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. 12 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 15 [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)
[ ] on (DATE) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[X] on September 30, 1996 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.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
JOHN HANCOCK
TAX-FREE
INCOME FUNDS
[JOHN HANCOCK'S GRAPHIC LOGO. A CIRCLE,
A DIAMOND, TRIANGLE AND A DIAMOND.]
- --------------------------------------------------------------------------------
PROSPECTUS
SEPTEMBER 30, 1996
This prospectus gives vital information about these funds. For your own benefit
and protection, please read it before you invest, and keep it on hand for future
reference.
Please note that these funds:
- - are not bank deposits
- - are not federally insured
- - are not endorsed by any bank or government agency
- - are not guaranteed to achieve their goal(s)
High Yield Tax-Free Fund may invest up to 100% in junk bonds; read risk
information carefully.
Like all mutual fund shares, 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.
CALIFORNIA TAX-FREE INCOME FUND
HIGH YIELD TAX-FREE FUND
MANAGED TAX-EXEMPT FUND
MASSACHUSETTS TAX-FREE
INCOME FUND
NEW YORK TAX-FREE INCOME FUND
TAX-FREE BOND FUND
[JOHN HANCOCK'S GRAPHIC LOGO. A CIRCLE,
A DIAMOND, TRIANGLE AND A DIAMOND.]
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
101 Huntington Avenue, Boston, Massachusetts 02199-7603
With respect to Class B shares of John Hancock Massachusetts Tax-Free Income
Fund and Class B shares of John Hancock New York Tax-Free Income Fund:
A registration statement relating to these securities and exchange commission.
These securities may not be sold nor may offers to buy be accepted prior to the
registration statement becomes effective. This prospectus shall not constitute
an offer to sell or the solicitation of an offer to buy Class B shares of these
Funds.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
CONTENTS
- --------------------------------------------------------------------------------
A fund-by-fund look at goals, strategies, risks, expenses and financial history.
Policies and instructions for opening, maintaining and closing an account in any
tax-free income fund.
Details that apply to the tax-free income funds as a group.
CALIFORNIA TAX-FREE INCOME FUND 4
HIGH YIELD TAX-FREE FUND 6
MANAGED TAX-EXEMPT FUND 8
MASSACHUSETTS TAX-FREE INCOME FUND 10
NEW YORK TAX-FREE INCOME FUND 12
TAX-FREE BOND FUND 14
YOUR ACCOUNT
Choosing a share class 16
How sales charges are calculated 16
Sales charge reductions and waivers 17
Opening an account 17
Buying shares 18
Selling shares 19
Transaction policies 21
Dividends and account policies 21
Additional investor services 22
FUND DETAILS
Business structure 23
Sales compensation 24
More about risk 26
FOR MORE INFORMATION BACK COVER
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
OVERVIEW
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
GOAL AND STRATEGY The fund's particular investment goals and the strategies it
intends to use in pursuing those goals.
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
PORTFOLIO SECURITIES The primary types of securities in which the fund invests.
Secondary investments are described in "More about risk" at the end of the
prospectus.
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
RISK FACTORS The major risk factors associated with the fund.
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
PORTFOLIO MANAGEMENT The individual or group designated by the investment
adviser to handle the fund's day-to-day management.
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
EXPENSES The overall costs borne by an investor in the fund, including sales
charges and annual expenses.
[[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
FINANCIAL HIGHLIGHTS A table showing the fund's financial performance for up to
ten years, by share class. A bar chart showing total return allows you to
compare the fund's historical risk level to those of other funds.
GOAL OF THE TAX-FREE INCOME FUNDS
John Hancock tax-free income funds seek to offer regular income that is exempt
from federal and, in some cases, state and local income tax. Each fund employs
its own strategy and has its own risk/reward profile. Each fund invests at least
80% of assets in municipal securities exempt from federal (and in some funds,
state) income tax as well as the federal alternative minimum tax. However, a
portion of a tax-free fund's income may be subject to these taxes. Because you
could lose money by investing in these funds, be sure to read all risk
disclosure carefully before investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
- - are in higher income brackets
- - desire regular monthly income
- - are interested in lowering their income tax burden
- - live in California, Massachusetts or New York (for state- specific funds)
Tax-free income funds may NOT be appropriate if you:
- - are seeking an investment for a tax-deferred retirement account
- - are not subject to a high level of state or federal income taxes
- - are investing for maximum return over a long time horizon
- - require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock tax-free income funds are managed by John Hancock Advisers,
Inc. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John
Hancock Mutual Life Insurance Company and manages more than $19 billion in
assets.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
CALIFORNIA TAX-FREE INCOME FUND
REGISTRANT NAME: JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
TICKER SYMBOL CLASS A: TACAX CLASS B: TSCAX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks income that is exempt from federal and California personal
income taxes. The fund seeks to provide the maximum current income that is
consistent with preservation of capital. To pursue this goal, the fund invests
primarily in California municipal securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial paper
of any maturity. Under normal circumstances, the fund invests at least 80% of
net assets in California municipal securities, particularly bonds. At the time
of investment the fund's debt securities must be rated at least BB/Ba, or if
unrated, be of equivalent quality. No more than 20% of assets may be invested in
municipal securities rated BB/Ba (junk bonds), and no more than 25% of assets
may be invested in unrated securities.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in certain
other investments, including private activity bonds, and may engage in other
investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
bonds).
Although the fund is diversified, because it concentrates in securities of
California issuers its performance is largely dependent on factors that may
disproportionately affect California issuers. These may include:
- - local economic or policy changes
- - tax base erosion
- - state constitutional limits on tax increases
- - changes in the ratings assigned to the state's municipal issuers
- - the legacy of past credit problems, such as the 1994 bankruptcy of Orange
County
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Dianne Sales-Singer, leader of the fund's portfolio management team since April
1995, is a senior portfolio officer of the adviser. Ms. Sales-Singer joined John
Hancock Funds in 1989 and has been in the investment business since 1984.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- --------------------------------------------------------------------------------
<S> <C> <C>
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(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fee (after expense limitation)(3) 0.40% 0.40%
12b-1 fee (net of reduction)(4) 0.15% 0.90%
Other expenses (after expense limitation)(3) 0.20% 0.20%
Total fund operating expenses(3) 0.75% 1.50%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $52 $68 $ 85 $134
Class B shares
Assuming redemption
at end of period $65 $77 $102 $159
Assuming no redemption $15 $47 $ 82 $159
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.55% for each class and total fund
operating expenses would be 0.90% for Class A and 1.75% for Class B.
(4) Without the reduction, 12b-1 fees would be 1.00% for Class B shares. Because
of the 12b-1 fee, long-term shareholders may indirectly pay more than the
equivalent of the maximum permitted front-end sales charge.
4 CALIFORNIA TAX-FREE INCOME FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors,
_______________________.
VOLATILITY, AS INDICATED BY CLASS A [BAR CHART]
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED DECEMBER 31, 1990 1991 1992 1993 1994(1) 1995
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.00 $ 9.91 $ 10.32 $ 10.41 $ 10.85 $ 9.28
Net investment income (loss) 0.74 0.69 0.66(2) 0.62 0.58 0.57(2)
Net realized and unrealized gain (loss) on investments (0.16) 0.47 0.25 0.76 (1.57) 1.41
Total from investment operations 0.58 1.16 0.91 1.38 (0.99) 1.98
Less distributions:
Dividends from net investment income (0.67) (0.70) (0.67) (0.62) (0.58) (0.57)
Distributions from net realized gain on investments sold -- (0.05) (0.15) (0.32) -- --
Total distributions (0.67) (0.75) (0.82) (0.94) (0.58) (0.57)
Net asset value, end of period $ 9.91 $ 10.32 $ 10.41 $ 10.85 $ 9.28 $ 10.69
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 6.13 12.26 9.15 13.60 (9.31) 21.88
Total adjusted investment return at net asset value(3,4)(%) 5.29 11.86 8.90 13.42 (9.45) 21.73
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)($) 80,200 163,693 217,014 279,692 241,583 309,305
Ratio of expenses to average net assets (%) 0.00 0.40 0.58 0.69 0.75 0.75
Ratio of adjusted expenses to average net assets(5)(%) 0.84 0.80 0.83 0.87 0.89 0.90
Ratio of net investment income (loss) to average net assets(%) 7.11 6.75 6.36 5.69 5.85 5.76
Ratio of adjusted net investment income (loss) to average net
assets(5)(%) 6.27 6.35 6.11 5.51 5.71 5.61
Portfolio turnover rate(%) 62 45 34 51 62 37(6)
Fee reduction per share($) 0.09 0.04 0.03(2) 0.02 0.01 0.01(2)
<CAPTION>
CLASS B - YEAR ENDED DECEMBER 31, 1992 1993 1994(1) 1995
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.32 $ 10.41 $ 10.85 $ 9.28
Net investment income (loss) 0.58(2) 0.54 0.51 0.50(2)
Net realized and unrealized gain (loss) on investments 0.25 0.76 (1.57) 1.40
Total from investment operations 0.83 1.30 (1.06) 1.90
Less distributions:
Dividends from net investment income (0.59) (0.54) (0.51) (0.50)
Distributions from net realized gain on investments sold (0.15) (0.32) -- --
Total distributions (0.74) (0.86) (0.51) (0.50)
Net asset value, end of period $ 10.41 $ 10.85 $ 9.28 $ 10.68
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3)(%) 8.35 12.76 (9.99) 20.87
Total adjusted investment return at net asset value(3,4)(%) 8.10 12.58 (10.13) 20.72
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)($) 26,595 65,437 77,365 84,673
Ratio of expenses to average net assets(%) 1.35 1.44 1.50 1.50
Ratio of adjusted expenses to average net assets(5)(%) 1.60 1.62 1.64 1.65
Ratio of net investment income (loss) to average net assets(%) 5.43 4.82 5.10 4.97
Ratio of adjusted net investment income (loss) to average net assets(5)(%) 5.18 4.64 4.96 4.82
Portfolio turnover rate(%) 34 51 62 37(6)
Fee reduction per share($) 0.03(2) 0.02 0.01 0.01(2)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Portfolio turnover excludes merger activity.
CALIFORNIA TAX-FREE INCOME FUND 5
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
HIGH YIELD TAX-FREE FUND
REGISTRANT NAME: JOHN HANCOCK TAX-FREE TRUST
TICKER SYMBOL CLASS A: JHTFX CLASS B: TSHTX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks a high level of current income that is largely exempt from
federal income tax and is consistent with preservation of capital. To pursue
this goal, the fund invests primarily in a diversified portfolio of tax-exempt
medium-grade municipal debt securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial paper of
any maturity. Under normal circumstances, the fund invests at least 80% of
assets in municipal bonds that at the time of investment are rated at least
BB/Ba, or if unrated, of equivalent quality. Up to 5% of assets may be invested
in bonds rated below BB/Ba, or equivalent. Bonds rated BB/Ba or lower are
considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in private
activity bonds and certain other investments, including various derivative
securities used in the fund's capital preservation strategies, and may engage in
other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
bonds). Investors should expect greater fluctuations in share price, yield and
total return compared to less aggressive tax-free bond funds. These
fluctuations, whether positive or negative, may be sharp and unanticipated.
Issuers of medium-grade bonds are typically in weaker financial health than
issuers of high quality bonds, and their ability to pay interest and principal
is less certain. Medium-grade issuers are more likely to encounter financial
difficulties and to be materially affected by these difficulties when they do
encounter them. As a result, markets for medium-grade bonds may react strongly
to adverse news about an issuer or the economy, or to the perception of adverse
news. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Frank A. Lucibella, leader of the fund's portfolio management team since April
1995, is a second vice president of the adviser. Mr. Lucibella joined John
Hancock Funds in 1988 and has been in the investment business since 1982.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- --------------------------------------------------------------------------------
<S> <C> <C>
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(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fee 0.58% 0.58%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.25% 0.25%
Total fund operating expenses 1.08% 1.83%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $56 $78 $102 $171
Class B shares
Assuming redemption
at end of period $69 $88 $119 $195
Assuming no redemption $19 $58 $ 99 $195
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6 HIGH YIELD TAX-FREE FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's
independent auditors, _________________________.
VOLATILITY, AS INDICATED BY CLASS B
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED OCTOBER 31, 1994(1) 1995(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.85 $ 8.82
Net investment income (loss) 0.48(3) 0.57
Net realized and unrealized gain (loss) on investments sold
and financial futures contracts (0.94) 0.70
Total from investment operations (0.46) 1.27
Less distributions:
Dividends from net investment income (0.48) (0.58)
Distributions in excess of net investment income (0.09) (0.04)
Total distributions (0.57) (0.62)
Net asset value, end of period $8.82 $9.47
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 4.96(5) 14.85
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 15,401 14,225
Ratio of expenses to average net assets (%) 1.15(6) 1.06
Ratio of net investment income (loss) to average net assets (%) 6.08(6) 6.36
Portfolio turnover rate (%) 62 64
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1987(7) 1987(8) 1988 1989 1990 1991(1) 1992
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.00 $ 9.49 $ 8.62 $ 9.25 $ 9.29 $ 9.07 $ 9.31
Net investment income (loss) 0.53 0.37 0.62 0.55 0.55 0.54 0.55
Net realized and unrealized gain (loss) on
investments sold
and financial futures contracts (0.51) (0.87) 0.70 0.13 (0.14) 0.34 0.17
Total from investment operations 0.02 (0.50) 1.32 0.68 0.41 0.88 0.72
Less distributions:
Dividends from net investment income (0.53) (0.37) (0.66) (0.51) (0.55) (0.54) (0.55)
Distributions in excess of net investment
income -- -- -- -- -- -- --
Distributions from net realized gain on
investments sold -- -- (0.03) -- -- -- (0.09)
Distributions from capitol paid-in -- -- -- (0.13) (0.08) (0.10) --
Total distributions (0.53) (0.37) (0.69) (0.64) (0.63) (0.64) (0.64)
Net asset value, end of period $ 9.49 $ 8.62 $ 9.25 $ 9.29 $ 9.07 $ 9.31 $ 9.39
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4)(%) 0.12(5) (5.13)(5) 15.88 7.54 4.60 10.07 7.89
Total adjusted investment return at net asset
value(4,9) (%) (0.39)(5) (5.34)(5) -- -- -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 15,753 15,026 24,278 29,841 35,820 51,467 65,933
Ratio of expenses to average net assets (%) 0.56(5) 0.61(5) 2.05 2.32 2.20 2.36 2.17
Ratio of adjusted expenses to average net
assets(10) (%) 1.07(5) 0.82(5) -- -- -- -- --
Ratio of adjusted net investment income to
average net assets (%) 4.96(5) 4.05(5) 6.66 5.79 5.96 5.61 5.78
Ratio of net investment income (loss) to
average net assets(10) (%) 4.45(5) 3.84(5) -- -- -- -- --
Portfolio turnover rate (%) 153 42 82 29 41 83 40
Fee reduction per share ($) 0.05 0.02 -- -- -- -- --
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1993 1994 1995(2)
- ----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.39 $ 9.98 $ 8.82
Net investment income (loss) 0.53 0.48 0.51
Net realized and unrealized gain (loss) on
investments sold
and financial futures contracts 0.72 (0.90) 0.69
Total from investment operations 1.25 (0.42) 1.20
Less distributions:
Dividends from net investment income (0.56) (0.48) (0.51)
Distributions in excess of net investment
income -- (0.07) (0.04)
Distributions from net realized gain on
investments sold (0.10) (0.19) --
Distributions from capitol paid-in -- -- --
Total distributions (0.66) (0.74) (0.55)
Net asset value, end of period $ 9.98 $ 8.82 $ 9.47
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4)(%) 13.69 (4.44) 13.99
Total adjusted investment return at net asset
value(4,9) (%) -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 113,442 151,069 155,234
Ratio of expenses to average net assets (%) 2.06 1.85 1.79
Ratio of adjusted expenses to average net
assets(10) (%) -- -- --
Ratio of adjusted net investment income to
average net assets (%) 5.23 5.36 5.61
Ratio of net investment income (loss) to
average net assets(10) (%) -- -- --
Portfolio turnover rate (%) 100 62 64
Fee reduction per share ($) -- -- --
</TABLE>
(1) Class A shares commenced operations on December 31, 1993.
(2) On December 22, 1994 John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) Annualized.
(7) For the period August 25, 1986 to April 30, 1987.
(8) For the period May 1, 1987 to October 31, 1987.
(9) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during periods shown.
(10) Unreimbursed, without fee reduction.
HIGH YIELD TAX-FREE FUND 7
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
MANAGED TAX-EXEMPT FUND
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: FMTAX CLASS B: FMTEX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks as high a level of current income exempt from Federal income tax
as is consistent with preservation of capital. To pursue this goal, the fund
ordinarily invests at least 80% of assets in a diversified portfolio of
municipal securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial paper
of any maturity. The fund's municipal securities must be investment grade at the
time of investment.
The fund generally does not invest more than 25% of assets in any one industry,
but reserves the right to invest more than 25% in the securities of a given
sector of the municipals market, in industrial revenue bonds, in securities of a
given state, or in U.S. Government and agency securities.
For defensive purposes, the fund may increase its holdings of investment-grade
short-term municipal securities, and may invest in taxable investment-grade
short-term securities. The fund also may invest in certain other investments,
and may engage in other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income investments, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
bonds). Economic and policy factors can also affect performance. To the extent
that the fund concentrates in the securities of a given issuer, sector, region,
type or rating, it increases its exposure to the risks of that category of
security. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Frank A. Lucibella, leader of the fund's portfolio management team since 1993,
is a second vice president of the adviser. Mr Lucibella joined John Hancock
Funds in 1988 and has been in the investment business since 1982.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- --------------------------------------------------------------------------------
<S> <C> <C>
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(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fee (net of reduction)(3) 0.55% 0.55%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.21% 0.21%
Total fund operating expenses (net of reduction)(3) 1.06% 1.76%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $55 $77 $101 $169
Class B shares
Assuming redemption
at end of period $68 $85 $115 $189
Assuming no redemption $18 $55 $ 95 $189
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Without reduction, the management fee would be 0.60% for each class and
total fund operating expenses would be 1.11% for Class A and 1.81% for Class
B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
8 MANAGED TAX-EXEMPT FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors, Price
Waterhouse LLP.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VOLATILITY, AS INDICATED BY CLASS B
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) (1.31)(3) 18.98 8.25 5.66 12.55 6.39 15.51 (5.85) 12.63
<CAPTION>
CLASS A - YEAR ENDED OCTOBER 31, 1992(1) 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C>
Net asset value, beginning of period $11.25 $ 11.12 $ 12.13 $ 10.79
Net investment income (loss) 0.55 0.70 0.64 0.63
Net realized and unrealized gain (loss) on investments (0.11) 1.05 (1.25) 0.77
Total from investment operations 0.44 1.75 (0.61) 1.40
Less distributions:
Dividends from net investment income (0.53) (0.70) (0.64) (0.63)
Distributions from net realized gain on investments sold (0.04) (0.04) (0.09) --
Total distributions (0.57) (0.74) (0.73) (0.63)
Net asset value, end of period $11.12 $ 12.13 $ 10.79 $ 11.56
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) 4.74(3) 16.10 (5.22) 13.30
Total adjusted investment return at net asset value(2,4) (%) 4.51(3) 15.77 (5.29) 13.25
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 9,589 14,244 20,968 42,384
Ratio of expenses to average net assets (%) 0.78(3) 0.70 0.95 1.06
Ratio of adjusted expenses to average net assets(5) (%) 1.01(3) 1.03 1.02 1.11
Ratio of net investment income (loss) to average net assets (%) 6.24(3) 5.98 5.52 5.53
Ratio of adjusted net investment income (loss) to average
net assets(5) (%) 6.01(3) 5.65 5.42 5.48
Portfolio turnover rate (%) 23 23 59 104
Fee reduction per share ($) 0.02 0.04 0.01 0.01
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1987(7) 1988 1989 1990 1991 1992
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $ 9.69 $ 10.73 $ 10.78 $ 10.61 $ 11.12
Net investment income (loss) 0.27 0.74 0.74 0.73 0.68 0.66
Net realized and unrealized gain (loss) on investments (0.31) 1.04 0.12 (0.14) 0.61 0.04
Total from investment operations (0.04) 1.78 0.86 0.59 1.29 0.70
Less distributions:
Dividends from net investment income (0.27) (0.74) (0.74) (0.72) (0.72) (0.64)
Distributions from net realized gain on investments sold -- -- (0.07) (0.04) (0.06) (0.06)
Total distributions (0.27) (0.74) (0.81) (0.76) (0.78) (0.70)
Net asset value, end of period $ 9.69 $ 10.73 $ 10.78 $ 10.61 $ 11.12 $ 11.12
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) (1.31)(3) 18.98 8.25 5.66 12.55 6.39
Total adjusted investment return at net asset value(2,4)(%) (2.49)(3) 18.00 7.66 5.10 12.24 6.20
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 8,220 46,329 106,107 140,803 199,955 226,943
Ratio of expenses to average net assets (%) 1.40(3) 0.74 0.93 0.95 1.19 1.35
Ratio of adjusted expenses to average net assets(5) (%) 2.58(3) 1.72 1.52 1.51 1.50 1.54
Ratio of net investment income (loss) to average net assets (%) 6.11(3) 6.90 6.81 6.74 6.19 5.74
Ratio of adjusted net investment income (loss) to average
net assets(5) (%) 4.93(3) 5.92 6.22 6.18 5.88 5.55
Portfolio turnover rate (%) 174 186 94 54 30 23
Fee Reduction per share ($) 0.05(3) 0.10 0.06 0.06 0.04 0.02
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1993 1994 1995
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C>
Net asset value, beginning of period $ 11.12 $ 12.13 $ 10.79
Net investment income (loss) 0.64 0.56 0.55
Net realized and unrealized gain (loss) on investments 1.05 (1.25) 0.78
Total from investment operations 1.69 (0.69) 1.33
Less distributions:
Dividends from net investment income (0.64) (0.56) (0.55)
Distributions from net realized gain on investments sold (0.04) (0.09) --
Total distributions (0.68) (0.65) (0.55)
Net asset value, end of period $ 12.13 $ 10.79 $ 11.57
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) 15.51 (5.85) 12.63
Total adjusted investment return at net asset value(2,4)(%) 15.18 (5.92) 12.61
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 256,342 217,066 178,002
Ratio of expenses to average net assets (%) 1.23 1.62 1.73
Ratio of adjusted expenses to average net assets(5) (%) 1.56 1.69 1.78
Ratio of net investment income (loss) to average net assets (%) 5.49 4.84 4.92
Ratio of adjusted net investment income (loss) to average
net assets(5) (%) 5.16 4.77 4.87
Portfolio turnover rate (%) 23 59 104
Fee Reduction per share ($) 0.04 0.01 0.01
</TABLE>
(1) Class A and Class B shares commenced operations on January 3, 1992 and April
22, 1987, respectively.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Annualized.
(4) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
MANAGED TAX-EXEMPT FUND 9
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
MASSACHUSETTS TAX-FREE INCOME FUND
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: JHMAX CLASS B: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks income that is exempt from federal and Massachusetts personal
income taxes. The fund seeks to provide the maximum current income that is
consistent with preservation of capital. To pursue this goal, the fund invests
primarily in Massachusetts municipal securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial paper
of any maturity. Under normal circumstances, the fund invests at least 80% of
net assets in municipal securities. Up to 33.3% of assets may be invested in
municipal securities rated A or lower, or if unrated, of equivalent quality. The
balance of the fund's investments must be rated, at the time of investment, in
the top two rating categories or be of equivalent quality. Bonds rated BB/Ba or
lower are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term municipal securities. For defensive
purposes, it may invest more assets in these securities. The fund also may
invest in certain other investments, including private activity bonds, and may
engage in other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
bonds).
Because the fund is not diversified and because it concentrates in securities of
Massachusetts issuers, its performance is largely dependent on factors that may
disproportionately affect Massachusetts issuers. These may include:
- - local economic or policy changes
- - tax base erosion
- - state constitutional limits on tax increases
- - changes in the ratings assigned to the state's municipal issuers
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Dianne Sales-Singer, leader of the fund's portfolio management team since July
1993, is a senior portfolio officer of the adviser. Ms. Sales-Singer joined John
Hancock Funds in 1989 and has been in the investment business since 1984.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The figures
below are based on Class A expenses for the past year, adjusted to reflect any
changes. There were no Class B shares issued or outstanding during the last
fiscal year. Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- --------------------------------------------------------------------------------
<S> <C> <C>
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(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fee (after expense limitation)(3) 0.00% 0.00%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.40% 0.40%
Total fund operating expenses
(after expense limitation)(3) 0.70% 1.40%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $52 $66 $82 $128
Class B shares
Assuming redemption
at end of period $64 $74 $97 $149
Assuming no redemption $14 $44 $77 $149
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.50% for each class and total fund
operating expenses would be 1.20% for Class A and 1.90% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10 MASSACHUSETTS TAX-FREE INCOME FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors, Price
Waterhouse LLP.
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED AUGUST 31, 1988(1) 1989 1990 1991 1992 1993 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.00 $10.63 $10.94 $ 10.63 $ 11.15 $ 11.75 $ 12.43
Net investment income (loss) 0.65 0.70 0.69 0.73 0.71 0.67 0.63
Net realized and unrealized gain (loss) on investments 0.63 0.31 (0.31) 0.53 0.60 0.82 (0.75)
Total from investment operations 1.28 1.01 0.38 1.26 1.31 1.49 (0.12)
Less distributions:
Dividends from net investment income (0.65) (0.70) (0.69) (0.73) (0.71) (0.67) (0.63)
Distributions from net realized gain on investments sold -- -- -- (0.01) -- (0.14) (0.12)
Total distributions (0.65) (0.70) (0.69) (0.74) (0.71) (0.81) (0.75)
Net asset value, end of period $10.63 $10.94 $10.63 $ 11.15 $ 11.75 $ 12.43 $ 11.56
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 13.13(4) 9.67 3.49 12.10 12.11 13.29 (0.97)
Total adjusted investment return at net asset value(3,6) (%) 10.38(4) 9.16 2.72 10.66 10.93 12.38 (1.50)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 4,757 9,138 9,968 15,015 29,113 50,019 54,122
Ratio of expenses to average net assets (%) 1.00(4) 1.00 1.00 0.60 0.60 0.67 0.70
Ratio of adjusted expenses to average net assets(7) (%) 3.75(4) 1.51 1.77 2.04 1.78 1.58 1.23
Ratio of net investment income (loss) to average net assets (%) 6.28(4) 6.35 6.31 6.64 6.18 5.61 5.28
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.53(4) 5.84 5.54 5.20 5.00 4.70 4.75
Portfolio turnover rate (%) 20 2 2 29 56 79 29
Fee reduction per share ($) 0.28 0.11 0.08 0.16 0.14 0.11 0.06
<CAPTION>
CLASS A - YEAR ENDED AUGUST 31, 1995 1996(2)
- -------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 11.56 $ 11.76
Net investment income (loss) 0.65 0.32
Net realized and unrealized gain (loss) on investments 0.20 0.23
Total from investment operations 0.85 0.55
Less distributions:
Dividends from net investment income (0.65) (0.32)
Distributions from net realized gain on investments sold -- --
Total distributions (0.65) (0.32)
Net asset value, end of period $ 11.76 $ 11.99
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 7.66 4.76(5)
Total adjusted investment return at net asset value(3,6) (%) 7.21 4.37(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 54,416 56,852
Ratio of expenses to average net assets (%) 0.70 0.76(4,8)
Ratio of adjusted expenses to average net assets(7) (%) 1.15 1.15(4)
Ratio of net investment income (loss) to average net assets (%) 5.67 5.42(4)
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 5.22 5.04(4)
Portfolio turnover rate (%) 24 24
Fee reduction per share ($) 0.05 0.04(4)
</TABLE>
(1) Class A shares commenced operations on September 3, 1987.
(2) Six months ended February 29, 1996. (Unaudited.)
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Annualized.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Unreimbursed, without fee reduction.
(8) The ratio does not reflect the application of fee credits, had the credits
been taken into consideration, the ratio would have been 0.70%.
MASSACHUSETTS TAX-FREE INCOME FUND 11
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
NEW YORK TAX-FREE INCOME FUND
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: JHNYX CLASS B: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks income that is exempt from federal income taxes as well as
New York State and New York City personal income taxes. The fund seeks to
provide the maximum current income that is consistent with preservation of
capital. To pursue this goal, the fund invests primarily in New York municipal
securities.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal securities may include bonds, notes and commercial
paper of any maturity. Under normal circumstances, the fund invests at least 80%
of net assets in municipal securities. Up to 33.3% of assets may be invested in
municipal securities rated A or lower, or if unrated, of equivalent quality. The
balance of the fund's investments must be rated, at the time of investment, in
the top two rating categories or be of equivalent quality. Bonds rated BB/Ba or
lower are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in certain
other investments, including private activity bonds, and may engage in other
investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
bonds).
Because the fund is not diversified and because it concentrates in securities of
New York issuers, its performance is largely dependent on factors that may
disproportionately affect New York issuers. These may include:
- - local economic or policy changes
- - tax base erosion
- - limited flexibility to raise taxes
- - changes in the ratings assigned to the state's municipal issuers
- - the legacy of past credit problems of New York City and other issuers
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Frank A. Lucibella, leader of the fund's portfolio management team since
April 1995, is a second vice president of the adviser. Mr. Lucibella joined John
Hancock Funds in 1988 and has been in the investment business since 1982.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The
figures below are based on Class A expenses for the past year, adjusted to
reflect any changes. There were no Class B shares issued or outstanding during
the last fiscal year. Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------- ------- -------
<S> <C> <C>
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(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------
<S> <C> <C>
Management fee (after expense limitation)(3) 0.00% 0.00%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.40% 0.40%
Total fund operating expenses
(after expense limitation)(3) 0.70% 1.40%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over
the various time frames indicated. The example assumes you reinvested all
dividends and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- ----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class A shares $52 $66 $82 $128
Class B shares
Assuming redemption
at end of period $64 $74 $97 $149
Assuming no redemption $14 $44 $77 $149
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.50% for each class and total fund
operating expenses would be 1.20% for Class A and 1.90% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
12 NEW YORK TAX-FREE INCOME FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors,
Price Waterhouse LLP.
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A -- YEAR ENDED AUGUST 31, 1988(1) 1989 1990 1991 1992 1993 1994 1995 1996(2)
- -------------------------------- ------- ---- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.00 $10.48 $ 11.01 $ 10.74 $ 11.29 $ 11.90 $ 12.63 $ 11.73 $ 11.88
Net investment income (loss) 0.61 0.68 0.67 0.72 0.72 0.68 0.64 0.65 0.33
Net realized and unrealized gain (loss)
on investments 0.48 0.55 (0.25) 0.55 0.63 0.87 (0.77) 0.15 0.30
Total from investment operations 1.09 1.23 0.42 1.27 1.35 1.55 (0.13) 0.80 0.63
Less distributions:
Dividends from net investment income (0.61) (0.68) (0.67) (0.72) (0.72) (0.68) (0.64) (0.65) (0.33)
Distributions from net realized gain
on investments sold -- (0.02) (0.02) -- (0.02) (0.14) (0.13) -- --
Total distributions (0.61) (0.70) (0.69) (0.72) (0.74) (0.82) (0.77) (0.65) (0.33)
Net asset value, end of period $10.48 $11.01 $ 10.74 $ 11.29 $ 11.90 $ 12.63 $ 11.73 $ 11.88 $ 12.18
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(3) (%) 11.40(4) 11.87 3.74 12.24 12.17 13.70 (1.05) 7.19 5.37(5)
Total adjusted investment return at net
asset value(3,6) (%) 7.56(4) 11.22 3.05 11.02 11.09 12.83 (1.58) 6.74 4.97(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's
omitted) ($) 4,306 8,795 13,357 20,878 33,806 52,444 55,690 55,753 57,770
Ratio of expenses to average net assets
(%) 1.00(4) 1.00 1.00 0.60 0.60 0.67 0.70 0.70 0.73(4,8)
Ratio of adjusted expenses to average
net assets(7) (%) 4.84(4) 1.65 1.69 1.82 1.68 1.54 1.23 1.15 1.13(4)
Ratio of net investment income (loss) to
average net assets (%) 6.11(4) 6.30 6.17 6.57 6.22 5.63 5.28 5.67 5.47(4)
Ratio of adjusted net investment income
(loss) to average net assets(7) (%) 2.27(4) 5.65 5.48 5.35 5.14 4.76 4.75 5.22 5.07(4)
Portfolio turnover rate (%) 16 10 10 12 48 56 23 70 30
Fee reduction per share ($) 0.38 0.13 0.08 0.13 0.13 0.11 0.06 0.05 0.05(4)
</TABLE>
(1) Class A shares commenced operations on September 11, 1987.
(2) Six months ended February 29, 1996. (Unaudited.)
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Annualized.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Unreimbursed, without fee reduction.
(8) The ratio does not reflect the application of fee credits, had the credits
been taken into consideration, the ratio would have been 0.70%.
NEW YORK TAX-FREE INCOME FUND 13
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
TAX-FREE BOND FUND
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST
TICKER SYMBOL CLASS A: TAMBX CLASS B: TSMBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT.]
The fund seeks as high a level of current income exempt from federal income
tax as is consistent with preservation of capital. To pursue this goal, the fund
invests in a diversified portfolio of municipal securities. Under normal
circumstances, the fund will place at least 80% of assets in municipal bonds.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER.]
The fund's municipal bonds may include investment-grade bonds, notes and
commercial paper. Less than 35% of assets may be invested in municipal bonds
rated BB/Ba or B (junk bonds). The fund may not invest more than 25% of assets
in industrial development or pollution control bonds that are directly or
indirectly dependent on the revenues or credit of private entities in any one
industry.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
and tax-free investment-grade short-term securities. For defensive purposes, it
may invest more assets in these securities. The fund also may invest in certain
other investments, including private activity bonds, and may engage in other
investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS.]
As with most income investments, the value of your investment in the fund
will fluctuate with changes in interest rates. Typically, a rise in interest
rates causes a decline in the market value of fixed income securities (including
municipal bonds). Bonds with longer maturities are especially sensitive to
interest rate movements. To the extent that the fund invests in bonds rated
BBB/Baa or lower, it takes on higher risks of volatility and default. Issuers of
these bonds are typically in weaker financial health and their ability to pay
interest and principal is less certain. Before you invest, please read "More
about risk" starting on page 26.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON.]
Thomas C. Goggins has been leader of the fund's portfolio management team
since joining the adviser in April 1995. A senior vice president of the adviser,
Mr. Goggins has been in the investment business since 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SIGN.]
Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------- ------- -------
<S> <C> <C>
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(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------
<S> <C> <C>
Management fee 0.55% 0.55%
12b-1 fee(4) 0.25% 1.00%
Other expenses 0.29% 0.29%
Total fund operating expenses(4) 1.09% 1.84%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over
the various time frames indicated. The example assumes you reinvested all
dividends and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- ----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class A shares $56 $78 $102 $172
Class B shares
Assuming redemption
at end of period $69 $88 $120 $196
Assuming no redemption $19 $58 $100 $196
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
(4) Until December 23, 1996 the adviser has agreed to limit total fund operating
expenses to 0.85% for Class A and 1.60% for Class B. Effective December 23,
1996 the 12b-1 fee will be increased from 0.15% to 0.25% for Class A and
from 0.90% to 1.00% for Class B. Prior to the increase, total fund operating
expenses would be 0.99% for Class A and 1.74% for Class B.
14 TAX-FREE BOND FUND
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN.]
The figures below have been audited by the fund's independent auditors,
__________________________.
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART]
<TABLE>
<CAPTION>
CLASS A -- YEAR ENDED DECEMBER 31, 1990(1) 1991 1992 1993 1994(2) 1995
------- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.00 $ 9.90 $ 10.24 $ 10.47 $ 10.96 $ 9.39
Net investment income (loss) 0.71 0.69 0.67 0.62 0.58 0.57(3)
Net realized and unrealized gain (loss) on investments (0.13) 0.72 0.42 0.93 (1.58) 1.28
Total from investment operations 0.58 1.41 1.09 1.55 (1.00) 1.85
Less distributions:
Dividends from net investment income (0.68) (0.68) (0.68) (0.62) (0.57) (0.57)
Distributions from net realized gain on investments sold -- (0.39) (0.18) (0.44) -- --
Total distributions (0.68) (1.07) (0.86) (1.06) (0.57) (0.57)
Net asset value, end of period $ 9.90 $ 10.24 $ 10.47 $ 10.96 $ 9.39 $ 10.67
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 6.04(5) 14.78 10.97 15.15 (9.28) 20.20
Total adjusted investment return at net asset value(4,6) (%) 5.18(5) 14.40 10.67 14.98 (9.39) 20.08
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 45,437 73,393 99,523 136,521 114,539 118,797
Ratio of expenses to average net assets (%) 0.40(5) 0.60 0.66 0.78 0.85 0.85
Ratio of adjusted expenses to average net assets(7) (%) 1.26(5) 0.98 0.96 0.95 0.96 0.97
Ratio of net investment income (loss) to average net assets (%) 7.09(5) 6.86 6.46 5.57 5.72 5.67
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 6.29(5) 6.48 6.16 5.40 5.61 5.55
Portfolio turnover rate (%) 64 123 79 116 107 113
Fee reduction per share ($) 0.08 0.04 0.03 0.02 0.01 0.01(3)
<CAPTION>
CLASS B -- YEAR ENDED DECEMBER 31, 1992 1993 1994(2) 1995
---- ---- ------- ----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.24 $ 10.47 $ 10.96 $ 9.38
Net investment income (loss) 0.59(3) 0.54 0.50 0.50(3)
Net realized and unrealized gain (loss) on investments 0.42 0.93 (1.58) 1.28
Total from investment operations 1.01 1.47 (1.08) 1.78
Less distributions:
Dividends from net investment income (0.60) (0.54) (0.50) (0.49)
Distributions from net realized gain on investments sold (0.18) (0.44) -- --
Total distributions (0.78) (0.98) (0.50) (0.49)
Net asset value, end of period $ 10.47 $ 10.96 $ 9.38 $ 10.67
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 10.15 14.30 (10.05) 19.41
Total adjusted investment return at net asset value(4,6) (%) 9.85 14.13 (10.16) 19.29
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) ($) 18,272 56,384 70,243 76,824
Ratio of expenses to average net assets (%) 1.43 1.53 1.60 1.60
Ratio of adjusted expenses to average net assets(7) (%) 1.73 1.70 1.71 1.72
Ratio of net investment income (loss) to average net assets (%) 5.57 4.66 4.97 4.90
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 5.27 4.49 4.86 4.78
Portfolio turnover rate (%) 79 116 107 113
Fee reduction per share (%) 0.03(3) 0.02 0.01 0.01(3)
</TABLE>
(1) Class A shares commenced operations on January 5, 1990.
(2) On December 22, 1994 John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Unreimbursed, without fee reduction.
TAX-FREE BOND FUND 15
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
YOUR ACCOUNT
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock tax-free income funds offer two classes of shares, Class A and
Class B. Each class has its own cost structure, allowing you to choose the one
that best meets your requirements. Your financial representative can help you
decide.
CLASS A
- - Front-end sales charges, as described below. There are several ways to reduce
these charges, also described below.
- - Lower annual expenses than Class B shares.
CLASS B
- - No front-end sales charge; all your money goes to work for you right away.
- - Higher annual expenses than Class A shares.
- - A deferred sales charge on shares you sell within six years of purchase, as
described below.
- - Automatic conversion to Class A shares after eight years, thus reducing future
annual expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
CLASS A Sales charges are as follows:
<TABLE>
<CAPTION>
CLASS A SALES CHARGES
- ---------------------
AS A % OF AS A % OF YOUR
YOUR INVESTMENT OFFERING PRICE INVESTMENT
<S> <C> <C>
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 3.00% 3.09%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE Class A shares are available with no
front-end sales charge. However, there is a contingent deferred sales charge
(CDSC) on any shares sold within one year of purchase, as follows:
<TABLE>
<CAPTION>
CDSC ON $1 MILLION+ INVESTMENTS
- -------------------------------
YOUR INVESTMENT CDSC ON SHARES BEING SOLD
<S> <C>
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
</TABLE>
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the LAST day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
CLASS B Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a contingent deferred sales charge
(CDSC) on shares you sell within six years of buying them. There is no CDSC on
shares acquired through reinvestment of dividends. The CDSC is based on the
original purchase cost or the current market value of the shares being sold,
whichever is less. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
<TABLE>
<CAPTION>
CLASS B DEFERRED CHARGES
- ------------------------
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
<S> <C>
1st year 5.00%
2nd year 4.00%
3rd or 4th years 3.00%
5th year 2.00%
6th year 1.00%
After 6 years None
</TABLE>
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the FIRST day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
16 YOUR ACCOUNT
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCING YOUR CLASS A SALES CHARGES There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
- - Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge.
- - Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
- - Combination Privilege -- lets you combine Class A shares of multiple funds for
purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Investor Services to add these options to an
existing account (see the back cover of this prospectus).
GROUP INVESTMENT PROGRAM Allows established groups of four or more investors to
invest as a group. Each has an individual account, but for sales charge
purposes, their investments are lumped together, making the investors
potentially eligible for reduced sales charges. There is no charge, no
obligation to invest (although initial aggregate investments must be at least
$250) and you may terminate the program at any time.
To utilize: contact your financial representative or Investor Services to find
out how to qualify.
CDSC WAIVERS In general, the CDSC for either share class may be waived on
shares you sell for the following reasons:
- - to make payments through certain systematic withdrawal plans
- - to make certain distributions from a retirement plan
- - because of shareholder death or disability
To utilize: contact your financial representative or Investor Services, or
consult the SAI (see the back cover of this prospectus).
REINSTATEMENT PRIVILEGE If you sell shares of a John Hancock fund, you may
invest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge. If you paid a CDSC when you sold
your shares, you will be credited with the amount of the CDSC. All accounts
involved must have the same registration.
To utilize: contact your financial representative or Investor Services.
WAIVERS FOR CERTAIN INVESTORS Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
- - government entities that are prohibited from paying mutual fund sales charges
- - financial institutions or common trust funds investing $1 million or more for
non-discretionary accounts
- - selling brokers and their employees and sales representatives
- - financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
- - fund trustees and other individuals who are affiliated with these or other
John Hancock funds
- - individuals transferring assets to a John Hancock tax-free fund from an
employee benefit plan that has John Hancock funds
- - members of an approved affinity group financial services program
- - certain insurance company contract holders (one-year CDSC applies)
- - participants in certain plans with at least 100 members (one-year CDSC
applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
Investor Services or consult the SAI.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for the
John Hancock tax-free income funds are as follows:
- non-retirement account: $1,000
- group investments: $250
- Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest at
least $25 a month
3 Complete the appropriate parts of the account application, carefully following
the instructions. If you have questions, please contact your financial
representative or call Investor Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges section of the
application. By applying for privileges now, you can avoid the delay and
inconvenience of having to file an additional application if you want to add
privileges later.
5 Make your initial investment using the table on the next page. You can
initiate any purchase, exchange or sale of shares through your financial
representative.
YOUR ACCOUNT 17
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
BUYING SHARES
OPENING AN ACCOUNT
BY CHECK
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A BLANK CHECK.]
- Make out a check for the investment amount, payable to "John Hancock
Investor Services Corporation."
- Deliver the check and your completed application to your financial
representative, or mail them to Investor Services (address on next page).
ADDING TO AN ACCOUNT
- Make out a check for the investment amount payable to "John Hancock
Investor Services Corporation."
- Fill out the detachable investment slip from an account statement. If no
slip is available, include a note specifying the fund name, your share
class, your account number, and the name(s) in which the account is
registered.
- Deliver the check and your investment slip or note to your financial
representative, or mail them to Investor Services (address on next page).
OPENING AN ACCOUNT
BY EXCHANGE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A WHITE ARROW OUTLINED IN BLACK THAT POINTS TO THE RIGHT
ABOVE A BLACK THAT POINTS TO THE LEFT.]
- Call your financial representative or Investor Services to request an
exchange.
ADDING TO AN ACCOUNT
- Call Investor Services to request an exchange.
OPENING AN ACCOUNT
BY WIRE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A JAGGED WHITE ARROW OUTLINED IN BLACK THAT POINTS UPWARDS
AT A 45 DEGREE ANGLE.]
- Deliver your completed application to your financial representative, or
mail it to Investor Services.
- Obtain your account number by calling your financial representative or
Investor Services.
- Instruct your bank to wire the amount of your investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your choice of share class, the new account number
and the name(s) in which the account is registered. Your bank may charge
a fee to wire funds.
ADDING TO AN ACCOUNT
- Instruct your bank to wire the amount of your investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your share class, your account number and the
name(s) in which the account is registered. Your bank may charge a fee to
wire funds.
OPENING AN ACCOUNT
BY PHONE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A TELEPHONE.]
See "By wire" and "By exchange."
ADDING TO AN ACCOUNT
- Verify that your bank or credit union is a member of the Automated
Clearing House (ACH) system.
- Complete the "Invest-By-Phone" and "Bank Information" sections on your
account application.
- Call Investor Services to verify that these features are in place on your
account.
- Tell the Investor Services representative the fund name, your share
class, your account number, the name(s) in which the account is
registered and the amount of your investment.
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
SELLING SHARES
DESIGNED FOR
BY LETTER
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF THE BACK OF AN ENVELOPE.]
- Accounts of any type.
- Sales of any amount.
TO SELL SOME OR ALL OF YOUR SHARES
- Write a letter of instruction or complete a stock power indicating the
fund name, your share class, your account number, the name(s) in which
the account is registered and the dollar value or number of shares you
wish to sell.
- Include all signatures and any additional documents that may be required
(see next page).
- Mail the materials to Investor Services.
- A check will be mailed to the name(s) and address in which the account is
registered, or otherwise according to your letter of instruction.
DESIGNED FOR
BY PHONE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A TELEPHONE.]
- Most accounts.
- Sales of up to $100,000.
TO SELL SOME OR ALL OF YOUR SHARES
- For automated service 24 hours a day using your touch-tone phone, call
the John Hancock Funds EASI-Line at 1-800-338-8080.
- To place your order with a representative at John Hancock Funds, call
Investor Services between 8 A.M. and 4 P.M. on most business days.
DESIGNED FOR
BY WIRE OR ELECTRONIC FUNDS TRANSFER (EFT)
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A JAGGED WHITE ARROW OUTLINED IN BLACK THAT POINTS UPWARDS
AT A 45 DEGREE ANGLE.]
- Requests by letter to sell any amount (accounts of any type).
- Requests by phone to sell up to $100,000 (accounts with telephone
redemption privileges).
TO SELL SOME OR ALL OF YOUR SHARES
- Fill out the "Telephone Redemption" section of your new account
application.
- To verify that the telephone redemption privilege is in place on an
account, or to request the forms to add it to an existing account, call
Investor Services.
- Amounts of $1,000 or more will be wired on the next business day. A $4
fee will be deducted from your account.
- Amounts of less than $1,000 may be sent by EFT or by check. Funds from
EFT transactions are generally available by the second business day. Your
bank may charge a fee for this service.
DESIGNED FOR
BY EXCHANGE
- --------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A WHITE ARROW OUTLINED IN BLACK THAT POINTS TO THE RIGHT
ABOVE A BLACK THAT POINTS TO THE LEFT.]
- Accounts of any type.
- Sales of any amount.
TO SELL SOME OR ALL OF YOUR SHARES
- Obtain a current prospectus for the fund into which you are exchanging by
calling your financial representative or Investor Services.
- Call Investor Services to request an exchange.
ADDRESS
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116 BOSTON, MA 02205-9116
PHONE
1-800-225-5291
OR CONTACT YOUR FINANCIAL REPRESENTATIVE FOR INSTRUCTIONS AND ASSISTANCE.
To sell shares through a systematic withdrawal plan,
see "Additional investor services."
YOUR ACCOUNT 19
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
SELLING SHARES IN WRITING In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
- your address of record has changed within the past 30 days
- you are selling more than $100,000 worth of shares
- you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
- a broker or securities dealer
- a federal savings, cooperative or other type of bank
- a savings and loan or other thrift institution
- a credit union
- a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
[A GRAPHIC IMAGE OF THE BACK OF AN ENVELOPE]
<TABLE>
<CAPTION>
SELLER REQUIREMENTS FOR WRITTEN REQUESTS
- ----------------------------------------------------------------------------------------
<S> <C>
Owners of individual, joint, sole - Letter of instruction.
proprietorship, UGMA/UTMA (custodial
accounts for minors) or general partner - On the letter, the signatures and
accounts. titles of all persons authorized to sign
for the account, exactly as the account
is registered.
- Signature guarantee if applicable
(see above).
- ----------------------------------------------------------------------------------------
Owners of corporate or association - Letter of instruction.
accounts.
- Corporate resolution, certified
within the past 90 days.
- On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
- Signature guarantee if applicable
(see above).
- ----------------------------------------------------------------------------------------
Owners or trustees of trust accounts. - Letter of instruction.
- On the letter, the signature(s) of
the trustee(s).
- If the names of all trustees are not
registered on the account, please also
provide a copy of the trust document
certified within the past 60 days.
- Signature guarantee if applicable (see
above).
- ----------------------------------------------------------------------------------------
Joint tenancy shareholders whose
co-tenants are deceased. - Letter of instruction signed by
surviving tenant.
- Copy of death certificate.
- Signature guarantee if applicable
(see above).
- ----------------------------------------------------------------------------------------
Executors of shareholder estates. - Letter of instruction signed by
executor.
- Copy of order appointing executor.
- Signature guarantee if applicable
(see above).
- ----------------------------------------------------------------------------------------
Administrators, conservators,
guardians and other sellers or account
types not listed above. - Call 1-800-225-5291 for instructions.
</TABLE>
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
TRANSACTION POLICIES
VALUATION OF SHARES The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time) by dividing a class's net assets
by the number of its shares outstanding.
BUY AND SELL PRICES When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
EXECUTION OF REQUESTS Each fund is open on those days when the New York Stock
Exchange is open, typically Monday - Friday. Buy and sell requests are executed
at the next NAV to be calculated after your request is accepted by Investor
Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
TELEPHONE TRANSACTIONS For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, Investor Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are not taken, Investor Services is
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone transactions are not
permitted on accounts whose names or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
EXCHANGES You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
Class B shares will continue to age from the original date and will retain the
same CDSC rate as they had before the exchange, except that the rate will change
to that of the new fund if the new fund's rate is higher. A CDSC rate that has
increased will drop again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may change or cancel its exchange
privilege at any time, upon 60 days' notice to its shareholders. A fund may also
refuse any exchange order.
CERTIFICATED SHARES Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Investor Services. Certificated
shares can only be sold by returning the certificates to Investor Services,
along with a letter of instruction or a stock power and a signature guarantee.
SALES IN ADVANCE OF PURCHASE PAYMENTS When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten calendar days after
the purchase.
ELIGIBILITY BY STATE You may only invest in, or exchange into, fund shares
legally available in your state.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
- After every transaction (except a dividend reinvestment) that affects your
account balance.
- After any changes of name or address of the registered owner(s).
- In all other circumstances, every quarter.
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS The funds generally declare dividends daily and pay them monthly.
Short- and long-term capital gains, if any, are distributed annually, typically
after the end of a fund's fiscal year. Your dividends begin accruing the day
after payment is received by the fund and continue through the day your shares
are actually sold.
YOUR ACCOUNT 21
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
DIVIDEND REINVESTMENTS Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
TAXABILITY OF DIVIDENDS As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
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". However, any portion of exempt-interest dividends
attributable to interest on private activity bonds may increase certain
shareholders' alternative minimum tax.
Dividends from a fund's short- and long-term capital gains are taxable. Taxable
dividends paid in January may be taxable as if they had been paid the previous
December.
The state tax-free income funds intend to comply with certain state tax
requirements so that their income dividends will be exempt from state and local
personal income taxes in the applicable state. Dividends of the other tax-free
income funds are not exempt from state and local income taxes.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
TAXABILITY OF TRANSACTIONS Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
SMALL ACCOUNTS (NON-RETIREMENT ONLY) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds.
Alternatively, Investor Services may charge you $10 a year to maintain your
account. You will not be charged a CDSC if your account is closed for this
reason, and your account will not be closed if its drop in value is due to fund
performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
- Complete the appropriate parts of your account application.
- If you are using MAAP to open an account, make out a check ($25 minimum) for
your first investment amount payable to "John Hancock Investor Services
Corporation." Deliver your check and application to your financial
representative or Investor Services.
SYSTEMATIC WITHDRAWAL PLAN This plan may be used for routine bill payment or
periodic withdrawals from your account. To establish:
- Make sure you have at least $5,000 worth of shares in your account.
- Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
- Specify the payee(s). The payee may be yourself or any other party, and
there is no limit to the number of payees you may have, as long as they are
all on the same payment schedule.
- Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
- Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Investor Services.
RETIREMENT PLANS John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SEPs, SARSEPs, 401(k) plans, 403(b) plans (including
TSAs) and other pension and profit-sharing plans. Using these plans, you can
invest in any John Hancock fund (except tax-free income funds) with a low
minimum investment of $250 or, for some group plans, no minimum investment at
all. To find out more, call Investor Services at 1-800-225-5291.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
FUND DETAILS
- -------------------------------------------------------------------------------
BUSINESS STRUCTURE
HOW THE FUNDS ARE ORGANIZED Each John Hancock tax-free income fund is an
open-end management investment company or a series of such a company.
Each fund is supervised by a board of trustees, an independent body which has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others (see diagram). The board has the right, and
the obligation, to terminate the fund's relationship with any of these companies
and to retain a different company if the board believes that it is in the
shareholders' best interests.
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock tax-free income funds may
include individuals who are affiliated with the investment adviser. However, the
majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
[A flow chart that contains 7 rectangular-shaped boxes and illustrates the
hierachy of how the funds are organized. Within the flowchart, there are 5
tiers. The tiers are connected by shaded lines.]
[Shareholders represent the first tier. There is a shaded vertical arrow on the
left-hand side of the page. The arrow has arrowheads on both ends and is
contained within two horizontal, shaded lines. This is meant to highlight tiers
two and three which focus on Distribution and Shareholder Services.]
[Financial Services Firms and their Representatives are shown on the second
tier. Principal Distributor and Transfer Agent are shown on the third tier.]
[A shaded vertical arrow on the right-hand side of the page denotes those
entities involved in the Asset Management. The arrow has arrowheads on both ends
and is contained within two horizontal, shaded lines. This fourth tier includes
the Investment Advisor and the Custodian.]
[The fifth tier contains the Trustees/Directors.]
YOUR ACCOUNT 23
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
ACCOUNTING COMPENSATION The funds compensate the adviser for performing tax and
financial management services. Annual compensation for 1996 will not exceed
0.02% of each fund's average net assets.
PORTFOLIO TRADES In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock Mutual
Life Insurance Company, but only when the adviser believes no other firm offers
a better combination of quality execution (i.e., timeliness and completeness)
and favorable price.
INVESTMENT GOALS AND POLICIES Except for California Tax-Free Income Fund, High
Yield Tax-Free Fund and Tax-Free Bond Fund, each fund's investment goal is
non-fundamental and may be changed without shareholder approval. Except for
Managed Tax Exempt Fund, each fund's policy of investing at least 80% in
municipal securities is fundamental and may not be changed without shareholder
approval. High Yield Fund's 80% credit policy is also fundamental.
DIVERSIFICATION All of the tax-free funds are diversified, except the
Massachusetts and New York Tax-Free Income funds. Because they are not
diversified, these two funds can invest more than 5% of assets in the securities
of a single issuer.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock Funds,
pay compensation to financial services firms that sell the funds' shares. These
firms typically pass along a portion of this compensation to your financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the fund in assets ("12b-1" refers to the
federal securities regulation authorizing annual fees of this type). The 12b-1
fee rates vary by fund and by share class, according to Rule 12b-1 plans adopted
by the funds' respective boards. The sales charges and 12b-1 fees paid by
investors are detailed in the fund-by-fund information. The portions of these
expenses that are reallowed to financial services firms are shown on the next
page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
<TABLE>
<CAPTION>
CLASS B UNREIMBURSED DISTRIBUTION EXPENSES(1)
Unreimbursed As a % of
Fund expenses net assets
- ---- ------------ ----------
<S> <C> <C>
California Tax-Free Income $3,275,187 3.99%
High Yield Tax-Free $5,853,826 3.77%
Managed Tax-Exempt $6,993,452 3.51%
Massachusetts Tax-Free Income N/A N/A
New York Tax-Free Income N/A N/A
Tax-Free Bond $3,009,557 4.07%
</TABLE>
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
INITIAL COMPENSATION Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
ANNUAL COMPENSATION Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears. Firms affiliated
with John Hancock, which include Tucker Anthony, Sutro & Company and John
Hancock Distributors, may receive an additional fee of up to 0.05% a year of
their total eligible net assets.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
<TABLE>
<CAPTION>
CLASS A INVESTMENTS
MAXIMUM
SALES CHARGE REALLOWANCE FIRST YEAR MAXIMUM
PAID BY INVESTORS OR COMMISSION SERVICE FEE TOTAL COMPENSATION(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 3.00% 2.26% 0.25% 2.50%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
REGULAR INVESTMENTS OF
$1 MILLION OR MORE
First $1M - $4,999,999 -- 1.00% 0.25% 1.24%
Next $1 - $5M above that -- 0.50% 0.25% 0.74%
Next $1 and more above that -- 0.25% 0.25% 0.49%
WAIVER INVESTMENTS(2) -- 0.00% 0.25% 0.25%
<CAPTION>
CLASS B INVESTMENTS
MAXIMUM
REALLOWANCE FIRST YEAR MAXIMUM
OR COMMISSION SERVICE FEE TOTAL COMPENSATION
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
All amounts 3.75% 0.25% 4.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to fund commission
payments when there is no initial sales charge.
FUND DETAILS 25
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following page are brief descriptions of these
securities and practices, along with the risks associated with them. The funds
follow certain policies that may reduce these risks.
As with any bond fund, there is no guarantee that a John Hancock tax-free income
fund will earn income or show a positive return over any period of time.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
CORRELATION RISK The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks.
CREDIT RISK The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
INFORMATION RISK The risk that key information about a security or market is
inaccurate or unavailable. Common to all municipal securities.
INTEREST RATE RISK The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
LEVERAGE RISK Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
- HEDGED When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position which the
fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
- SPECULATIVE To the extent that a derivative is not used as a hedge, the fund
is directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost.
LIQUIDITY RISK The risk that certain securities may
be difficult or impossible to sell at the time and the price that the seller
would like. The seller may have to lower the price, sell other securities
instead, or forego an investment opportunity, any of which could have a negative
effect on fund management or performance.
MANAGEMENT RISK The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
MARKET RISK The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industry, sector of
the economy or the market as a whole. Common to all stocks and bonds and the
mutual funds that invest in them.
OPPORTUNITY RISK The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in other investments.
VALUATION RISK The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
HIGHER RISK SECURITIES AND PRACTICES
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semi-annual reports.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
- - No policy limitation on usage; fund may be using currently
+ Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
California
Tax-Free High Yield Managed Massachusetts New York
Income Tax-Free Tax-Exempt Tax-Free Income Tax-Free Income Tax-Free Bond
------ -------- ---------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENTS
The borrowing of money from banks or
through reverse repurchase agreements.
Leverage, credit risks. 15 33.3(1) 10 33.3 33.3 15
REPURCHASE AGREEMENTS The purchase of a
security that must later be sold back to
the issuer at the same price plus
interest. Credit risk. - - - - - -
SECURITIES LENDING The lending of
securities to financial institutions,
which provide cash or government
securities as collateral. Credit risk. 33.3 -- -- 33.3 33.3 33.3
SHORT-TERM TRADING Selling a security
soon after purchase. A portfolio
engaging in short-term trading will have
higher turnover and transaction
expenses. Market risk. - - - - - -
WHEN-ISSUED SECURITIES AND FORWARD
COMMITMENTS The purchase or sale of
securities for delivery at a future
date; market value may change before
delivery. Market, opportunity, leverage
risks. - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
RESTRICTED AND ILLIQUID SECURITIES
Securities not traded on the open
market. May include illiquid Rule 144A
securities. Liquidity, market risks. 10 10 15 15 15 10
- -----------------------------------------------------------------------------------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
PARTICIPATION INTERESTS Securities
representing an interest in another
security, often a municipal lease
obligation (MLO). MLOs are not backed by
the full faith and credit of the issuing
municipality. Credit, information,
interest rate, liquidity, valuation
risks. - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
LEVERAGED DERIVATIVE SECURITIES
FINANCIAL FUTURES AND OPTIONS;
SECURITIES AND INDEX OPTIONS Contracts
involving the right or obligation to
deliver or receive assets or money
depending on the performance of one or
more assets or an economic index.
- ---Futures and related options. Interest
rate, market, hedged or speculative
leverage, correlation, liquidity,
opportunity risks. + + + + + +
- ---Options on securities and indices.
Interest rate, market, hedged or
speculative leverage, correlation,
liquidity, credit, opportunity risks. 10(2) 10(2) + + + 10(2)
STRUCTURED SECURITIES Leveraged and/or
indexed debt securities, including
principal-only and interest-only
securities, leveraged floating rate
securities, and others. These securities
tend to be highly sensitive to interest
rate movements and their performance may
not correlate to such movements in a
conventional fashion. Credit, interest
rate, market, speculative leverage,
liquidity, valuation risks.
10 - 10 10 10 10
SWAPS, CAPS, FLOORS, COLLARS OTC
contracts involving the right or
obligation to receive or make payments
based on two different income streams.
Correlation, credit, currency, interest
rate, hedged or speculative leverage,
liquidity, valuation risks. + + + + + +
</TABLE>
(1) Applies to reverse repurchase agreements. Other borrowings are limited to
15% of total assets.
(2) Applies to purchased options only.
FUND DETAILS 27
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
<TABLE>
<CAPTION>
ANALYSIS OF FUNDS WITH 5% OR MORE IN JUNK BONDS
INVESTMENT-GRADE BONDS
QUALITY RATING
(S&P/MOODY'S)(1) HIGH YIELD TAX-FREE FUND TAX-FREE BOND FUND
- ---------------- ------------------------ ------------------
<S> <C> <C>
AAA/Aaa 10.32% 22.6%
AA/Aa 1.69% 4.8%
A/A 4.76% 14.9%
BBB/Baa 31.42% 51.1%
- --------------------------------------------------------------------------------
JUNK BONDS
BB/Ba 45.12% 5.3%
B/B 1.63% 0.9%
CCC/Caa 0.00% 0.00%
CC/Ca 0.00% 0.00%
C/C 0.00% 0.00%
D/D 0.00% 0.00%
% of portfolio in bonds 100.0 99.6
</TABLE>
- - Rated by S&P or Moody's
- - Rated by the adviser
(1) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
<PAGE>
TAX-FREE INCOME FUNDS IN PROGRESS 7-8-96
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
tax-free income funds:
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual/ semi-annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into this prospectus (is legally a part of this
prospectus).
To request a free copy of the current annual/semi-annual report or SAI, please
write or call:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, MA 02205-9116
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
[John Hancock's graphic logo. A circle, a diamond, triangle and a diamond.]
101 Huntington Avenue
Boston, Massachusetts 02199-7603
[John Hancock's script logo.]
<PAGE>
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
CLASS A AND CLASS B SHARES
Statement Of Additional Information
September 30, 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 September 30, 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 15
Investment Restrictions 24
Those Responsible for Management 27
Investment Advisory and other Services 37
Initial Sales Charge on Class A Shares 40
Deferred Sales Charge on Class B Shares 42
Distribution Contract 46
Special Redemptions 49
Additional Services and Programs 49
Description of the Fund's Shares 50
Net Asset Value 52
Tax Status 53
Calculation of Performance 60
Brokerage Allocation 62
Transfer Agent Services 64
Independent Auditors 64
Custody of Portfolio 65
Appendix A A-1
Financial Statements F-1
<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 July 1, 1996. Prior to the approval of John
Hancock Advisers, Inc. (the "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 "Goal and Strategy" 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.
General. The Fund normally invests substantially all of its assets in the
following debt obligations issued by or on behalf of the State of California,
its political subdivisions, municipalities, agencies, instrumentalities or
public authorities and obligations issued by other governmental entities (for
example, certain U.S. territories or possessions) the interest on which is
excluded from gross income for federal income tax purposes and is exempt from
California personal income taxes (collectively referred to as "California Tax
Exempt Securities") subject to the following quality standards:
(1) Bonds which, at the time of purchase, are rated within one of the five
highest ratings by Standard & Poor's Ratings Group ("S&P") (AAA, AA,
A, BBB or BB), Moody's Investor Services ("Moody's") (Aaa, Aa, A, Baa
or Ba), or Fitch Investor Services ("Fitch") (AAA, AA, A, BBB or Ba)
or equivalent ratings.
(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.
2
<PAGE>
(4) Participation interests, which are, at the time of purchase, rated A
or better by S&P, Moody's or Fitch or which are issued by an issuer
whose outstanding bonds are rated A or better.
(5) Unrated bonds, notes and commercial paper that in the opinion of the
Adviser are, at the time of purchase, comparable in quality to the
rated obligations of the same types described above.
(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
attached to this 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 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. The Adviser 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
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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; (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, certificates of deposit
and bankers' acceptances will be subject to federal and California income taxes.
The circumstances in which the Fund will normally invest in these short-term
investments are (1) pending the investment of cash received from shareholders in
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, bankers'
acceptances, repurchase agreements 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.
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Description of Tax-Exempt Securities. As described under "Portfolio
Securities" in the Prospectus, in seeking to achieve its investment objective,
the Fund invests in a variety of 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 "Tax
Status" below. These securities consist of municipal bonds, municipal notes and
municipal commercial paper 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.
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.
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The interest on bonds issued to finance essential state and local
government operations is fully tax-exempt under the Internal Revenue Code of
1986, as amended (the "Code"). Interest on certain nonessential or private
activity bonds (including those for housing and student loans) issued after
August 7, 1986, while still tax-exempt, constitutes a tax preference item for
taxpayers in determining their alternative minimum tax: as a result, the Fund's
distributions attributable to such interest also constitute tax preference
items. The Code also imposes certain limitations and restrictions on the use of
tax-exempt bond financing for non-governmental business activities, such as
industrial development bonds.
Municipal Notes. Municipal notes are short-term obligations of
municipalities, generally with a maturity ranging from six months to three
years. The principal types of such Notes include tax, bond and revenue
anticipation notes and project notes.
Municipal Commercial Paper. Municipal commercial paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued to meet seasonal working
capital needs of a municipality or interim construction financing. Municipal
commercial paper is backed in many cases by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks and other institutions. The yields of municipal bonds depend
upon, among other things, general money market conditions, general conditions of
the municipal bond market, size of a particular offering, the maturity of the
obligation and rating of the issue.
Variable or Floating Rate Obligations. 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. Variable and floating rate instruments are generally considered to be
"derivative" instruments because they derive their values from the performance
of an underlying asset, index or other benchmark. See "Derivative Instruments"
below. 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
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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 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. In certain states,
such as California, COP's constitute a majority of new municipal financing
issues. The facilities are typically used by the state or municipality pursuant
to a lease with a financing authority. Certain municipal lease obligations may
trade infrequently. Participation interests in municipal lease obligations will
not be considered illiquid for purposes of the Fund's 10% limitation on illiquid
securities provided the Adviser determines that there is a readily available
market for such securities. In reaching liquidity decisions, the Adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer.) With respect to municipal lease obligations, the Adviser also
considers: (1) the willingness of the municipality to continue, annually or
biannually, to appropriate funds for payment of the lease; (2) the general
credit quality of the municipality and the essentiality to the municipality of
the property covered by the lease; (3) an analysis of factors similar to that
performed by nationally recognized statistical rating organizations in
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evaluating the credit quality of a municipal lease obligation, including (i)
whether the lease can be canceled; (ii) if applicable, what assurance there is
that the assets represented by the lease can be sold; (iii) the strength of the
lessee's general credit (e.g., its debt, administrative, economic and financial
characteristics); (iv) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an event of nonappropriation); and (v) the legal recourse in the event of
failure to appropriate; and (4) any other factors unique to municipal lease
obligations as determined by the Adviser.
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 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 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
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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. 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.
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.
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
costs. A Recovery Plan which includes the diversion of public transit revenues
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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 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 from 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 the 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 purposes 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.
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.
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, the recession
continued, forcing the State to continue to carry its $2.8 billion budget
deficit as of June 30, 1993.
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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. This plan places the burden on the legislature to maintain
ongoing control over the annual budget, and could exert additional pressure on
local governments reliant on appropriated program expenditures. 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
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Budget projects General Fund revenues of $44.1 billion and expenditures of $43.4
billion. Key components 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 cautious 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
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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 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.
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The Federally sponsored Medicaid program for health care services to
eligible welfare recipients is known as the Medi-Cal program. In the past, the
Medi-Cal program has provided a cost-based system of reimbursement for impatient
care furnished to Medi-Cal beneficiaries by any eligible hospital. The State now
selectively contracts by county with California hospitals to provide
reimbursement for non-emergency inpatient services to Medi-Cal beneficiaries,
generally on a flat per-diem payment basis regardless of cost. California law
also permits private health plans and insurers to contract selectively with
hospitals for services to beneficiaries on negotiated terms, generally at rates
lower than standard charges.
Debt obligations payable solely from revenues of health care institutions
may also be insured by the state pursuant to an insurance program operated by
the Office of Statewide Health Planning and Development (the "Office"). Most of
such debt obligations are secured by a mortgage of real property in favor of the
Office and the holders. If a default occurs on such insured debt obligations,
the Office has the option of either continuing to meet debt service obligations
of foreclosing the mortgage and requesting the State Treasurer to issue
debentures payable from a reserve fund established under the insurance fund or
payable from appropriated state funds.
Security for certain debt obligations held by the Fund may be in form of a
mortgage or deed of trust on real property. California has statutory provisions
which limit the remedies of a creditor secured by a mortgage or deed of trust.
Principally, the provisions establish conditions governing the limits of a
creditor's right to a deficiency judgment. In the case of a default, the
creditor's rights under the mortgage or deed of trust are subject to constraints
imposed by California real property law upon transfers of title to real property
by private power of sale. These laws require that the loan must have been in
arrears for at least seven months before foreclosure proceedings can begin.
Under California's anti-deficiency legislation, there is no personal recourse
against a mortgagor of single-family residence regardless of whether the
creditor chooses judicial or non-judicial foreclosure. These disruptions could
disrupt the stream of revenues available to the issuer for paying debt service.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment changes on such
mortgage loans may be imposed only with respect to voluntary payments made
during the first five years of the mortgage loan, and cannot in any event exceed
six months, advance interest on the amount prepaid in excess of 20% of the
original principal amount of the mortgage loan. This limitation could affect the
flow of revenues available to the issuer for debt service on these outstanding
debt obligations.
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
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property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (1) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (2) an issuer to perform on its contract
of insurance in the event of widespread losses; or (3) the Federal or State
government to appropriate sufficient funds within their respective budget
limitations.
The January 1994 major earthquake in greater Los Angeles (Northridge) was
estimated to have resulted in up to $20 billion in property damage. Significant
damage was incurred by public and private facilities in four counties. Los
Angeles, Ventura, Orange and San Bernadino Counties were declared State and
Federal disasters. The Federal government approved a total of $9.5 billion in
earthquake relief funds for assistance to homeowners and small businesses, as
well as repair of damaged public facilities.
As described in the summary above, the Fund's investments are susceptible
to possible adverse effects of the complex political, economic and regulatory
matters affecting California issuers. In the view of the 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,
their obligations.
Legislation limiting taxation and spending may, however, affect the
creditworthiness of 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.
CERTAIN INVESTMENT PRACTICES
When-Issued and Forward Commitment Securities. The Fund may purchase
securities on a 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-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 or sell 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 or the buyer, as the case may be, to consummate a purchase transaction.
The failure of the issuer or seller to consummate the transaction may result in
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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. 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 may recognize a
taxable gain or a loss.
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 for
the purpose of realizing additional (taxable) income. 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 Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements. The Fund has established a procedure providing that the securities
serving as collateral for each repurchase agreement must be delivered to the
Fund's custodian either physically or in book-entry form and that the collateral
must be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities and could experience losses, including the
possible decline in the value of the underlying securities during the period in
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.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements which involve the sale of U.S. Government securities held
in its portfolio to a bank with an agreement that the Fund will buy back the
securities at a fixed future date at a fixed price plus an agreed amount of
"interest" which may be reflected in the repurchase price. Reverse repurchase
agreements are considered to be borrowings by the Fund. Reverse repurchase
agreements involve the risk that the market value of securities purchased by the
Fund with proceeds of the transaction may decline below the repurchase price of
the securities sold by the Fund which it is obligated to repurchase. The Fund
will also continue to be subject to the risk of a decline in the market value of
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the securities sold under the agreements because it will reacquire those
securities upon effecting their repurchase. To minimize various risks associated
with reverse repurchase agreements, the Fund will establish and maintain with
the Fund's custodian a separate account consisting of highly liquid, marketable
securities in an amount at least equal to the repurchase prices of the
securities (plus any accrued interest thereon) under such agreements. In
addition, the Fund will not enter into reverse repurchase agreements and other
borrowings exceeding in the aggregate 15% of the Fund's total assets valued at
market less liabilities (not including the amount borrowed) at the time the
borrowing was made. The Fund will enter into reverse repurchase agreements only
with federally insured banks or savings and loan associations which are approved
in advance as being creditworthy by the Board of Trustees. Under procedures
established by the Board of Trustees, the Adviser will monitor the
creditworthiness of the banks involved.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions for the purpose of realizing additional
(taxable) income if the loan is collateralized by cash or U.S. Government
securities according to applicable regulatory requirements. The Fund may
reinvest any cash collateral in short-term securities. When the Fund lends
portfolio securities, there is a risk that the borrower may fail to return the
securities involved in the transaction. As a result, the Fund may incur a loss
or, in the event of the borrower's bankruptcy, the Fund may be delayed in or
prevented from liquidating the collateral. Securities loaned by the Fund will
remain subject to fluctuations of market value. It is a fundamental policy of
the Fund not to lend portfolio securities having a total value exceeding 33 1/3%
of its total assets.
Options, Futures and Options on Futures Transactions.
General. The Fund may buy and sell options contracts on securities and debt
security indices, interest rate and municipal bond index futures contracts and
options on such futures contracts. Options and futures contracts are bought and
sold to manage the Fund's exposure to changing interest rates and security
prices. Some options and futures strategies, including selling futures, buying
puts and writing calls, tend to hedge a Fund's investment against price
fluctuations. Other strategies, including buying futures, writing puts, and
buying calls, tend to increase market exposure. Options and futures may be
combined with each other or with forward contracts in order to adjust the risk
and return characteristics of the overall strategy. The Fund may invest in
options and futures based on debt securities and municipal bond indices
(securities indices).
Options and futures can be volatile investments and involve certain risks.
If the Adviser applies a hedge at an inappropriate time or judges market
conditions incorrectly, options and futures strategies may lower the Fund's
return. The Fund could also experience losses if the prices of its options and
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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. See also
"Derivative Instruments" below.
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
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indexes (if and when they are traded) only as a hedge against changes in the
general level of interest rates in accordance with strategies more specifically
described below.
The purchase of a financial futures contract obligates the buyer to accept
and pay for the specific type of debt security called for in the contract at a
specified future time and at a specified price. The Fund would purchase a
financial futures contract when it is not fully invested in long-term debt
securities but wishes to defer its purchases for a time until it can invest in
such securities in an orderly manner or because short-term yields are higher
than long-term yields. Such purchases would enable the Fund to earn the income
on a short-term security while at the same time minimizing the effect of all or
part of an increase in the market price of the long-term debt security which the
Fund intends to purchase in the future. A rise in the price of the long-term
debt security prior to its purchase either would generally be offset by an
increase in the value of the futures contract purchased by the Fund or avoided
by taking delivery of the debt securities under the futures contract.
The sale of a financial futures contract obligates the seller to deliver
the specific type of debt security called for in the contract at a specified
future time and at a specified price. The Fund would sell a financial futures
contract in order to continue to receive the income from a long-term debt
security, while endeavoring to avoid part or all of the decline in market value
of that security which would accompany an increase in interest rates. If
interest rates did rise, a decline in the value of the debt security held by the
Fund would be substantially offset by an increase in the value of the futures
contract sold by the Fund. While the Fund could sell a long-term debt security
and invest in a short-term security, ordinarily the Fund would give up income on
its investment, since long-term rates normally exceed short-term rates.
In addition, the Fund may purchase and write put and call options on
financial futures contracts which are traded on an Exchange or a Board of Trade
and enter into closing transactions with respect to such options to terminate an
existing position. Options on financial futures contracts are similar to options
on securities except that a put option on a financial futures contract gives the
purchaser the right in return for the premium paid to assume a short position in
a financial futures contract and a call option on a financial futures contract
gives the 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
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index at the close of the last trading day of the contract and the price at
which the future was originally written.
The Fund may also purchase and write put and call options on tax-exempt
bond indexes (if and when such options are traded) and enter into closing
transactions with respect to such options. An option on an index future is
similar to an option on a debt security except that an option on an index future
gives the holder the right to assume a position in an index future. The Fund
will use options on futures contracts and options on tax-exempt bond indexes (if
and when they are traded) in connection with hedging strategies. Generally,
these strategies would be employed under the same market conditions in which the
Fund would use put and call options on debt securities.
The Fund may hedge up to the full value of its portfolio through the use of
options and futures. At the time the Fund purchases a futures contract, an
amount of cash or U.S. Government securities at least equal to the market value
of the futures contract will be deposited in a segregated account with the
Fund's Custodian to collateralize the position and thereby insure that such
futures contract is unleveraged. The Fund may not purchase or sell futures
contracts or purchase or write related put or call options if immediately
thereafter the sum of the amount of initial 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 net 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's 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.
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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 the Fund to close out or
prevent the Fund from closing out a contract which may result in reduced gain or
increased loss to the Fund. The absence of a liquid market in futures contracts
might cause the Fund to make or take delivery of the underlying securities at a
time when it may be disadvantageous to do so. The purchase of put options on
futures contracts involves less potential dollar risk to the Fund than an
investment of equal amount in futures contracts, since the premium is the
maximum amount of risk the purchaser of the option assumes. The entire amount of
the premium paid for an option can be lost by the purchaser, but no more than
that amount. 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 "Derivative Instruments" below for additional risk disclosure.
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 Fund's 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")
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(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.
Correlation Risk. The 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
contact 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
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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.
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.
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" in the Prospectus.
Industry Concentration. 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.
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%
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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 to be invested in the securities of such issuer or the Fund
would own more than 10% of the outstanding voting securities of such issuer.
4. Make loans to others, except through the purchase of obligations in
which the Fund is authorized to invest, entering in repurchase agreements and
lending portfolio securities in an amount not exceeding one third of its total
assets.
5. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 or securities which are not readily marketable if such
purchase would cause the Fund to have more than 10% of its net assets invested
in such types of securities.
6. Purchase or retain the securities of any issuer, if those officers and
Trustees of the Fund or the Investment Adviser who own beneficially more than of
1% of the securities of such issuer, together own more than 5% of the securities
of such issuer.
7. Write, purchase or sell puts, calls or combinations thereof, except put
and call options on debt securities, futures contracts based on debt securities,
indices of 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
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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 do 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.
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
States Government, its agencies or instrumentalities, unless the securities are
rated by a nationally recognized rating service.
26
<PAGE>
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. Unless otherwise noted, the address of each officer and Trustee is
101 Huntington Avenue, Boston, MA 02199-7603. Their affiliations represent their
principal occupations during the past five years.
27
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address with the Fund During Past Five Years
- ---------------- ------------- ----------------------
<S> <C> <C>
Edward J. Boudreau, Jr.* Chairman and Chief Chairman and Chief Executive
October 1944 Executive Officer(1)(2) Officer, the Adviser and The
Berkeley Financial Group ("The
Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital") and John Hancock Advisers
International Limited ("Advisers
International"); Chairman, Chief
Executive Officer and President,
John Hancock Funds, Inc. ("John
Hancock Funds"); John Hancock
Investor Services Corporation
("Investor Services"), First
Signature Bank and Trust Company
and Sovereign Asset Management
Corporation ("SAMCorp"); Director,
John Hancock Freedom Securities
Corporation, John Hancock Capital
Corporation and New England/ Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science; Vice
Chairman and President, the Adviser
(until July 1992); Chairman, John
Hancock Distributors, Inc. (until
April, 1994).
- ----------------------------------
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
28
<PAGE>
Positions Held Principal Occupation(s)
Name and Address with the Fund During Past Five Years
- ---------------- ------------- ----------------------
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 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 (since 1995);
Receiver, the City of Chelsea
(until August 1992).
William H. Cunningham Trustee(3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair for Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
- ----------------------------------
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
29
<PAGE>
Positions Held Principal Occupation(s)
Name and Address with the Fund During Past Five Years
- ---------------- ------------- ----------------------
Harold R. Hiser, Jr. Trustee(3) Executive Vice President,
Schering-Plough Corporation Schering-Plough Corporation
One Giralda Farms (pharmaceuticals) (retired 1996);
Madison, NJ 07940-1000 Director, ReCapital Corporation
October 1931 (reinsurance) (until 1995).
Charles F. Fretz Trustee(3) Retired; self-employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Forster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Anne C. Hodsdon* President and President and Chief Operating
April 1953 Trustee(1)(2) Officer, the Adviser; Executive
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
460 North Gulph Road company)(until 1992); Senior Vice
King of Prussia, PA 19406 President, Finance UGI Corp.
February 1938 (holding company, public utilities,
LPGAS).
- ----------------------------------
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
30
<PAGE>
Positions Held Principal Occupation(s)
Name and Address with the Fund During Past Five Years
- ---------------- ------------- ----------------------
Leo E. Linbeck, Jr. Trustee(3) Chairman, President, Chief
3810 W. Alabama Executive Officer and Director,
Houston, TX 77027 Linbeck Corporation (a holding
August 1934 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
Eastern Corporation (a diversified
energy company), Daniel Industries,
Inc. (manufacturer of gas measuring
products and energy related
equipment), GeoQuest International,
Inc. (a geophysical consulting
firm) (1980-1993); Director,
Greater Houston Partnership.
Patricia P. McCarter Trustee(3) Director and Secretary, The
Swedesford Road McCarter Corp. (machine
RD #3, Box 121 manufacturer).
Malvern, PA 19355
May 1928
- ----------------------------------
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
31
<PAGE>
Positions Held Principal Occupation(s)
Name and Address with the Fund During Past Five Years
- ---------------- ------------- ----------------------
Steven R. Pruchansky Trustee(1)(3) Director and President, Mast
360 Horse Creek Drive, #208 Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust
(1982-1994); President, Maxwell
Building Corp. (until 1991).
Richard S. Scipione* Trustee(1) General Counsel, John Hancock
John Hancock Place Mutual Life Insurance Company;
P.O. Box 111 Director, the Adviser, Advisers
Boston, MA 02199 International, John Hancock Funds,
August 1937 Investor Services, John Hancock
Distributors, Inc., John Hancock
Subsidiaries, Inc., John Hancock
Property and Casualty Insurance and
its affiliates (until November
1993), SAMCorp and NM Capital;
Trustee, The Berkeley Group;
Director, JH Networking Insurance
Agency, Inc.
Norman H. Smith Trustee(3) Lieutenant General, USMC, Deputy
Rt. 1, Box 249 E Chief of Staff for Manpower and
Linden, VA 22642 Reserve Affairs, Headquarters
March 1933 Marine Corps; Commanding General
III Marine Expeditionary Force/3rd
Marine Division (retired 1991).
- ----------------------------------
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
32
<PAGE>
Positions Held Principal Occupation(s)
Name and Address with the Fund During Past Five Years
- ---------------- ------------- ----------------------
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
September 1930 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 1991);
Director, Smith Barney, Inc.,
Mutual Management Company and
Smith, Barney Advisers, Inc.
(investment advisers) (retired
1991); 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
July 1938 Investment Officer(2) Officer, the Adviser; President,
the Adviser (until December 1994);
Director, the Adviser, Advisers
International, John Hancock Funds
Investor Services, SAMCorp and NM
Capital; Senior Vice President, The
Berkeley Group.
- ----------------------------------
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
33
<PAGE>
Positions Held Principal Occupation(s)
Name and Address with the Fund During Past Five Years
- ---------------- ------------- ----------------------
James B. Little* Senior Vice President and Senior Vice President, the Adviser,
February 1935 Chief Financial Officer The Berkeley Group, John Hancock
Funds and Investor Services
James J. Stokowski* Vice President and Vice President, the Adviser.
November 1946 Treasurer
Susan S. Newton* Vice President and Vice President and Assistant
March 1950 Secretary Secretary, the Adviser; Vice
President and Secretary, John
Hancock Funds, Investor Services
and John Hancock Distributors, Inc.
(until 1994); Secretary, SAMCorp;
Vice President, The Berkeley Group.
John A. Morin* Vice President Vice President, the Adviser,
July 1950 Investor Services and John Hancock
Funds; Counsel, John Hancock Mutual
Life Insurance Company; Vice
President and Assistant Secretary,
The Berkeley Group.
</TABLE>
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
Adviser serves as investment adviser.
- ----------------------------------
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
34
<PAGE>
As of June 27, 1996, the officers and Trustees of the Fund as a group
beneficially owned less than 1% of these outstanding shares. As of June 27,
1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deerlake Dr. East, Jacksonville,
FL held 1,749,078 shares representing 6.21% of the Fund's outstanding Class A
Shares and 793,750 shares representing 10.03% 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 Adviser). The members of the Advisory Board are
distinct from the Board of Trustees, do not serve the Fund in any other capacity
and are persons who have no power to determine what securities are purchased or
sold and behalf of the Fund. Each member of the Advisory Board may be contacted
at 101 Huntington Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal occupations
during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management services);
former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from Texas;
co-founder, Houston Parents' League; former board member of various civic
and cultural organizations in Houston, including the Houston Symphony,
Museum of Fine Arts and YWCA. Mrs. Bentsen is presently active in various
civic and cultural activities in the Washington, D.C. area, including
membership on the Area Board for The March of Dimes and is a National
Trustee for the Botanic Gardens of Washington, D.C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief Executive
Officer, TFMC; Director, West Central Advisory Board, Texas Commerce Bank;
Trustee, Memorial Hospital System; Chairman of the Board of Regents of
Baylor University; Member, Board of Governors, National Association of
Securities Dealers, Inc.; Formerly, Chairman, Investment Company Institute;
formerly, President, Houston Chapter of Financial Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company; Director,
Houston Industries and Houston Lighting and Power Company; Director,
TransAmerican Companies (natural gas producer and transportation); Member,
Board of Managers, Harris County Hospital District; Advisory Director,
Commercial State Bank, El Campo; Advisory Director, First National Bank of
35
<PAGE>
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, Messrs. Boudreau and Scipione and each of
the officers of the Funds are interested persons of the Adviser, are compensated
by the Adviser/or affiliated companies and received no compensation from the
Funds for their services.
Total Compensation
from all Funds in
Aggregate John Hancock Fund
Compensation Complex to
Trustees from the Fund(1) Trustees(2)
- -------- ---------------- -----------
James F. Carlin $ 2,966 $ 60,700
William H. Cunningham+ 7,336 69,700
Charles F. Fretz 459 56,200
Harold R. Hiser, Jr.+ 244 60,200
Charles L. Ladner 3,657 60,700
Leo E. Linbeck, Jr. 7,586 73,200
Patricia P. McCarter 3,657 60,700
Steven R. Pruchansky 3,771 62,700
Norman H. Smith 3,771 62,700
John P. Toolan+ 3,657 60,700
------- --------
Total: $37,104 $627,500
(1) Compensation for the fiscal year ended December 31, 1995.
(2) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1995.
+ As of December 31, 1995, the value of the aggregate accrued deferred
compensation from all funds in the John Hancock Fund Complex for Mr.
Cunningham was $54, 413, for Mr. Hiser was $31,324 and for Mr. Toolan was
$71,437 under the John Hancock Deferred Compensation Plan for Independent
Trustees.
36
<PAGE>
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Benefits Accrued as from Certain Funds in
Compensation from Part of the Fund's John Hancock Fund Complex
Advisory Board*** the Fund Expenses 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.
All Independent Trustees are currently Trustees of 33 funds in the John
Hancock Fund Complex.
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Fund receives its investment advice
from the 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 Adviser is named above, together with the capacity in which such person is
affiliated with the Fund and the Adviser.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and has more than $19 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 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
Adviser. Under the investment management contract, the Adviser provides the Fund
with (i) a continuous investment program, consistent with the Fund's stated
37
<PAGE>
investment objective and policies, and (ii) supervision of all aspects of the
Fund's operations except those that are delegated to a custodian, transfer agent
or other agent. 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 Adviser is responsible for the
management of the Fund's portfolio assets.
No person other than the 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 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.
All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Fund including, but not limited to, (i) the
fees of the Trustees of the Fund who are not "interested persons," as such term
is defined in the 1940 Act (the "Independent Trustees"), (ii) the fees of the
members of the Fund's Advisory Board (described above) and (iii) the continuous
public offering of the shares of the Fund are borne by the Fund.
As provided by the investment management contract, the Fund pays the
Adviser an investment management fee, which is accrued daily and paid monthly in
arrears, equal on an annual basis to 0.55% of the Fund's average daily net asset
value.
The 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 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
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 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
38
<PAGE>
gross negligence on the part of the 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 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 Adviser or its affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser or for other funds or clients for which the Adviser
renders investment advice arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
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 Adviser. In addition, the Adviser or the Life Company may grant the
non-exclusive right to use the name "John Hancock" or any similar name to any
other corporation or entity, including but not limited to any investment company
of which the Life Company or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
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. The Adviser has voluntarily
39
<PAGE>
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.
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 Adviser as adviser to the Fund to permit
services under the Agreement to be provided to the Fund by the 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.
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 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 John
Hancock Investor Services Corporation ("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.
40
<PAGE>
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
o Any state, county 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.1
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.*
o A Trustee or officer of the Fund; a Director or officer of the Adviser and
its affiliates or Selling Broker (as defined below); employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, mother, father, sister, brother, mother-in-law,
father-in-law) of any of the foregoing; or any fund, pension, profit
sharing or other benefit plan for the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into 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.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund. o A member of an
approved affinity group financial services plan.*
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 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.
- ---------------------
* 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.
41
<PAGE>
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 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.
Class A shares may also be acquired without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
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 Prospectus as a percentage of the dollar
amount subject to the CDSC. The charge will be assessed on an amount equal to
42
<PAGE>
the lesser of the current market value or the original purchase cost of the
Class B Shares being redeemed. Accordingly, no CDSC will be imposed on increases
in account value above the initial purchase prices, including Class B Shares
derived from reinvestment of dividends or capital gains distributions. Certain
redemptions of Class A Shares may be subject to a CDSC, as described in the
Prospectus.
Class B shares are not available to 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.
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 first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will
be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the six- year CDSC redemption period or those you acquired
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the six-year period. For this purpose, the amount
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount please indicate
if you require the proceeds to equal the dollar amount requested. If not
indicated, only the specified dollar amount will be redeemed from your account
and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
----
* Amount subject to CDSC $400
43
<PAGE>
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.
Waiver of Contingent Deferred Sales Charge. 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:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other plans qualified under
the Code) unless otherwise noted.
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code after age 70 1/2.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans such as 401(k), 403(b), 457. In
all cases, the distribution must be free from penalty under the Code.
* Redemptions made to effect distributions from an Individual Retirement
Account either before age 59 1/2 or after age 59 1/2, as long as the
distributions are based on your life expectancy or the joint-and-last
survivor life expectancy of you and your beneficiary. These distributions
must be free from penalty under the Code.
44
<PAGE>
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares prior
to May 15, 1995.
For non-retirement accounts (please see above for retirement account
waivers):
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 10% of your account value at
the time you established your periodic withdrawal planand 10% of the value
of subsequent investments (less redemptions) in that account at the time
you notify Investor Services. (Please note, this waiver does not apply to
periodic withdrawal plan redemptions of Class A shares that are subject to
a CDSC.)
Please see matrix for reference.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 10% of account
mandatory value annually
distributions in periodic
payments
- ------------------------------------------------------------------------------------------------------
Between 59 1/2 Only Life 10% of account
and 70 1/2 Waived Waived Waived Expectancy value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived for 10% of account
rollover, or Waived for Waived for Waived for value annually
annuity annuity annuity annuity in periodic
payments. Not payments payments payments payments
waived if paid
directly to
participant.
- ------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ------------------------------------------------------------------------------------------------------
45
<PAGE>
- ------------------------------------------------------------------------------------------------------
Hardships Not Waived Not Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- ------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
If you qualify for a CDSC waiver under one of these situations, you must
notify Investor Services at the time you make your redemption. The waiver will
be granted once Investor Services has confirmed that you are entitled to the
waiver.
DISTRIBUTION CONTRACT
As discussed in the Prospectus, the Fund's shares are sold on a continuous
basis at the public offering price. John Hancock Funds, a wholly-owned
subsidiary of the 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, John Hancock Funds 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 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 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 John Hancock Funds.
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 ended December 31, 1995, 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.
47
<PAGE>
Under the Class A Plan, the distribution and 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 the Fund's Prospectus as from
time to time in effect); provided that the portion of such fee used tocover
service expenses (described below) shall not exceed an annual rate of 0.15% of
the average daily net asset value of the Class A Shares of the Fund. 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 and 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 the 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. John Hancock Funds 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.
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.
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 John Hancock Funds 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 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 with 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. Service expenses under the Plans include
payments made to, or on account of, account executives of selected
broker-dealers (including affiliates of John Hancock Funds) and others who
48
<PAGE>
furnish personal and shareholder account maintenance services to shareholders of
the relevant class of the Fund.
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:
Printing and Interest,
Mailing of Compensation Carrying or
Prospectuses to to Selling Other Finance
Advertising New Shareholders Brokers Charges
----------- ---------------- ------- -------
Class A shares $26,879 $5,599 $271,250 $ 0
Class B shares $17,056 $2,848 $289,614 $361,535
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 John Hancock Funds 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,
have 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.
49
<PAGE>
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. 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. The Fund permits the establishment of a
Systematic Withdrawal Plan. Payments under this plan represent proceeds arising
from the redemption of Fund shares. Since the redemption price of Fund shares
may be more or less than the shareholder's cost, depending upon the market value
of the securities owned by the Fund at the time of redemption, the distribution
of cash pursuant to this plan may result in recognition 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 Investor Services.
Monthly Automatic Accumulation Program ("MAAP"). This 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.
50
<PAGE>
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 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
The Trustees of the Fund are responsible for the management and supervision
of the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund, without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series, without
further action by shareholders. As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of one series of shares
- -- the Fund. In addition, the Trustees have authorized the issuance of two
classes of shares of the Fund, designated as Class A and Class B.
51
<PAGE>
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to the classes of the Fund.
Class A and Class B shares of the Fund will be sold exclusively to members of
the public (other than the institutional investors described in the Prospectus)
at net asset value. A sales charge will be imposed either at the time of the
purchase, for Class A shares, or on a contingent deferred basis, for Class B
shares. For Class A shares, no sales charge is payable at the time of purchase
on investments of $1 million or more, but for such investments a CDSC may be
imposed in the event of certain redemption transactions within one year of
purchase.
Class A and Class B shares each have exclusive voting rights on matters
relating to their respective distribution plans. The different classes of the
Fund may bear different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares
will be calculated in the same manner, at the same time and on the same day and
will be in the same amount, except for differences resulting from the facts that
(i) the distribution and service fees relating to Class A and Class B shares
will be borne exclusively by that class (ii) Class B shares will pay higher
distribution and service fees than Class A shares and (iii) each of Class A and
Class B shares will bear any other class expenses properly allocable to such
class of shares, subject to the requirements imposed by the Internal Revenue
Service on funds with a multiple-class structure. Similarly, the net asset value
per share may vary depending on whether Class A or Class B shares are purchased.
In the event of liquidation, shareholders are entitled to share pro rata in
the net assets of the Fund available for distribution to such shareholders.
Shares entitle their holders to one vote per share, are freely transferable and
have no preemptive, subscription or conversion rights. When issued, shares are
fully paid and non-assessable by the Fund, except as set forth below.
Unless otherwise required by the 1940 Act or the Declaration of Trust, the
Fund has no intention of holding annual meetings of shareholders. Fund
shareholders may remove a Trustee by the affirmative vote of at least two-thirds
of the Fund's outstanding shares and the Trustees shall promptly call a meeting
for such purpose when requested to do so in writing by the record holders of not
less than 10% of the outstanding shares of the Fund. Shareholders may, under
certain circumstances, communicate with other shareholders in connection with
requesting a special meeting of shareholders. However, at any time that less
than a majority of the Trustees holding office were elected by the shareholders,
the Trustees will call a special meeting of shareholders for the purpose of
electing Trustees.
52
<PAGE>
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Fund's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations or affairs of
the Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any Fund shareholder held
personally liable by reason of being or having been a shareholder. Liability is
therefor limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
Pursuant to an order granted by 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.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
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.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
shares, the following procedures are utilized wherever applicable. Debt
investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or
less are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees. The Fund will not price its securities on
53
<PAGE>
the following national holidays: New Year's Day; President's Day; Good Friday;
Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
54
<PAGE>
TAX STATUS
Federal Income Taxation
The Fund has qualified and elected to be treated as a "regulated investment
company" under Subchapter M of 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 and tax-exempt income (including net realized capital
gains, if any) which is distributed to shareholders in accordance with the
timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to seek to avoid or minimize liability
for such tax by satisfying such distribution requirements.
The Fund expects to qualify to pay "exempt-interest dividends," as defined
in the Code. To qualify to pay exempt-interest dividends, the Fund must, at the
close of each quarter of its taxable year, have at least 50% of the value of its
total assets invested in municipal securities whose interest is excluded from
gross income under Section 103(a) of the Code. In purchasing municipal
securities, the Fund intends to rely on opinions of nationally recognized bond
counsel for each issue as to the excludability of interest on such obligations
from gross income for federal income tax purposes. The Fund will not undertake
independent investigations concerning the tax-exempt status of such obligations,
nor does it guarantee or represent that bond counsels' opinions are correct.
Bond counsels' opinions will generally be based in part upon covenants by the
issuers and related parties regarding continuing compliance with federal tax
requirements. Tax laws enacted principally during the 1980's not only had the
effect of limiting the purposes for which tax-exempt bonds could be issued and
reducing the supply of such bonds, but also increased the number and complexity
of requirements that must be satisfied on a continuing basis in order for bonds
to be and remain tax-exempt. If the issuer of a bond or a user of a
bond-financed facility fails to comply with such requirements at any time,
interest on the bond could become taxable, retroactive to the date the
obligations was issued. In that event, a portion of the Fund's distributions
attributable to interest the Fund received on such bond for the current year and
for prior years could be characterized or recharacterized as taxable income. The
availability of tax-exemptobligations and the value of the Fund's portfolio may
be affected by restrictive federal income tax legislation enacted in recent
years or by similar future legislation.
55
<PAGE>
If the Fund satisfies the applicable requirements, dividends paid by the
Fund which are attributable to tax exempt interest on municipal securities and
designated by the Fund as exempt-interest dividends in a written notice mailed
to its shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. The recipient of tax-exempt income is required
to report such income on his federal income tax return. However, a shareholder
is advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" under Section 147(a)(1) with respect to some or
all of the tax-exempt obligations held by the Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund is not deductible to the extent it is deemed related to the Fund's
exempt- interest dividends. Pursuant to published guidelines, the Internal
Revenue Service may deem indebtedness to have been incurred for the purpose of
purchasing or carrying shares of the Fund even though the borrowed funds may not
be directly traceable to the purchase of shares.
Although all or a substantial portion of the dividends paid by the Fund may
be excluded by the Fund's shareholders from their gross income for federal
income tax purposes, the Fund may purchase specified private activity bonds, the
interest from which (including the Fund's distributions attributable to such
interest) may be a preference item for purposes of the federal alternative
minimum tax (both individual and corporate). All exempt-interest dividends from
the Fund, whether or not attributable to private activity bond interest, may
increase a corporate shareholder's liability, if any, for corporate alternative
minimum tax and will be taken into account in determining the extent to which a
shareholder's Social Security or certain railroad retirement benefits are
taxable.
Distributions other than exempt-interest dividends from the Fund's current
or accumulated earnings and profits ("E&P") will be taxable under the Code for
investors who are subject to tax. Taxable distributions include distributions
from the Fund that are attributable to (i) taxable income, including but not
limited to taxable bond interest, recognized market discount income, original
issue discount income accrued with respect to taxable bonds, income from
repurchase agreements, income from securities lending, income from dollar rolls,
income from interest rate swaps, caps, floors and collars, and a portion of the
discount from certain stripped tax-exempt obligations or their coupons or (ii)
capital gains from the sale of securities or other investments (including from
the disposition of rights to when-issued securities prior to issuance) or from
options and futures contracts. If these distributions are paid from the Fund's
"investment company taxable income," they will be taxable as ordinary income;
and if they are paid from the Fund's "net capital gain," they will be taxable as
long-term capital gain. (Net capital gain is the excess (if any) of net
long-term capital gain over net short-term capital loss, and investment company
taxable income is all taxable income and capital gains or losses, other than
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those gains and losses included in computing net capital gain, after reduction
by deductible expenses.) Some distributions from investment company taxable
income and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Amounts that are not allowable as a deduction in computing
taxable income, including expenses associated with earning tax-exempt interest
income, do not reduce the Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of the Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders who have chosen automatic reinvestment of their distributions will
have a federal tax basis in each share received pursuant to such a reinvestment
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received in the
reinvestment.
After the close of each calendar year, the Fund will inform shareholders of
the federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative
After the close of each calendar year, the Fund will inform shareholders of
the federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative minimum tax. Shareholders who have not held shares of
the Fund for its full taxable year may have designated as tax-exempt or as a tax
preference item a percentage of distributions which is not equal to the actual
amount of tax-exempt income or tax preference item income earned by the Fund
during the period of their investment in the Fund.
The amount of the Fund's net 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. Consequently,
subsequent distributions on these shares from such appreciation may be taxable
to such investor even if the net asset value of the investor's shares is, as a
result of the distributions, reduced below the investor's cost for such shares,
and the distributions in reality represent a return of a portion of the purchase
price.
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Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's tax holding period for the shares
and subject to the special rules described below. 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 may be disallowed
to the extent the shares disposed of are replaced with other shares of the Fund
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of, such as pursuant to automatic dividend reinvestments. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be disallowed to the extent of all
exempt-interest dividends paid with respect to such shares and, to the extentin
excess of the amount disallowed, will be treated as a long-term capital loss to
the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess of net long-term capital gain over net short-term
capital loss in any year. The Fund will not in any event distribute net capital
gain realized in any year to the extent that a capital loss is carried forward
from prior years against such gain. To the extent such excess was retained and
not exhausted by the carryforward of prior years' capital losses, it would be
subject to Federal income tax in the hands of the Fund. Upon proper designation
of this amount by the Fund, each shareholder would be treated for Federal income
tax purposes as if the Fund had distributed to him on the last day of its
taxable year his pro rata share of such excess, and he had paid his pro rata
share of the taxes paid by the Fund and reinvested the remainder in the Fund.
Accordingly, each shareholder would (a) include his pro rata share of such
excess as long-term capital gain in his return for his taxable year in which the
last day of the Fund's taxable year falls, (b) be entitled either to a tax
credit on his return for, or to a refund of, his pro rata share of the taxes
paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his
shares in the Fund by the difference between his pro rata share of such excess
and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its net capital gains, if any, during the
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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 $5,482,396 of capital loss carryforwards. Of this
amount $44,815 expires December 31, 2001, $267,864 expires December 31, 2002 and
$5,169,717 expires December 31, 2003.
Dividends and capital gain distributions from the Fund will not qualify for
the dividends-received deduction for corporate shareholders.
The Fund is required to accrue income on any debt securities that have more
than a de minimis amount of original issue discount (or debt securities acquired
at a market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options and futures contracts may also
require the Fund to recognize gain without a concurrent receipt of cash.
However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy these distribution
requirements.
The Fund will be required to report to the Internal Revenue Service (the
"IRS") all taxable distributions to shareholders, as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. However, the Fund's
taxable distributions may not be subject to backup withholding if the Fund can
reasonably estimate that at least 95% of its distributions for the year will be
exempt-interest dividends. The Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
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tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
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 or successor portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's gains. Some of these transactions may also cause the Fund to dispose of
investments sooner than would otherwise have occurred. These transactions may
therefore affect the amount, timing and character of the Fund's distributions to
shareholders. The Fund will take into account the special tax rules (including
consideration of available elections) applicable to options and futures
contracts in order to seek to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as insurance companies and financial institutions. Dividends
(including exempt-interest dividends), capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of Fund shares
may also be subject to state and local taxes, except as described below under
"State Taxation." 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 for Form W8 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.
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State Taxation
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
The following discussion assumes that the Fund will be qualified as a
regulated investment company under subchapter M of the Code and will be
qualified thereunder to pay exempt interest dividends.
Individual shareholders of the Fund who are subject to California personal
income taxation will not be required to include in their California gross income
that portion of their federal exempt-interest dividends which the Fund clearly
and accurately identifies as directly attributable to interest earned on
obligations the interest on which is exempt from California personal income
taxation, provided that at least 50 percent of the value of the Fund's total
assets at the close of each quarter of its taxable year consists of such
obligations. Distributions to individual shareholders derived from interest on
Tax-Exempt Securities issued by governmental authorities in states other than
California or on other obligations or investments the interest or other income
on which is not exempt from California personal income taxation 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
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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 June 30, 1996, the annualized yields of the
Fund's Class A Shares and Class B Shares were 5.32% and 4.83%, respectively
(5.24% and 4.75%, respectively, without taking into account the expense
limitation arrangements). As of June 30, 1996 the average annual total returns
of the Class A Shares of the Fund for the one and five year periods and since
inception on December 29, 1989 were 3.32%, 6.80% and 6.94%, respectively As of
June 30, 1996, the average annual returns for the Fund's Class B Shares for the
one year period and since inception on December 31, 1991 were 2.33% and 5.91%,
respectively. Without taking into account the expense limitation arrangements,
the foregoing total return performance would have been lower.
The Fund advertises yield, where appropriate. The Fund's yield is computed
by dividing net investment income per share determined for a 30-day period by
the maximum offering price per share (which includes the full sales charge) on
the last day of the period, according to the following standard formula:
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
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a stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt. The tax equivalent yields for the
Fund's Class A and Class B Shares at the combined maximum federal and California
tax rates, which assumes the full deductibility of state income taxes on the
federal income tax return, for the 30-day period ended June 30, 1996 were 9.90%
and 8.98%, respectively.
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
P (1 + T) n = ERV
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment made at the
beginning of the 1-year and life-of-fund periods.
In the case of Class A Shares or Class B Shares, this calculation assumes
the maximum sales charge is included in the initial investment or the CDSC is
applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period.
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's maximum sales
charge on Class A Shares or the CDSC on Class B Shares into account. Excluding
the Fund's sales charge on Class A Shares and the CDSC on Class B Shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income Fund
Performance 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
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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 Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the 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 Adviser may consider sales of shares of the Fund as
a factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
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To the extent consistent with the foregoing, the Fund will be governed in
the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser of the
Fund, and their value and expected contribution to the performance of the Fund.
It is not possible to place a dollar value on information and services to be
received from brokers and dealers, since it is only supplementary to the
research efforts of the Adviser. The receipt of research information is not
expected to reduce significantly the expenses of the Adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other advisory clients of the Adviser, and
conversely, brokerage commissions and spreads paid by other advisory clients of
the Adviser may result in research information and statistical assistance
beneficial to the Fund. The Fund will make no 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.
The 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 the
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.
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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 Adviser or the Affiliated Brokers. Because the
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
_________________, ____________________, Boston, Massachusetts _____, has
been selected as the independent auditors of the Fund. The financial statements
of the Fund included in the Prospectus and this Statement of Additional
Information have been audited by _________________ for the periods indicated in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
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CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and Investors Bank & Trust Company, 89 South Street, Boston,
Massachusetts 02111. Under the custodian agreement, Investors Bank & Trust
Company performs custody, portfolio and fund accounting services.
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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:
A-1
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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.
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.
A-2
<PAGE>
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.
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 Loansbearing 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.
A-3
<PAGE>
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+.
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.
A-4
<PAGE>
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%.
<PAGE>
<TABLE>
<CAPTION>
Marginal
Combined
California IN CALIFORNIA, A TAX-EXEMPT YIELD OF:
Single Return Joint Return and Federal ------------------------------------------------
- --------------------------------- Income Tax
(Taxable Income) Bracket* 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
- ------------------------------------ ----------- ------------------------------------------------
IS EQUIVALENT TO A TAXABLE YIELD OF:
------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 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-5
<PAGE>
PART C.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Not applicable.
(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 June 17, 1996, the number of record holders of shares of the
Registrant was as follows:
Title of Class Number of Record Holders
Class A Shares - 7,926
Class B Shares - 2,585
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.
C-1
<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
C-2
<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 Trust, John Hancock Current Interest, John
Hancock Series, Inc., John Hancock Tax-Free Bond Trust, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Limited Term
Government 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.
C-3
<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
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
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
C-4
<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 and Secretary Vice President
101 Huntington Avenue
Boston, Massachusetts
Susan S. Newton Vice President Vice President, and
101 Huntington Avenue Secretary
Boston, Massachusetts
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
C-5
<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
C-6
<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 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
18th day of July, 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
- ------------------------ Senior Vice President and Chief July 18, 1996
James B. Little 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/Susan S Newton July 18, 1996
-------------------
Susan S. Newton
under Powers of Attorney dated
June 25, 1996, filed herewith
</TABLE>
C-9
<PAGE>
<TABLE>
<S> <C>
John Hancock Bank and Thrift Opportunity Fund John Hancock Patriot Global Dividend Fund
John Hancock Bond Fund John Hancock Patriot Preferred Dividend Fund
John Hancock California Tax-Free Income Fund John Hancock Patriot Premium Dividend Fund I
John Hancock Cash Reserve, Inc. John Hancock Patriot Premium Dividend Fund II
John Hancock Current Interest John Hancock Patriot Select Dividend Trust
John Hancock Institutional Series Trust John Hancock Series, Inc.
John Hancock Investment Trust John Hancock Tax-Free Bond Fund
</TABLE>
POWER OF ATTORNEY
The undersigned Trustee/Director of each of the above listed Trusts, each a
Massachusetts business trust, and Corporations, each a Maryland Corporation,
does hereby severally constitute and appoint EDWARD J. BOUDREAU, JR., SUSAN S.
NEWTON, AND JAMES B. LITTLE, and each acting singly, to be my true, sufficient
and lawful attorneys, with full power to each of them, and each acting singly,
to sign for me, in my name and in the capacity indicated below, any Registration
Statement on Form N-1A and any Registration Statement on Form N-14 to be filed
by the Trust under the Investment Company Act of 1940, as amended (the "1940
Act"), and under the Securities Act of 1933, as amended (the "1933 Act"), and
any and all amendments to said Registration Statements, with respect to the
offering of shares and any and all other documents and papers relating thereto,
and generally to do all such things in my name and on my behalf in the capacity
indicated to enable the Trust to comply with the 1940 Act and the 1933 Act, and
all requirements of the Securities and Exchange Commission thereunder, hereby
ratifying and confirming my signature as it may be signed by said attorneys or
each of them to any such Registration Statements and any and all amendments
thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as of
the 25th day of June, 1996.
/s/Edward J. Boudreau, Jr. /s/Leo E. Linbeck, Jr.
- ----------------------------- --------------------------
Edward J. Boudreau, Jr. Leo E. Linbeck, Jr.
/s/ James F. Carlin /s/Patricia P. McCarter
- ----------------------------- --------------------------
James F. Carlin Patricia P. McCarter
/s/ William H. Cunningham /s/Steven R. Pruchansky
- ----------------------------- --------------------------
William H. Cunningham Steven R. Pruchansky
/s/Charles F. Fretz /s/Richard S. Scipione
- ----------------------------- --------------------------
Charles F. Fretz Richard S. Scipione
/s/Harold R. Hiser, Jr. /s/Norman H. Smith
- ----------------------------- --------------------------
Harold R. Hiser, Jr. Norman H. Smith
/s/Anne C. Hodsdon /s/John P. Toolan
- ----------------------------- --------------------------
Anne C. Hodsdon John P. Toolan
/s/Charles L. Ladner
- -----------------------------
Charles L. Ladner
<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 Not applicable
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.**
* 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
