marketable if
such purchase would cause the Fund to have more than 10% of its net assets
invested in such types of securities.
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6. Purchase or retain the securities of any issuer, if those officers and
Trustees of the Fund or the Investment Adviser who own beneficially more
than of 1% of the securities of such issuer, together own more than 5% of
the securities of such issuer.
7. Write, purchase or sell puts, calls or combinations thereof, except put
and call options on debt securities, futures contracts based on debt
securities, indices of debt securities and futures contracts based on
indices of debt securities, sell securities on margin or make short sales
of securities or maintain a short position, unless at all times when a
short position is open it owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to,
the securities sold short, and unless not more than 10% of the Fund's net
assets (taken at current value) is held as collateral for such sales at any
one time.
8. Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
9. Invest more than 25% of its assets in the securities of "issuers" in any
single industry; provided that there shall be no limitation on the purchase
of obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities or by any state or political subdivision
thereof. For purposes of this limitation when the assets and revenues of an
agency, authority, instrumentality or other political subdivision are
separate from those of the government creating the issuing entity and a
security is backed only by the assets and revenues of the entity, the
entity would be deemed to be the sole issuer of the security. Similarly, in
the case of an industrial development or pollution control bond, if that
bond is backed only by the assets and revenues of the nongovernmental user,
then such nongovernmental user would be deemed to be the sole issuer. If,
however, in either case, the creating government or some other entity
guarantees a security, such a guarantee would be considered a separate
security and would be treated as an issue of such government or other
entity unless all securities issued or guaranteed by the government or
other entity owned by the Fund does not exceed 10% of the Fund's total
assets.
10. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, except commodities and commodities
contracts which are necessary to enable the Fund to engage in permitted
futures and options transactions necessary to implement hedging strategies,
or oil and gas interests. This limitation shall not prevent the Fund from
investing in municipal securities secured by real estate or interests in
real estate or holding real estate acquired as a result of owning such
municipal securities.
11. Invest in common stock or in securities of other investment companies,
except that securities of investment companies may be acquired as part of a
merger, consolidation or acquisition of assets and units of registered unit
investment trusts whose assets consist substantially of tax-exempt
securities may be acquired to the extent permitted by Section 12 of the Act
or applicable rules.
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12. Invest more than 5% of the value of its total assets in securities of
issuers having a record, including predecessors, of fewer than three years
of continuous operation, except obligations issued or guaranteed by the
United State Government, its agencies or instrumentalities, unless the
securities are rated by a nationally recognized rating service.
13. Issue any senior securities, except insofar as the Fund may be deemed
to have issued a senior security by: entering into a repurchase agreement;
purchasing securities in a when-issued or delayed delivery basis;
purchasing or selling any options or financial futures contract; borrowing
money or lending securities in accordance with applicable investment
restrictions.
In order to comply with certain state regulatory policies, the Fund has
adopted a non-fundamental policy prohibiting the purchase of warrants. The
Fund's Trustees have approved the following non-fundamental investment policy
pursuant to an order of the SEC: Notwithstanding any investment restriction to
the contrary, the Fund may, in connection with the John Hancock Group of Funds
Deferred Compensation Plan for Independent Trustees/Directors, purchase
securities of other investment companies within the John Hancock Group of Funds
provided that, as a result, (i) no more than 10% of the Fund's assets would be
invested in securities of all other investment companies, (ii) such purchase
would not result in more than 3% of the total outstanding voting securities of
any one such investment company being held by the Fund and (iii) no more than 5%
of the Fund's assets would be invested in any one such investment company.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers who
are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Fund are also officers and directors of the Adviser or officers and Trustees of
the Fund's principal distributor, John Hancock Funds, Inc. ( "John Hancock
Funds").
Set forth below is information with respect to each of the Fund's officers
and Trustees. The officers and Trustees may be contacted at 101 Huntington
Avenue, Boston, MA 02199-7603. Their affiliations represent their principal
occupations during the past five years.
-17-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
Edward J. Boudreau, Jr.* Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer(1)(2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("The
Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital"); John Hancock Advisers
International Limited ("Advisers
International"); John Hancock
Funds, Inc.; John Hancock Investor
Services Corporation ("Investor
Services"); and Sovereign Asset
Management Corporation ("SAMCorp");
(hereinafter the Adviser, the
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Inc., Investor
Services and SAMCorp are
collectively referred to as the
"Affiliated Companies"); Chairman,
First Signature Bank & Trust;
Director, John Hancock Freedom
Securities Corporation, John
Hancock Capital Corporation, New
England/ Canada Business Council;
Member, Investment Company
Institute Board of Governors;
Trustee, Museum of Science;
President, the Adviser (until July
1992); and Chairman, John Hancock
Distributors, Inc. (until April,
1994).
</TABLE>
- ----------
* An "interested person" of the Portfolio, as such term is defined in the
1940 Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
-18-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
James F. Carlin Trustee(3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May,
1995) and Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education; Receiver, the
City of Chelsea (until August,
1992) .
William H. Cunningham
601 Colorado Street Trustee(3) Chancellor, University of Texas
O'Henry Hall System and former President of the
Austin, TX 78701 University of Texas, Austin, Texas;
Lee Hage and Joseph D. Jamail
Regents Chair for Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company); LBJ Foundation
Board (education foundation); and
Advisory Director, Texas Commerce
Bank - Austin.
Charles F. Fretz Trustee (3) Retired: Former Vice President and
RD #5, Box 300B Director, Towers, Perrin, Foster &
Clothier Springs Road Crosby, Inc. (international
Malvern, PA 19355 management consultants)
(1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hills, NJ 07078 (pharmaceuticals)(until 1996);
Director, ReCapital Corporation
(reinsurance)(until 1995).
</TABLE>
- ----------
* An "interested person" of the Portfolio, as such term is defined in the
1940 Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
-19-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
Anne C. Hodsdon* Trustee and President and Chief Operating
101 Huntington Avenue President (1)(2) Officer; the Adviser; Executive
Boston, MA 02199 Vice President, the Adviser (until
December, 1994); Senior Vice
President, the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
Charles L. Ladner Trustee(3) Director, Energy North, Inc.
UGI Corporation (public utility holding
P.O. Box 858 company)(until 1992); Senior Vice
Valley Forge, PA 19482 President and Chief Financial
Officer and Chief Financial Officer
of UGI Corp. Holding Company:
Public Utilities, LPGAS.
Leo E. Linbeck, Jr. Trustee(3) Chairman, President, Chief
3810 W. Alabama Executive Officer and Director,
Houston, TX 77027 Linbeck Corporation (a holding
company engaged in various phases
of the construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company); Director, Daniel
Industries, Inc. (manufacturer of
gas measuring products and energy
related equipment); Director,
GeoQuest International Holdings,
Inc. (a geophysical consulting
firm) (1980-95).
Patricia P. McCarter Trustee (3) Director and Secretary, The
1230 Brentford Road McCarter Corp. (machine
Malvern, PA 19355 manufacturer).
</TABLE>
- ----------
* An "interested person" of the Portfolio, as such term is defined in the
1940 Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
-20-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
Steven R. Pruchansky Trustee(1)(3) Director and Treasurer, Mast
6920 Daniel road Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
Trust Company (until August 1991);
Director, Mast Realty Trust
(1982-1994; President, Maxwell
Building Corp. (until 1991).
Richard S. Scipione* Trustee (1) General Counsel, the Life Company;
John Hancock Place Director, the Adviser, the
P.O. Box 111 Affiliated Companies, John Hancock
Boston, Massachusetts Distributors, Inc., JH Networking
Insurance Agency, Inc., John
Hancock Subsidiaries, Inc.,
SAMCorp, NH Capital and John
Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993; Trustee, The
Berkeley Group.
Norman H. Smith Trustee(3) Lieutenant General, USMC, Deputy
243 Mt. Oriole Lane Chief of Staff for Manpower and
Linden, VA 22642 Reserve Affairs, Headquarters
Marine Corps; Commanding General
III Marine Expeditionary Force/3rd
Marine Division (retired 1991).
</TABLE>
- ----------
* An "interested person" of the Portfolio, as such term is defined in the
1940 Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
-21-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
John P. Toolan Trustee (3) Director, The Smith Barney Muni
13 Chadwell Place Bond Funds, The Smith Barney
Morristown, NJ 07960 Tax-Free Money Fund, Inc., Vantage
Money Market Funds (mutual funds),
The Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith, Barney Advisers, Inc.
(investment advisers) (retired
1991); and Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman* Vice Chairman and Chief Vice Chairman and Chief Investment
101 Huntington Avenue Investment Officer(2) Officer, the Adviser; President,
Boston, MA 02199 the Adviser (until 1994)
James B. Little* Senior Vice President and Senior Vice President, the Adviser.
101 Huntington Avenue Chief Financial Officer
Boston, MA 02199
Thomas H. Drohan* Senior Vice President and Senior Vice President and Secretary,
101 Huntington Avenue Secretary the Adviser.
Boston, MA 02199
James J. Stokowski* Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue President(2)
Boston, MA 02199 Adviser.
</TABLE>
- ----------
* An "interested person" of the Portfolio, as such term is defined in the
1940 Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
-22-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
Susan S. Newton* Vice President, Assistant Vice President and Assistant Secretary, the
101 Huntington Avenue Secretary and Compliance Adviser.
Boston, MA 02199 Officer
John A. Morin* Vice President, the Adviser Vice President, the Adviser;
101 Huntington Avenue Counsel, the Life Company (until
Boston, MA 02199 1995).
</TABLE>
- ----------
* An "interested person" of the Portfolio, as such term is defined in the
1940 Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which the
Investment Adviser serves as investment adviser.
As of March 13, 1996, the officers and Directors of the Fund as a group
beneficially owned less than 1% of these outstanding shares. As of March 13,
1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deerlake Dr. East, Jacksonville,
FL held 1,736,567 shares representing 6.06% of the Fund's outstanding Class A
Shares and 756,532 shares representing 9.60% of the Fund's outstanding Class B
Shares (such ownership is as nominee only and does not represent beneficial
ownership). At such date, no other person owned of record or was known by the
Fund to own beneficially as much as 5% of the outstanding shares of the Fund.
As of December 22, 1994, the Trustees have established an Advisory Board
which acts to facilitate a smooth transition of management over a two-year
period (between Transamerica Fund Management Company ("TFMC"), the prior
investment adviser, and the Investment Adviser). The members of the Advisory
Board are distinct from the Board of Trustees, do not serve the Fund in any
other capacity and are persons who have no power to determine what securities
are purchased or sold and behalf of the Fund. Each member of the Advisory Board
may be contacted at 101 Huntington Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal occupations
during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management
services); former Chairman of the Board, Mosher Steel Company.
-23-
<PAGE>
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman
from Texas; co-founder, Houston Parents' League; former board member of
various civic and cultural organizations in Houston, including the Houston
Symphony, Museum of Fine Arts and YWCA. Mrs. Bentsen is presently active in
various civic and cultural activities in the Washington, D.C. area,
including membership on the Area Board for The March of Dimes and is a
National Trustee for the Botanic Gardens of Washington, D.C.
Thomas R. Powers, Formerly Chairman of the Board, President and
Chief Executive Officer, TFMC; Director, West Central Advisory Board, Texas
Commerce Bank; Trustee, Memorial Hospital System; Chairman of the Board of
Regents of Baylor University; Member, Board of Governors, National
Association of Securities Dealers, Inc.; Formerly, Chairman, Investment
Company Institute; formerly, President, Houston Chapter of Financial
Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company;
Director, Houston Industries and Houston Lighting and Power Company;
Director, TransAmerican Companies (natural gas producer and
transportation); Member, Board of Managers, Harris County Hospital
District; Advisory Director, Commercial State Bank, El Campo; Advisory
Director, First National Bank of Bryan; Advisory Director, Sterling
Bancshares; Former Director and Vice Chairman, Texas Commerce Bancshares;
and Vice Chairman, Texas Commerce Bank.
Compensation of the Trustees and Advisory Board. The following table
provides information regarding the compensation paid by the Fund and the other
investment companies in the John Hancock Fund Complex to the Independent
Trustees and the Advisory Board members for their services. The three
non-Independent Trustees, Ms. Hodsdon, Messes. Boudreau and Scipione and each of
the officers of the Funds are interested persons of the Investment Adviser, are
compensated by the Investment Adviser / or affiliated companies and received no
compensation from the Funds for their services.
-24-
<PAGE>
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation from
Aggregate Compensation Benefits Accrued as Part all Funds in John Hancock
Trustees from the Fund of the Fund's Expenses Fund Complex to Trustees**
- -------- ------------- ---------------------- --------------------------
<S> <C> <C> <C>
James F. Carlin $ 2,966 0 $ 60,700
William H. Cunningham 2,238 $5,098 69,700
Charles F. Fretz 459 0 56,200
Harold R. Hiser, Jr. 0 244 60,200
Charles L. Ladner 3,657 0 60,700
Leo E. Linbeck, Jr. 7,586 0 73,200
Patricia P. McCarter 3,657 0 60,700
Steven R. Pruchansky 3,771 0 62,700
Norman H. Smith 3,771 0 62,700
John P. Toolan 0 3,657 60,700
------- ------ --------
Total: $28,105 $8,999 $627,500
</TABLE>
* Compensation made pursuant to different compensation arrangements than in
effect for the fiscal year ended December 31, 1995
** The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is $627,500 as of the calendar year ended December 31,
1995. All Trustees/Directors except Messrs. Cunningham and Linbeck are
Trustees/Directors of 33 funds in the John Hancock Fund Complex. Messrs.
Cunningham and Linbeck are Trustees of 31 funds
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation from
Aggregate Compensation Benefits Accrued as Part all Funds in John Hancock
Advisory Board*** from the Fund of the Fund's Expenses Fund Complex to Advisory Board***
- ----------------- ------------- ---------------------- ---------------------------------
<S> <C> <C> <C>
R. Trent Campbell $ 6,369 $ 0 $ 70,000
Mrs. Lloyd Bentsen 6,564 0 63,000
Thomas R. Powers 6,369 0 63,000
Thomas B. McDade 6,369 0 63,000
------- ------ --------
Total: $25,671 $ 0 $259,000
</TABLE>
*** As of December 31, 1995.
-25-
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Fund receives its investment advice
from the Investment Adviser. Investors should refer to the Prospectus for a
description of certain information concerning the investment management
contract. Each of the Trustees and principal officers of the Fund who is also an
affiliated person of the Investment Adviser is named above, together with the
capacity in which such person is affiliated with the Fund and the Investment
Adviser.
The Investment Adviser, located at 101 Huntington Avenue, Boston,
Massachusetts 02199-7603, was organized in 1968 and more than $16 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,080,000 shareholders.
The Investment Adviser is a wholly-owned subsidiary of The Berkeley Financial
Group, which is in turn a wholly-owned subsidiary of John Hancock Subsidiaries,
Inc., which is in turn a wholly-owned subsidiary of the Life Company, one of the
nation's oldest and largest financial services companies. With total assets
under management of over $80 billion, the Life Company is one of the ten largest
life insurance companies in the United States, and carries Standard & Poor's and
A.M. Best's highest ratings. Founded in 1862, the Life Company has been serving
clients for over 130 years.
The Fund has entered into an investment management contract with the
Investment Adviser. Under the investment management contract, the Investment
Adviser provides the Fund with (i) a continuous investment program, consistent
with the Fund's stated investment objective and policies, (ii) supervision of
all aspects of the Fund's operations except those that are delegated to a
custodian, transfer agent or other agent and (iii) such executive,
administrative and clerical personnel, officers and equipment as are necessary
for the conduct of its business. See "Organization and Management of the Fund"
and "The Fund's Expenses" in the Prospectus for a description of certain
information concerning the Fund's investment management contract. The Investment
Adviser is responsible for the management of the Fund's portfolio assets.
No person other than the Investment Adviser and its directors and employees
regularly furnishes advice to the Fund with respect to the desirability of the
Fund investing in, purchasing or selling securities. The Investment Adviser may
from time to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life Company
and its affiliates.
Under the terms of the investment management contract with the Fund, the
Investment Adviser provides the Fund with office space, equipment and supplies
and other facilities and personnel required for the business of the Fund. The
Investment Adviser pays the compensation of all officers and employees of the
Fund and Trustees of the Fund affiliated with the Investment Adviser, the office
expenses of the Fund, including those of the Fund's Treasurer and Secretary, and
other expenses incurred by the Investment Adviser in connection with the
performance of its duties. All expenses which are not specifically paid by the
Investment Adviser and which are
-26-
<PAGE>
incurred in the operation of the Fund including, but not limited to, (i) the
fees of the Trustees of the Fund who are not "interested persons," as such term
is defined in the 1940 Act (the "Independent Trustees"), (ii) the fees of the
members of the Fund's Advisory Board (described above) and (iii) the continuous
public offering of the shares of the Fund are borne by the Fund.
As provided by the investment management contract, the Fund pays the
Investment Adviser an investment management fee, which is accrued daily and paid
monthly in arrears, equal on an annual basis to a 0.55% of the Fund's average
daily net asset value. See "Organization and Management of the Fund" in the
Prospectus.
The Investment Adviser may voluntarily and temporarily reduce its advisory
fee or make other arrangements to limit the Fund's expenses to a specified
percentage of average daily net assets. The Investment Adviser retains the right
to re-impose the advisory fee and recover any other payments to the extent that,
at the end of any fiscal year, the Fund's annual expenses fall below this limit.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of any state limit where the
Fund is registered to sell shares of beneficial interest, the fee payable to the
Investment Adviser will be reduced to the extent required by law. At this time,
the most restrictive limit on expenses imposed by a state requires that expenses
charged to the Fund in any fiscal year not exceed 2.5% of the first $30,000,000
of the Fund's average daily net asset value, 2% of the next $70,000,000 and 1.5%
of the remaining average daily net asset value. When calculating the limit
above, the Fund may exclude interest, brokerage commissions and extraordinary
expenses.
Pursuant to the investment management contract, the Investment Adviser is
not liable to the Fund or its shareholders for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the matters to
which its contract relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Investment Adviser in the
performance of its duties or from its reckless disregard of the obligations and
duties under the contract.
The investment management contract initially expires on December 22, 1996
and will continue in effect from year to year thereafter if approved annually by
a vote of a majority of the Trustees of the Fund who are not interested persons
of one of the parties to the contract, cast in person at a meeting called for
the purpose of voting on such approval, and by either a majority of the Trustees
or the holders of a majority of the Fund's outstanding voting securities. The
management contract may, on 60 days' written notice, be terminated at any time
without the payment of any penalty by the Fund by vote of a majority of the
outstanding voting securities of the Fund, by the Trustees or by the Investment
Adviser. The management contract terminates automatically in the event of its
assignment.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Investment Adviser or its affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds
-27-
<PAGE>
or clients when one or more are selling the same security. If opportunities for
purchase or sale of securities by the Investment Adviser or for other funds or
clients for which the Investment Adviser renders investment advice arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds or clients in a manner
deemed equitable to all of them. To the extent that transactions on behalf of
more than one client of the Investment Adviser or its affiliates may increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
Under the investment management contract, the Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If the Fund's investment management contract is no longer in
effect, the Fund (to the extent that it lawfully can) will cease to use such
name or any other name indicating that it is advised by or otherwise connected
with the Investment Adviser. In addition, the Investment Adviser or the Life
Company may grant the non-exclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
For the fiscal years ended December 31, 1993 and 1994 advisory fees payable
by the Fund to TFMC, the Fund's former investment adviser, amounted to
$1,633,853 and $1,919,101, respectively. For the fiscal year end December 31,
1995, advisory fees payable by the Fund to the Adviser amounted to $1,907,146.
However, a portion of such fees were not imposed pursuant to the voluntary fee
and expense limitation arrangements then in effect (see "The Fund's Expenses" in
the Prospectus).
Administrative Services Agreement. The Fund was a party to an
administrative services agreement with TFMC (the "Services Agreement"), pursuant
to which TFMC performed bookkeeping and accounting services and functions,
including preparing and maintaining various accounting books, records and other
documents and keeping such general ledgers and portfolio accounts as are
reasonably necessary for the operation of the Fund. Other administrative
services included communications in response to shareholder inquiries and
certain printing expenses of various financial reports. In addition, such staff
and office space, facilities and equipment were provided as necessary to provide
administrative services to the Fund. The Services Agreement was amended in
connection with the appointment of the Investment Adviser as adviser to the Fund
to permit services under the Agreement to be provided to the Fund by the
Investment Adviser and its affiliates. The Services Agreement was terminated
during the current fiscal year.
For the fiscal years ended December 31, 1993 and 1994, the Fund paid to
TFMC (pursuant to the Services Agreement) $128,984 and $158,594, respectively,
of which $83,291 and $109,540, respectively, was paid to TFMC and $45,693 and
$49,054, respectively, were paid for certain data processing and pricing
information services. No fee relating to the Services Agreement was paid or
incurred during the fiscal year 1995.
-28-
INITIAL SALES CHARGE ON CLASS A SHARES
The sales charges applicable to purchases of Class A Shares of the Fund are
described in the Fund's Class A and Class B Prospectus. Methods of obtaining
reduced sales charges referred to generally in the Prospectus are described in
detail below. In calculating the sales charge applicable to current purchases of
Class A Shares, the investor is entitled to cumulate current purchases with the
greater of the current value (at offering price) of the Class A Shares of the
Fund, or if Investor Services is notified by the investor's dealer or the
investor at the time of the purchase, the cost of the Class A Shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases
of Class A Shares made at one time, the purchases will be combined if made by
(a) an individual, his or her spouse and their children under the age of 21
purchasing securities for his or her own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
Without Sales Charge. As described in the Class A and Class B Prospectus,
Class A Shares of the Fund may be sold without a sales charge to certain persons
described in the Prospectus.
Accumulation Privilege. Investors (including investors combining purchases)
who are already Class A Shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or value of the Class A Shares already held by such
person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Class A and Class B Prospectus) also are available to an investor
based on the aggregate amount of his concurrent and prior investments in Class A
Shares of the Fund and shares of all other John Hancock funds which carry a
sales charge.
Letter of Intention. The reduced sales loads are also applicable to
investments made over a specified period pursuant to a Letter of Intention
("LOI"), which should be read carefully prior to its execution by an investor.
The Fund offers two options regarding the specified period for making
investments under the LOI. All investors have the option of making their
investments over a period of thirteen (13) months. Investors who are using the
Fund as a funding medium for a qualified retirement plan, however, may opt to
make the necessary investments called for by the LOI over a forty-eight (48)
month period. These qualified retirement plans include IRA's, SEP, SARSEP, TSA,
401(k) plans, TSA plans and 457 plans. Such an investment (including
accumulations and combinations) must aggregate $100,000 or more invested during
the specified period from the date of the LOI or from a date within ninety (90)
days prior thereto, upon written request to Investor Services. The sales charge
applicable to all amounts invested under the LOI is computed as if the aggregate
amount intended to be invested had been invested immediately. If
-29-
<PAGE>
such aggregate amount is not actually invested, the difference in the sales
charge actually paid and the sales charge payable had the LOI not been in effect
is due from the investor. However, for the purchases actually made with the
specified period (either 13 or 48 months), the sales charge applicable will not
be higher than that which would have been applied (including accumulations and
combinations) had the LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing the
LOI, the investor authorizes Investor Services to act as his attorney-in-fact to
redeem any escrowed shares and adjust the sales charge, if necessary. A LOI does
not constitute a binding commitment by an investor to purchase, or by the Fund
to sell, any additional shares and may be terminated at any time.
DISTRIBUTION CONTRACT
As discussed in the Prospectus, the Fund's shares are sold on a continuous
basis at the public offering price. The Distributor, a wholly- owned subsidiary
of the Investment Adviser, has the exclusive right, pursuant to the distribution
contract dated December 22, 1994 (the "Distribution Contract"), to purchase
shares from the Fund at net asset value for resale to the public or to
broker-dealers at the public offering price. Upon notice to all broker-dealers
("Selling Brokers") with whom it has sales agreements, the Distributor may allow
such Selling Brokers up to the full applicable sales charge during periods
specified in such notice. During these periods, such Selling Brokers may be
deemed to be underwriters as that term is defined in the Securities Act of 1933.
The Distribution Contract was initially adopted by the affirmative vote of
the Fund's Board of Trustees including the vote a majority of Trustees who are
not parties to the agreement or interested persons of any such party, cast in
person at a meeting called for such purpose. The Distribution Contract shall
continue in effect until December 22, 1994 and from year to year if approved by
either the vote of the Fund's shareholders or the Board of Trustees including
the vote of a majority of Trustees who are not parties to the agreement or
interested persons of any such party, cast in person at a meeting called for
such purpose. The Distribution Contract may be terminated at any time, without
penalty, by either party upon sixty (60) days' written notice or by a vote of a
majority of the outstanding voting securities of the Fund and terminates
automatically in the case of an assignment by the Distributor.
Total underwriting commissions for sales of the Fund's Class A Shares for
the fiscal years ended December 31, 1993, 1994 and 1995 were $2,391,072,
$1,805,845 and $577,540, respectively. Of such amounts $233,560, $126,490 were
retained by the Fund's former distributor, Transamerica Fund Distributors, Inc.
For the period end December 31, 1995,
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<PAGE>
underwriting commissions of $206,230 were retained by the Fund's current
distributor, John Hancock Funds.
Distribution Plan. The Trustees, including the Independent Trustees of the
Fund, approved new distribution plans pursuant to Rule 12b-1 under the 1940 Act
for Class A Shares ("Class A Plan") and Class B Shares ("Class B Plan"). Such
Plans were approved by a majority of the outstanding shares of each respective
class on December 16, 1994 and became effective on December 22, 1994.
Under the Class A Plan, the distribution or service fees will not exceed an
annual rate of 0.15% of the average daily net asset value of the Class A Shares
of the Fund (determined in accordance with such Fund's Prospectus as from time
to time in effect). Any expenses under the Class A Plan not reimbursed within 12
months of being presented to the Fund for repayment are forfeited and not
carried over to future years. Under the Class B Plan, the distribution or
service fees to be paid by the Fund will not exceed an annual rate of 1.00% of
the average daily net assets of the Class B Shares of the Fund (determined in
accordance with such Fund's prospectus as from time to time in effect); provided
that the portion of such fee used to cover Service Expenses (described below)
shall not exceed an annual rate of 0.25% of the average daily net asset value of
the Class B Shares of the Fund. The Distributor has agreed to limit the payment
of expenses pursuant to the Class B Plan to 0.90% of the average daily net
assets of the Class B Shares of the Fund. Under the Class B Plan, the fee covers
the Distribution and Service Expenses (described below) and interest expenses on
unreimbursed distribution expenses. In accordance with generally accepted
accounting principles, the Fund does not treat distribution fees in excess of
0.75% of the Fund's net assets attributable to Class B Shares as a liability of
the Fund and does not reduce the current net assets of class B by such amount
although the amount may be payable in the future.
Under the Plans, expenditures shall be calculated and accrued daily and
paid monthly or at such other intervals as the Trustees shall determine. The fee
may be spent by the Distributor on Distribution Expenses or Service Expenses.
"Distribution Expenses" include any activities or expenses primarily intended to
result in the sale of shares of the relevant class of the Fund, including, but
not limited to: (i) initial and ongoing sales compensation payable out of such
fee as such compensation is received by the Distributor or by Selling Brokers,
(ii) direct out-of-pocket expenses incurred in connection with the distribution
of shares, including expenses related to printing of prospectuses and reports;
(iii) preparation, printing and distribution of sales literature and advertising
material; (iv) an allocation of overhead and other branch office expenses of the
Distributor related to the distribution of Fund Shares (v) distribution expenses
that were incurred by the Fund's former distributor and not recovered through
payments under the Class A or Class B former plans or through receipt of
contingent deferred sales charges; and (vi) in the event that any other
investment company (the "Acquired Fund") sells all or substantially all of its
assets, merges or otherwise engages in a combination with the Fund, distribution
expenses originally incurred in connection with the distribution of the Acquired
Fund's shares. Service Expenses under the Plans include payments made to, or on
account of, account executives of selected broker-dealers (including affiliates
of the Distributor) and others who furnish personal and shareholder account
maintenance services to shareholders of the relevant class of the Fund.
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During the fiscal year ended December 31, 1995, the Funds paid John Hancock
Funds the following amounts of expenses with respect to the Class A and Class B
shares of the Fund:
<TABLE>
<CAPTION>
Printing and Mailing Interest, Carrying
of Prospectuses to Compensation to or Other Finance
Advertising New Shareholders Selling Brokers Charges
----------- ---------------- --------------- -------
<S> <C> <C> <C> <C>
Class A shares $26,879 $5,599 $271,250 $ 0
Class B shares $17,056 $2,848 $289,614 $361,535
</TABLE>
Each of the Plans provides that it will continue in effect only as long as
its continuance is approved at least annually by a majority of both the Trustees
and the Independent Trustees. Each of the Plans provides that it may be
terminated (a) at any time by vote of a majority of the Trustees, a majority of
the Independent Trustees, or a majority of the respective Class' outstanding
voting securities or (b) by the Distributor on 60 days' notice in writing to the
Fund. Each of the Plans further provides that it may not be amended to increase
the maximum amount of the fees for the services described therein without the
approval of a majority of the outstanding shares of the class of the Fund which
has voting rights with respect to the Plan. Each of the Plans provides that no
material amendment to the Plan will, in any event, be effective unless it is
approved by a majority vote of the Trustees and the Independent Trustees of the
Fund. The holders of Class A Shares and Class B Shares have exclusive voting
rights with respect to the Plan applicable to their respective class of shares.
The Board of Trustees, including the Trustees who are not interested in the Fund
and have no direct or indirect interest in the Plans, has determined that, in
their judgment, there is a reasonable likelihood that the Plans will benefit the
holders of the applicable class of shares of the Fund.
Information regarding the services rendered under the Plans and the
Distribution Agreement and the amounts paid therefore by the respective Class of
the Fund are provided to, and reviewed by, the Board of Trustees on a quarterly
basis. In its quarterly review, the Board of Trustees considers the continued
appropriateness of the Plans and the Distribution Agreement and the level of
compensation provided therein.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share
without the imposition of a sales charge so that the Fund will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B Shares which are redeemed within
six years of purchase will be subject to a contingent deferred sales charge
("CDSC") at the rates set forth in the Class A and Class B Prospectus as a
percentage of the dollar amount subject to the CDSC. The charge will be assessed
on an amount equal to the lesser of the current market value or the
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original purchase cost of the Class B Shares being redeemed. Accordingly, no
CDSC will be imposed on increases in account value above the initial purchase
prices, including Class B Shares derived from reinvestment of dividends or
capital gains distributions. Certain redemptions of Class A Shares may be
subject to a CDSC, as described in the Prospectus.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B Shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
Proceeds from the CDSC are paid to the Distributor and are used in whole or
in part by the Distributor to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B Shares, such as the payment of compensation to select Selling Brokers
for selling Class B Shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B Shares
without a sales charge being deducted at the time of the purchase. See the Class
A and Class B Prospectus for additional information regarding the CDSC.
SPECIAL REDEMPTIONS
Although it is the Fund's present policy to make payment of redemption
proceeds in cash, if the Board of Trustees determines that a material adverse
effect would otherwise be experienced by remaining investors, redemption
proceeds may be paid in whole or in part by a distribution in kind of securities
from the Fund in conformity with rules of the Securities and Exchange
Commission, valuing such securities in the same manner they are valued in
determining NAV, and selecting the securities in such manner as the Board may
deem fair and equitable. If such a distribution occurs, investors receiving
securities and selling them before their maturity could receive less than the
redemption value of such securities and, in addition, could incur certain
transaction costs. Such a redemption is not as liquid as a redemption paid in
cash or federal funds. The Fund has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which the Fund is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90 day period for any one account.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. As described more fully in the Prospectus, the Fund
permits exchanges of shares of any class of the Fund for shares of the same
class in any other John Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Class A and Class B
Prospectus, the Fund permits the establishment of a Systematic Withdrawal Plan.
Payments under this plan represent proceeds arising from the redemption of Fund
shares. Since the redemption
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<PAGE>
price of Fund shares may be more or less than the shareholder's cost, depending
upon the market value of the securities owned by the Fund at the time of
redemption, the distribution of cash pursuant to this plan may result in
realization of gain or loss for purposes of Federal, state and local income
taxes. The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional Class A or Class B Shares of the Fund could be
disadvantageous to a shareholder because of the initial sales charge payable on
such purchases of Class A Shares and the CDSC imposed on redemptions of Class B
Shares and because redemptions are taxable events. Therefore, a shareholder
should not purchase Fund shares at the same time as a Systematic Withdrawal Plan
is in effect. The Fund reserves the right to modify or discontinue the
Systematic Withdrawal Plan of any shareholder on 30 days' prior written notice
to such shareholder, or to discontinue the availability of such plan in the
future. The shareholder may terminate the plan at any time by giving proper
notice to Fund Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is explained
fully in the Fund's Class A and Class B Prospectus and the Account Privileges
Application. The program, as it relates to automatic investment checks, is
subject to the following conditions;
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non-payment of any check.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the due date of any investment.
Reinvestment Privilege. A shareholder who has redeemed Fund shares may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
the Fund or another John Hancock mutual fund, subject to the minimum investment
limit in that fund. The proceeds from the redemption of Class A Shares may be
reinvested at net asset value without paying a sales charge in Class A Shares of
the Fund or in Class A Shares of another John Hancock fund. If a CDSC was paid
upon a redemption, a shareholder may reinvest the proceeds from that redemption
at net asset value in additional shares of the class from which the redemption
was made. The shareholder's account will be credited with the amount of any CDSC
charged upon the prior redemption and the new shares will continue to be subject
to the CDSC. The holding period of the shares acquired through reinvestment
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares. The Fund may modify or
terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for
Federal income tax purposes even if the reinvestment privilege is exercised, and
any gain or loss realized by a
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<PAGE>
shareholder on the redemption or other disposition of Fund shares will be
treated for tax purposes as described under the caption "Dividends,
Distributions and Tax Status."
DESCRIPTION OF THE FUND'S SHARES
Shares of the Fund. Ownership of the Fund is represented by transferable
shares of beneficial interest. The Declaration of Trust permits the Trustees to
create an unlimited number of series and classes of shares of the Fund and, with
respect to each series and class, to issue an unlimited number of full or
fractional shares and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
of the Fund.
Each share of each series or class of the Fund represents an equal
proportionate interest with each other in that series or class, none having
priority or preference over other shares of the same series or class. The
interest of investors in the various series or classes of the Fund is separate
and distinct. All consideration received for the sales of shares of a particular
series or class of the Fund, all assets in which such consideration is invested
and all income, earnings and profits derived from such investments will be
allocated to and belong to that series or class. As such, each such share is
entitled to dividends and distributions out of the net income belonging to that
series or class as declared by the Trustees. Shares of the Fund have a par value
of $0.01 per share. The assets of each series are segregated on the Fund's books
and are charged with the liabilities of that series and with a share of the
Fund's general liabilities. The Trustees determine those assets and liabilities
deemed to be general assets or liabilities of the Fund, and these items are
allocated among each series in proportion to the relative total net assets of
each series. In the unlikely event that the liabilities allocable to a series
exceed the assets of that series, all or a portion of such liabilities may have
to be borne by the other series.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional classes within any
series (which would be used to distinguish among the rights of different
categories of shareholders, as might be required by future regulations or other
unforeseen circumstances). As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Fund designated as Class A and Class B. Class A and Class B Shares of the
Fund represent an equal proportionate interest in the aggregate net asset values
attributable to that class of the Fund. Holders of Class A Shares and Class B
Shares each have certain exclusive voting rights on matters relating to the
Class A Plan and the Class B Plan, respectively. The different classes of the
Fund may bear different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares
will be calculated in the same manner, at the same time and on the same day and
will be in the same amount, except for differences caused by the fact that (i)
the distribution and service fees relating to Class A and Class B shares will be
borne exclusively by such class, (ii) Class B shares will pay higher
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<PAGE>
distribution and service fees than Class A shares and (iii) each class of shares
will bear any other class expenses properly attributable to that class of
shares, subject to certain conditions imposed by the Internal Revenue Service in
issuing rulings to funds with a multiple-class structure. Similarly, the net
asset value per share may vary depending whether Class A Shares or Class B
Shares are purchased.
Voting Rights. Shareholders are entitled to a full vote for each full share
held. The Trustees themselves have the power to alter the number and the terms
of office of Trustees, and they may at any time lengthen their own terms or make
their terms of unlimited duration (subject to certain removal procedures) and
appoint their own successors, provided that at all times at least a majority of
the Trustees have been elected by shareholders. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees. Although
the Fund need not hold annual meetings of shareholders, the trustees may call
special meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust. Also, a shareholder's
meeting must be called if so requested in writing by the holders of record of
10% or more of the outstanding shares of the Fund. In addition, the Trustees may
be removed by the action of the holders of record of two-thirds or more of the
outstanding shares.
Shareholder Liability. The Declaration of Trust provides that no Trustee,
officer, employee or agent of the Fund is liable to the Fund or to a
shareholder, nor is any Trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the Fund, except as such liability may
arise from his or its own bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties. It also provides that all third persons shall
look solely to the Fund's property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.
As a Massachusetts business trust, the Fund is not required to issue share
certificates. The Fund shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders.
Reports to Shareholders. Shareholders of the Fund will receive annual and
semi-annual reports showing diversification of investments, securities owned and
other information regarding the Fund's activities. The financial statements of
the Fund are audited at least once a year by the Fund's independent auditors.
Registration Statement. This Statement of Additional Information and the
Prospectus do not contain all of the information set forth in the Fund's
Registration Statement filed with the Securities and Exchange Commission. The
complete Registration Statement may be obtained from the Securities and Exchange
Commission upon payment of the fee prescribed by the rules and regulations of
the Commission.
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<PAGE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's shares,
the following procedures are utilized wherever applicable. Debt investment
securities are valued on the basis of valuations furnished by a principal market
maker or a pricing service, both of which generally utilize electronic data
processing techniques to determine valuations for normal institutional size
trading units of debt securities without exclusive reliance upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or
less are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees. The Fund will not price its securities on
the following national holidays: New Year's Day; President's Day; Good Friday;
Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
TAX STATUS
The Fund has qualified and elected to be treated as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), and intends to continue to so qualify in the future. As such and
by complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on taxable income
(including net short-term and long-term capital gains from the disposition of
portfolio securities or the right to when-issued securities prior to issuance,
or from the lapse, exercise, delivery under or closing out of options or futures
contracts, income from repurchase agreements and other taxable securities,
income attributable to accrued market discount, income from securities lending,
and a portion of the discount from certain stripped tax-exempt obligations or
their coupons) which is distributed to shareholders at least annually in
accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in Fund shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
Federal income tax
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<PAGE>
purposes in each share so received equal to the amount of cash they would have
received had they elected to receive the distributions in cash, divided by the
number of shares received.
The Fund's distributions of tax-exempt interest ("exempt-interest
dividends") timely designated as such will be treated as tax-exempt interest
under the Code, provided that the Fund qualifies as a regulated investment
company and at least 50% of the value of its assets at the end of each quarter
of its taxable year is invested in tax-exempt obligations. Shareholders are
required to report their receipt of tax-exempt interest, including such
distributions, on their Federal income tax returns. The portion of the Fund's
distributions designated as exempt-interest dividends may differ from the actual
percentage that its tax-exempt income comprised of its total income during the
period of any particular shareholder's investment. The Fund will report to
shareholders the amount designated as exempt-interest dividends for each year.
Interest income from certain types of tax-exempt bonds that are private
activity bonds in which the Fund may invest is treated as an item of tax
preference for purposes of the Federal alternative minimum tax. To the extent
that the Fund invests in these types of tax-exempt bonds, shareholders will be
required to treat as an item of tax preference for Federal alternative minimum
purposes that part of the Fund's exempt-interest dividends which is derived from
interest on these tax-exempt bonds. Exempt-interest dividends derived from
interest income from all tax-exempt bonds may be included in corporate "adjusted
current earnings" for purposes of computing the alternative minimum tax
liability, if any, of corporate shareholders of the Fund.
The amount of the Fund's net short-term and long-term capital gains, if
any, in any given year will vary depending upon the Adviser's current investment
strategy and whether the Adviser believes it to be in the best interest of the
Fund to dispose of portfolio securities or enter into options or futures
transactions that will generate capital gains. At the time of an investor's
purchase of Fund shares, a portion of the purchase price is often attributable
to realized or unrealized appreciation in the Fund's portfolio or, less
frequently, to undistributed taxable income of the Fund. Consequently,
subsequent distributions from such appreciation or income may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon his basis in his shares. Such gain or loss will be treated as capital gain
or loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon the shareholder's tax holding period for
the shares. A sales charge paid in purchasing Class A shares of the Fund cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
shares of the Fund or another John Hancock Fund are subsequently acquired
without payment of a sales charge pursuant to the reinvestment or exchange
privilege. Such disregarded load will result in an increase in the shareholder's
tax basis in the shares subsequently acquired. Also, any loss realized on a
redemption or exchange will be disallowed to the extent the shares disposed of
are replaced with other shares of the Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of,
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<PAGE>
such as pursuant to an election to reinvest dividends in additional shares. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be disallowed to the extent of all
exempt-interest dividends paid with respect to such shares and, if not thus
disallowed, will be treated as a long- term capital loss to the extent of any
amounts treated as distributions of long-term capital gain with respect to such
shares.
Although its present intention is to distribute all net short-term and
long-term capital gains, if any, the Fund reserves the right to retain and
reinvest all or any portion of its "net capital gain," which is the excess, as
computed for Federal income tax purposes, of net long-term capital gain over net
short-term capital loss in any year. The Fund will not in any event distribute
net capital gain realized in any year to the extent that a capital loss is
carried forward from prior years against such gain. To the extent such excess
was retained and not exhausted by the carryforward of prior years' capital
losses, it would be subject to Federal income tax in the hands of the Fund. Each
shareholder would be treated for Federal income tax purposes as if the Fund had
distributed to him on the last day of its taxable year his pro rata share of
such excess, and he had paid his pro rata share of the taxes paid by the Fund
and reinvested the remainder in the Fund. Accordingly, each shareholder would
(a) include his pro rata share of such excess as long-term capital gain income
in his return for his taxable year in which the last day of the Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled
to increase the adjusted tax basis for his shares in the Fund by the difference
between his pro rata share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is generally permitted to carry
forward a net capital loss in any year to offset its net capital gains, if any,
during the eight years following the year of the loss. To the extent subsequent
capital gains are offset by such losses, they would not result in Federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders. The Fund has $5,472,579 of capital loss carry forwards. Of this
amount $34,998 expires December 31, 2001, $267,864 expires December 31, 2002 and
$5,169,717 expires December 31, 2003.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for Federal income tax purposes to the
extent it is deemed related to exempt-interest dividends paid by the Fund.
Pursuant to published guidelines, the Internal Revenue Service may deem
indebtedness to have been incurred for the purpose of purchasing or carrying
shares of the Fund even though the borrowed funds may not be directly traceable
to the purchase of shares.
Dividends paid by the Fund to its corporate shareholders will not qualify
for the corporate dividends received deduction in their hands.
If the Fund invests in zero coupon securities or, in general, any other
securities with original issue discount (or with market discount if the Fund
elects to include accrued market discount in income currently), the Fund must
accrue income on such investments prior to the receipt of the corresponding cash
payments. However, the Fund must distribute, at least annually,
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<PAGE>
all or substantially all of its net income, including such accrued income, to
shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, the Fund may have to dispose
of its portfolio securities under disadvantageous circumstances to generate
cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting portfolio positions may be deferred rather
than being taken into account currently in calculating the Fund's gains. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. Certain of the applicable tax rules may be
modified if the Fund is eligible and chooses to make one or more of certain tax
elections that may be available. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options and
futures contracts in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
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The following discussion assumes that the Fund will be qualified as a
regulated investment company under subchapter M of the Code and will be
qualified thereunder to pay exempt interest dividends.
Individual shareholders of the Fund who are subject to California personal
income taxation will not be required to include in their California gross income
that portion of their federal exempt-interest dividends which the Fund clearly
and accurately identifies as directly attributable to interest earned on
obligations the interest on which is exempt from California personal income
taxation, provided that at least 50 percent of the value of the Fund's total
assets consists of such obligations. Distributions to individual shareholders
derived from interest on Tax-Exempt Securities issued by governmental
authorities in states other than California and short-term capital gains will be
taxed as dividends for purposes of California personal income taxation. The
Fund's long-term capital gains for Federal income tax purposes that are
distributed to the shareholders will be taxed as long-term capital gains to
individual shareholders of the Fund for purposes of California personal income
taxation. Gain or loss, if any, resulting from a sale or redemption of shares
will be recognized in the year of the sale or redemption. Present California law
taxes both long-term and short-term capital gains at the rates applicable to
ordinary income. Interest on indebtedness incurred or continued by a shareholder
in connection with the purchase of shares of the Fund will not be deductible for
California personal income tax purposes.
Generally, corporate shareholders of the Fund subject to the California
franchise tax will be required to include any gain on a sale or redemption of
shares and all distributions of exempt interest, capital gains and other taxable
income, if any, as income subject to such tax.
The Fund will not be subject to California franchise or corporate income
tax on interest income or net capital gain distributed to the shareholders.
Shares of the Fund will be exempt from local property taxes in California.
Shares of the Fund will not be excludable from the taxable estates of
deceased California resident shareholders for purposes of the California estate
and generation skipping taxes. California estate and generation skipping taxes
are creditable against the corresponding Federal taxes.
The foregoing is a general, abbreviated summary of certain of the
provisions of California law presently in effect as it directly governs the
taxation of the shareholders of the Fund. These provisions are subject to change
by legislative or administrative action, and any such change may be retroactive
with respect to the Fund's transactions. Shareholders are advised to consult
with their own tax advisers for more detailed information concerning California
tax matters.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1995, the annualized yields of the
Fund's Class A Shares and Class B Shares were 5.00% and 4.49%, respectively
(4.85% and 4.34%,
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<PAGE>
respectively, without taking into account the expense limitation arrangements).
As of December 31, 1995 the average annual total returns of the Class A Shares
of the Fund for the one year period and since inception on December 29, 1989
were 16.40% and 7.69%, respectively As of December 31, 1995, the average annual
returns for the Fund's Class B Shares for the one year period and since
inception December 31, 1991 were 15.89% and 6.77%. Without taking into account
the expense limitation arrangements, the foregoing total return performance
would have been lower.
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
Yield = 2 [ (a-b + 1 )6 -1]
---
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the
period (NAV where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Fund which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt. The tax equivalent yields for the
Fund's Class A and Class B Shares at the maximum federal and California tax rate
(39.6%) for the 30-day period ended December 31, 1995 were 9.30% and 8.35%,
respectively.
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
P (1+T) n = ERV
Where:
P= a hypothetical initial investment of $1,000.
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 investment made
at the beginning of the 1-year and life-of-fund periods.
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<PAGE>
In the case of Class A Shares or Class B Shares, this calculation assumes
the maximum sales charge is included in the initial investment or the CDSC is
applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period.
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's maximum sales
charge on Class A Shares or the CDSC on Class B Shares into account. Excluding
the Fund's sales charge on Class A Shares and the CDSC on Class B Shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well as the Russell and Wilshire Indices. The Fund may also cite
Morningstar Mutual Values, an independent mutual fund information service which
ranks mutual funds. The Fund's promotional and sales literature may make
reference to the Fund's "beta." Beta is a reflection of the market-related risk
of the Fund by showing how responsive the fund is to the market.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will
also be utilized.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Investment Adviser pursuant
to recommendations made by an investment committee of the Investment Adviser,
which consists of officers and directors of
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<PAGE>
the Investment Adviser and affiliates and officers and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the officers of the Fund, will offer
the best price and market for the execution of each such transaction. Purchases
from underwriters of portfolio securities may include a commission or
commissions paid by the issuer and transactions with dealers serving as market
makers reflect a "spread." Investments in debt securities are generally traded
on a net basis through dealers acting for their own account as principals and
not as brokers; no brokerage commissions are payable on such transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the NASD and other policies that the
Trustees may determine, the Investment Adviser may consider sales of shares of
the Fund as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in
the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Investment
Adviser of the Fund, and their value and expected contribution to the
performance of the Fund. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Investment Adviser. The
receipt of research information is not expected to reduce significantly the
expenses of the Investment Adviser. The research information and statistical
assistance furnished by brokers and dealers may benefit the Life Company or
other advisory clients of the Investment Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Investment Adviser
may result in research information and statistical assistance beneficial to the
Fund. The Fund will make no commitments to allocate portfolio transactions upon
any prescribed basis. While the Fund's officers will be primarily responsible
for the allocation of the Fund's brokerage business, their policies and
practices in this regard must be consistent with the foregoing and will at all
times be subject to review by the Trustees. For the fiscal years ended December
31, 1995, 1994 and 1993, no negotiated brokerage commissions were paid on
portfolio transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Fund may pay to a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. During the fiscal year ended December 31, 1995, the
Fund did not pay commissions as compensation to any brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
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<PAGE>
The Investment Adviser's indirect parent, the Life Company, is the indirect
sole shareholder of John Hancock Freedom Securities Corporation and its
subsidiaries, three of which, Tucker Anthony Incorporated ("Tucker Anthony")
John Hancock Distributors, Inc. ("John Hancock Distributors") and Sutro &
Company, Inc. ("Sutro"), are broker-dealers ("Affiliated Brokers"). Pursuant to
procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through Tucker Anthony, Sutro or John Hancock Distributors. During the year
ended December 31, 1995, the Fund did not execute any portfolio transactions
with then affiliated brokers.
Any of the Affiliated Brokers may act as broker for the Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the 1940 Act.
Commissions paid to an Affiliated Broker must be at least as favorable as those
which the Trustees believe to be contemporaneously charged by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold. A transaction would not be placed with an Affiliated Broker
if the Fund would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions for its
other most favored, but unaffiliated, customers, except for accounts for which
the Affiliated Broker acts as a clearing broker for another brokerage firm, and
any customers of the Affiliated Broker not comparable to the Fund as determined
by a majority of the Trustees who are not interested persons (as defined in the
1940 Act) of the Fund, the Investment Adviser or the Affiliated Brokers. Because
the Investment Adviser, which is affiliated with the Affiliated Brokers, has, as
an investment adviser to the Fund, the obligation to provide investment
management services, which includes elements of research and related investment
skills, such research and related skills will not be used by the Affiliated
Brokers as a basis for negotiating commissions at a rate higher than that
determined in accordance with the above criteria. The Fund will not effect
principal transactions with Affiliated Brokers.
The Fund's portfolio turnover rates for the fiscal years ended December 31,
1994 and 1995 were 62% and 37%, respectively.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205-9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Investor Services
a monthly transfer agent fee of $19 per account for the Class A Shares and
$21.50 per account for the Class B Shares, plus out-of-pocket expenses. These
expenses are aggregated and charged to the Fund and allocated to each class on
the basis of the related net asset values.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has
been selected as the independent auditors of the Fund. The financial statements
of the Fund included in
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<PAGE>
the Prospectus and this Statement of Additional Information have been audited by
Ernst & Young LLP for the periods indicated in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and Investors Bank & Trust Company, 24 Federal Street, Boston,
Massachusetts 02110. Under the custodian agreement, Investors Bank & Trust
Company performs custody, portfolio and fund accounting services.
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<PAGE>
APPENDIX A
TAX EXEMPT BOND RATINGS
Below is a description of the five ratings that may apply to the Fund's
investments in Tax-Exempt Bonds.
Tax-Exempt Bond Ratings
Moody's describes its five highest ratings for Tax-Exempt Bonds as follows:
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as 'gilt
edge'. Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
The five highest ratings of Standard & Poor's for Tax-Exempt Bonds are AAA
(Prime), AA (High Grade), A (Good Grade), BBB (Medium Grade) and BB:
AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal
and interest.
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<PAGE>
AA Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and
interest for bonds in this category than for bonds in the A category.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
Fitch describes its ratings for Tax-Exempt Bonds as follows:
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA".
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foresee future developments, short-term
debt of these issuers is generally rated F-1+.
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds and, therefore, impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
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<PAGE>
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified that could assist the obligor in satisfying its debt
service requirements.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short-term run. Symbols
used will be as follows:
MIG 1 Loans bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing
or from established and broad-based access to the market for refinancing,
or both.
MIG 2 Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
MIG 3 Loans bearing this designation are of favorable quality, with all
securities elements accounted for but lacking the undeniable strength of
the preceding grades. Market access for refinancing, in particular, is
likely to be less well established.
Standard & Poor's ratings for state and municipal notes and other
short-term loans are designated Standard & Poor's Grade (SP).
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
Fitch Ratings for short-term debt obligations that are payable on demand or
have original maturities of up to three years including commercial paper,
certificates of deposits, medium term notes and municipal and investment notes
are designated by the following ratings:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
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<PAGE>
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin for safety is not as
great as for issues assigned F-1+ and F-1 ratings.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
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<PAGE>
PART C.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements listed below are included in and incorporated
by reference into Part B of the Registration Statement from the 1995 Annual
Report to Shareholders for the year ended December 31, 1995 (filed
electronically on February 3, 1996; file nos. 811-5979 and 33-31675; accession
numbers 0000950135-96-0001144):
John Hancock California Tax-Free Income Fund
Statement of Assets and Liabilities as of December 31, 1995.
Statement of Operations for the year ended December 31, 1995.
Statement of Changes in Net Assets for each of the two years in the
period ended December 31.
Financial Highlights for each of the periods indicated therein.
Notes to Financial Statements.
Schedule of Investments as of December 31, 1995.
(b) Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant
No person is directly or indirectly controlled by or under common control
with Registrant.
Item 26. Number of Holders of Securities
As of March 29, 1996, the number of record holders of shares of the
Registrant was as follows:
Title of Class Number of Record Holders
Class A Shares - 2,737
Class B Shares - 1,914
Item 27. Indemnification
(a) Indemnification provisions relating to the Registrant's Trustees,
officers, employees and agents is set forth in Article VII of the Registrant's
By Laws included as Exhibit 2 herein.
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<PAGE>
(b) Under Section 12 of the Distribution Agreement, John Hancock Funds,
Inc. ("John Hancock Funds" ) has agreed to indemnify the Registrant and its
Trustees, officers and controlling persons against claims arising out of certain
acts and statements of John Hancock Funds.
Section 9(a) of the By-Laws of John Hancock Mutual Life Insurance Company
"Insurance Company" provides, in effect, that the Insurance Company will,
subject to limitations of law, indemnify each present and former director,
officer and employee of the of the Insurance Company who serves as a Trustee or
officer of the Registrant at the direction or request of the Insurance Company
against litigation expenses and liabilities incurred while acting as such,
except that such indemnification does not cover any expense or liability
incurred or imposed in connection with any matter as to which such person shall
be finally adjudicated not to have acted in good faith in the reasonable belief
that his action was in the best interests of the Insurance Company. In addition,
no such person will be indemnified by the Insurance Company in respect of any
liability or expense incurred in connection with any matter settled without
final adjudication unless such settlement shall have been approved as in the
best interests of the Insurance Company either by vote of the Board of Directors
at a meeting composed of directors who have no interest in the outcome of such
vote, or by vote of the policyholders. The Insurance Company may pay expenses
incurred in defending an action or claim in advance of its final disposition,
but only upon receipt of an undertaking by the person indemnified to repay such
payment if he should be determined not to be entitled to indemnification.
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc.("the Adviser") provide as follows:
"Section 9.01. Indemnity: Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a director, officer, employee or agent of the
corporation, or is or was at any time since the inception of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and the liability was not incurred by reason of gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and expenses in connection therewith may be advanced by the Corporation,
all to the full extent authorized by the law."
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Declaration of Trust and By-Laws, the
Distribution Agreement, the By-Laws of John Hancock Funds, the Adviser, or the
Insurance Company or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
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<PAGE>
against policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Investment
Adviser, reference is made to Forms ADV (801-8124) filed under the Investment
Advisers Act of 1940, which is incorporated herein by reference.
Item 29. Principal Underwriters
(a) John Hancock Funds acts as principal underwriter for the Registrant and
also serves as principal underwriter or distributor of shares for John Hancock
Cash Reserve, Inc., John Hancock Bond Fund, John Hancock Current Interest, John
Hancock Series, Inc., John Hancock Tax-Free Bond Fund, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Limited Term
Government Fund, John Hancock Tax-Exempt Income Fund, John Hancock Sovereign
Investors Fund, Inc., John Hancock Special Equities Fund, John Hancock Sovereign
Bond Fund, John Hancock Tax-Exempt Series, John Hancock Strategic Series, John
Hancock Technology Series, Inc., John Hancock World Fund, John Hancock
Investment Trust, John Hancock Institutional Series Trust, Freedom Investment
Trust, Freedom Investment Trust II and Freedom Investment Trust III.
(b) The following table lists, for each director and officer of John
Hancock Funds, the information indicated.
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<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. President, Chief Executive Chairman
101 Huntington Avenue Officer and Director
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Compliance Officer
P.O. Box 111
Boston, Massachusetts
Robert G. Freedman Director Vice Chairman, Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Stephen M. Blair Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Thomas H. Drohan Senior Vice President Senior Vice President and
101 Huntington Avenue Secretary
Boston, Massachusetts
James W. McLaughlin Senior Vice President None
101 Huntington Avenue and
Boston, Massachusetts Chief Financial Officer
David A. King Senior Vice President and Director None
101 Huntington Avenue
Boston, Massachusetts
Michael T. Capenter Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
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<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- -------------
William S. Nichols Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Anthony P. Petrucci Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Albuquerque, New Mexico
John A. Morin Vice President Vice President
101 Huntington Avenue
Boston, Massachusetts
Susan S. Newton Vice President and Secretary Vice President,
101 Huntington Avenue Assistant Secretary
Boston, Massachusetts and Compliance Officer
Keith Harstein Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
Christopher M. Meyer Treasurer None
101 Huntington Avenue
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
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<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John Goldsmith Director None
One Beacon Street
Boston, Massachusetts
Richard O. Hansen Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David F. D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Foster Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
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<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
</TABLE>
(c) None.
Item 30. Location of Accounts and Records
Registrant maintains the records required to be maintained by it under
Rules 31a-1 (a), 31a-1(b), and 31a-2(a) under the Investment Company Act of
1940 at its principal executive offices at 101 Huntington Avenue, Boston
Massachusetts 02199-7603. Certain records, including records relating to
the Registrant's shareholders and the physical possession of its
securities, may be maintained pursuant to Rule 31a-3 at the main offices of
the Registrant's Transfer Agent and Custodian.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not Applicable
(b) Not Applicable
(c) The Registrant hereby undertakes to furnish each person to whom a
prospectus with respect to a series of the Registrant is delivered with a copy
of the latest annual report to shareholders with respect to that series upon
request and without charge.
(d) The Registrant undertakes to comply with Section 16(c) of the
Investment Company Act of 1940, as amended which relates to the assistance to be
rendered to shareholders by the Trustees of the Registrant in calling a meeting
of shareholders for the purpose of voting upon the question of the removal of a
trustee.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) unless the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boston, and the Commonwealth of Massachusetts on the
24th day of April, 1996.
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
By: *
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman and Chief Executive
Edward J. Boudreau, Jr. Officer (Principal Executive Officer)
/s/James B. Little
James B. Little Senior Vice President and Chief April 24, 1996
Financial Officer (Principal
Financial and Accounting Officer)
* Trustee
James F. Carlin
* Trustee
William H. Cunningham
* Trustee
Charles F. Fretz
* Trustee
Harold R. Hiser, Jr.
C-8
<PAGE>
Signature Title Date
--------- ----- ----
________________________ Trustee
Anne C. Hodsdon
* Trustee
Charles L. Ladner
* Trustee
Leo E. Linbeck, Jr.
* Trustee
Patricia P. McCarter
* Trustee
Steven R. Pruchansky
________________________ Trustee
Richard S. Scipione
* Trustee
Norman H. Smith
* Trustee
John P. Toolan
*By: /s/Thomas H. Drohan April 24, 1996
-------------------
Thomas H. Drohan,
Attorney-in-Fact
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.B1 Amended and Restated Declaration of Trust dated December
19, 1989; Amendment to Declaration of Trust dated October
22, 1991; Amendment to Declaration of Trust dated December
16, 1994 and September 11, 1995.**
99.B2 By-Laws.*
99.B3 None.
99.B4.1 Specimen share certificate for Registrant (Classes A and B).*
.
99.B5 Investment Advisory Agreement between John Hancock Advisers,
Inc. and the Registrant.*
99.B6 Distribution Agreement between John Hancock Funds, Inc. and the
Registrant.*
99.B6.1 Form of Financial Institution Sales and Service Agreement.*
99.B6.2 Form of Soliciting Dealer Agreement between John Hancock Broker
Distribution Services, Inc. and Selected Dealers.*
99.B7 None.
99.B8 Master Custodian Agreement with Investors Bank and Trust
Company Bank.*
99.B9 Transfer Agency and Service Agreement with John Hancock Fund
Services, Inc.*
99.B10 Not applicable
99.B11 Consent of Independent Auditors.+
99.B12 None
99.B13 None
C-10
<PAGE>
99.B15 Class A Distribution Plan between Registrant and John Hancock
Funds, Inc.*
99.B15.1 Class B Distribution Plan between Registrant and John Hancock
Funds, Inc.*
99.B16 Working papers showing yield calculation for yield and total
return incorporated by reference to Post-Effective Amendment.**
27.1A John Hancock California Tax-Free Income Fund
27.1B John Hancock California Tax-Free Income Fund
* Previously filed electronically with post-effective amendment number 9
(file nos. 33-31675 811-5979) on April 19, 1995, accession number
0000950135-95-000965.
** Previously filed electronically with post-effective amendment number (file
nos. 33- 31675 and 811-5979) on February 29, 1996, accession number
0000950135-96-001237.
+ Filed herewith
C-11
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "The Fund's Financial
Highlights" in the Class A and Class B Shares prospectus and "Independent
Auditors" in the Class A and Class B Shares Statement of Additional Information
and to the use of our report dated February 9, 1996, on the financial statements
and financial highlights of the John Hancock California Tax-Free Income Fund in
this Post-Effective Amendment Number 11 to Registration Statement (Form N-1A No.
33-31675) dated May 1, 1996.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
April 23, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> JOHN HANCOCK CALIFORNIA TAX-FREE INCOME - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 372,158,562
<INVESTMENTS-AT-VALUE> 392,867,753
<RECEIVABLES> 10,836,902
<ASSETS-OTHER> 345,374
<OTHER-ITEMS-ASSETS> 20,709,191
<TOTAL-ASSETS> 404,050,029
<PAYABLE-FOR-SECURITIES> 6,407,636
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,665,227
<TOTAL-LIABILITIES> 10,072,863
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 380,188,359
<SHARES-COMMON-STOCK> 28,947,194
<SHARES-COMMON-PRIOR> 26,034,286
<ACCUMULATED-NII-CURRENT> 147,647
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,439,031)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,080,191
<NET-ASSETS> 393,977,166
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,466,593
<OTHER-INCOME> 0
<EXPENSES-NET> 3,212,999
<NET-INVESTMENT-INCOME> 19,253,594
<REALIZED-GAINS-CURRENT> (2,245,541)
<APPREC-INCREASE-CURRENT> 51,125,949
<NET-CHANGE-FROM-OPS> 68,134,002
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15,185,497
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,504,203
<NUMBER-OF-SHARES-REDEEMED> 4,285,570
<SHARES-REINVESTED> 694,275
<NET-CHANGE-IN-ASSETS> 75,029,013
<ACCUMULATED-NII-PRIOR> 127,227
<ACCUMULATED-GAINS-PRIOR> (4,123,929)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,940,320
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,730,633
<AVERAGE-NET-ASSETS> 348,664,317
<PER-SHARE-NAV-BEGIN> 9.28
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> 1.41
<PER-SHARE-DIVIDEND> 0.57
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.69
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> JOHN HANCOCK CALIFORNIA TAX-FREE INCOME - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 372,158,562
<INVESTMENTS-AT-VALUE> 392,867,753
<RECEIVABLES> 10,836,902
<ASSETS-OTHER> 345,374
<OTHER-ITEMS-ASSETS> 20,709,191
<TOTAL-ASSETS> 404,050,029
<PAYABLE-FOR-SECURITIES> 6,407,636
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,665,227
<TOTAL-LIABILITIES> 10,072,863
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 380,188,359
<SHARES-COMMON-STOCK> 7,924,897
<SHARES-COMMON-PRIOR> 8,339,105
<ACCUMULATED-NII-CURRENT> 147,647
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,439,031)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,080,191
<NET-ASSETS> 393,977,166
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,466,593
<OTHER-INCOME> 0
<EXPENSES-NET> 3,212,999
<NET-INVESTMENT-INCOME> 19,253,594
<REALIZED-GAINS-CURRENT> (2,245,541)
<APPREC-INCREASE-CURRENT> 51,125,949
<NET-CHANGE-FROM-OPS> 68,134,002
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,060,951
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 861,939
<NUMBER-OF-SHARES-REDEEMED> 1,484,859
<SHARES-REINVESTED> 208,712
<NET-CHANGE-IN-ASSETS> 75,029,013
<ACCUMULATED-NII-PRIOR> 127,227
<ACCUMULATED-GAINS-PRIOR> (4,123,929)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,940,320
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,730,633
<AVERAGE-NET-ASSETS> 348,664,317
<PER-SHARE-NAV-BEGIN> 9.28
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> 1.40
<PER-SHARE-DIVIDEND> 0.50
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.68
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
