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. 14 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 17 [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
Susan S. Newton
Vice President and Secretary
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on January 1, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (DATE) pursuant to paragraph (a) of rule 485
Calculation of Registration Fees Under the Securities Act of 1933
<TABLE>
<CAPTION>
Proposed Maximum Proposed Aggregate
Title of Securities Amount of Shares Offering Price Maximum Amount of
Being Registered Being Registered Per Share Offering Price Registration Fee
---------------- ---------------- --------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest Indefinite N/A N/A N/A
Shares of Beneficial Interest 766,612 10.50 330,000 $100.00
</TABLE>
1. Registrant continues its election to register an indefinite number of
shares of beneficial interest pursuant to Rule 24e-2 under the
investment Company Act of 1940, as amended.
2. Registrant elects to calculate the maximum aggregate offering price
pursuant to Rule 24f-2. 3,464,566 shares were redeemed during the
fiscal year ended August 31, 1996. 2,729,383 shares were used for
reductions pursuant to Paragraph (c) of Rule 24f-2 during the current
fiscal year. 735,183 shares is the amount of redeemed shares used for
reduction in this Amendment. Pursuant to Rule 457(c) under the
Securities Act of 1933, the Maximum public offering price of $10.50 per
share on December 17, 1996 is the price used as the basis for
calculating the registration fee. While no fee is required for the
735,183 shares, the Registrant has elected to register, for $100, an
additional $330,000 shares (approximately 31,429 shares at $10.50 per
share).
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 October 29, 1996.
<PAGE>
<TABLE>
<CAPTION>
Item Number Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------ ------------------ -------------------
<S> <C> <C>
1 Front Cover Page *
2 Overview; Investor Expenses; *
3 Financial Highlights *
4 Overview; Goal and Strategy; Portfolio *
Securities; Risk Factors; Business
Structure; More About Risk
5 Overview; Business Structure; *
Manager/Subadviser; Investor Expenses
6 Choosing a Share Class; Buying Shares; *
Selling Shares; Transaction Policies;
Dividends and Account Policies;
Additional Investor Services
7 Choosing a Share Class; How Sales Charges *
are Calculated; Sales Charge Deductions
and Waivers; Opening an Account; Buying
Shares; Transaction Policies; Additional
Investor Services
8 Selling Shares; Transaction Policies; *
Dividends and Account Policies
9 Not Applicable *
10 * Front Cover Page
11 * Table of Contents
12 * Organization of the Fund
13 * Investment Objectives and Policies;
Certain Investment Practices;
Investment Restrictions
14 * Those Responsible for Management
15 * Those Responsible for Management
16 * Investment Advisory; Subadvisory
and Other Services; Distribution
Contract; Transfer Agent Services;
Custody of Portfolio; Independent
Auditors
17 * Brokerage Allocation
18 * Description of Fund's Shares
19 * Net Asset Value; Additional
Services and Programs
20 * Tax Status
21 * Distribution Contract
22 * Calculation of Performance
23 * Financial Statements
</TABLE>
<PAGE>
JOHN HANCOCK
TAX-FREE
INCOME FUNDS
[John Hancock's graphic logo. A circle,
diamond, triangle, and a cube.]
- --------------------------------------------------------------------------------
PROSPECTUS CALIFORNIA TAX-FREE INCOME FUND
JANUARY 1, 1997
HIGH YIELD TAX-FREE FUND
MASSACHUSETTS TAX-FREE
INCOME FUND
NEW YORK TAX-FREE INCOME FUND
TAX-FREE BOND FUND
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 85% 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.
[John Hancock's graphic logo. A circle, diamond, triangle, and a cube.]
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
101 Huntington Avenue, Boston,
Massachusetts 02199-7603
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
A fund-by-fund look at goals, CALIFORNIA TAX-FREE INCOME FUND 4
strategies, risks, expenses and
financial history. HIGH YIELD TAX-FREE FUND 6
MASSACHUSETTS TAX-FREE INCOME FUND 8
NEW YORK TAX-FREE INCOME FUND 10
TAX-FREE BOND FUND 12
Policies and instructions for YOUR ACCOUNT
opening, maintaining and closing CHOOSING A SHARE CLASS 14
an account in any HOW SALES CHARGES ARE CALCULATED 14
tax-free income fund. SALES CHARGE REDUCTIONS AND WAIVERS 15
OPENING AN ACCOUNT 15
BUYING SHARES 16
SELLING SHARES 17
TRANSACTION POLICIES 19
DIVIDENDS AND ACCOUNT POLICIES 19
ADDITIONAL INVESTOR SERVICES 20
Details that apply to the tax-free FUND DETAILS
income funds as a group. BUSINESS STRUCTURE 21
SALES COMPENSATION 22
MORE ABOUT RISK 24
FOR MORE INFORMATION BACK COVER
<PAGE>
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 symbol.] 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 income that is exempt from
federal and, in some cases, state and local income tax. Each fund has its own
strategy and its own risk/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
- - want regular monthly income
- - are interested in lowering their income tax burden
- - pay California, Massachusetts or New York income tax
(state-specific funds)
Tax-free income funds may NOT be appropriate if you:
- - are not subject to a high level of state or federal income tax
- - are seeking an investment for a tax-deferred retirement account
- - 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>
CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<S> <C> <C> <C>
REGISTRANT NAME: JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND TICKER SYMBOL CLASS A: TACAX CLASS B: TSCAX
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
municipal securities exempt from these taxes.
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
California municipal securities, particularly bonds. These are primarily
investment grade, although up to 20% of assets may be invested in junk bonds
rated BB/Ba and their unrated equivalents. 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
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 higher-risk 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 funds, the value of your investment 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
securities).
Although the fund is diversified, it concentrates in securities of California
issuers and its performance is largely dependent on factors that may
disproportionately affect these issuers. Factors 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 possibility of 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 24.
PORTFOLIO MANAGEMENT
[A graphic image of a generic person.] Dianne Sales-Singer, CFA, leader of the
fund's portfolio management team since April 1995, is a second vice president of
the adviser. Ms. Sales-Singer joined John Hancock Funds in 1989 and has been in
the investment business since 1984.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
<TABLE>
[A graphic image of a percent symbol.] 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.
<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) 0.45% 0.45%
12b-1 fee (net of reduction)(4) 0.15% 0.90%
Other expenses 0.15% 0.15%
Total fund operating expenses (after limitation)(3) 0.75% 1.50%
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%.
<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
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 0.85% for Class A and 1.60% 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.
</TABLE>
4 CALIFORNIA TAX-FREE INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
FINANCIAL HIGHLIGHTS
[A graphic image of a dollar sign.] The figures below have been audited by the
fund's independent auditors, Ernst & Young LLP.
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
(scale varies from fund to fund) (Bar Graph)
<CAPTION>
==============================================================================================================================
CLASS A - PERIOD ENDED: 12/90 12/91 12/92 12/93 12/94(1) 12/95 8/96(2)
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.00 $ 9.91 $ 10.32 $ 10.41 $ 10.85 $ 9.28 $ 10.69
Net investment income 0.74 0.69 0.66(3) 0.62 0.58 0.57(3) 0.39(3)
Net realized and unrealized gain (loss) on
investments (0.16) 0.47 0.25 0.76 (1.57) 1.41 (0.33)
Total from investment operations 0.58 1.16 0.91 1.38 (0.99) 1.98 0.06
Less distributions:
Dividends from net investment income (0.67) (0.70) (0.67) (0.62) (0.58) (0.57) (0.39)
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) (0.39)
Net asset value, end of period $ 9.91 $ 10.32 $ 10.41 $ 10.85 $ 9.28 $ 10.69 $ 10.36
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(4)(%) 6.13 12.26 9.15 13.60 (9.31) 21.88 0.61(5)
Total adjusted investment return at net
asset value(4,6)(%) 5.29 11.86 8.90 13.42 (9.45) 21.73 0.55(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted)($) 80,200 163,693 217,014 279,692 241,583 309,305 291,072
Ratio of expenses to average net assets(%) 0.00 0.40 0.58 0.69 0.75 0.75 0.76(7,8)
Ratio of adjusted expenses to average net
assets(9)(%) 0.84 0.80 0.83 0.87 0.89 0.90 0.84(7)
Ratio of net investment income (loss) to
average net assets(%) 7.11 6.75 6.36 5.69 5.85 5.76 5.57(7)
Ratio of adjusted net investment income
(loss) to average net assets(9)(%) 6.27 6.35 6.11 5.51 5.71 5.61 5.48(7)
Portfolio turnover rate (%) 62 45 34 51 62 37(10) 30
Fee reduction per share ($) 0.09 0.04 0.03(3) 0.02 0.01 0.01(3) 0.01(3)
<CAPTION>
=========================================================================================================
CLASS B - PERIOD ENDED: 12/92 12/93 12/94(1) 12/95 8/96(2)
=========================================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.32 $ 10.41 $ 10.85 $ 9.28 $ 10.68
Net investment income 0.58(3) 0.54 0.51 0.50(3) 0.33(3)
Net realized and unrealized gain (loss) on
investments 0.25 0.76 (1.57) 1.40 (0.31)
Total from investment operations 0.83 1.30 (1.06) 1.90 (0.02)
Less distributions:
Dividends from net investment income (0.59) (0.54) (0.51) (0.50) (0.34)
Distributions from net realized gain on
investments sold (0.15) (0.32) -- -- --
Total distributions (0.74) (0.86) (0.51) (0.50) (0.34)
Net asset value, end of period $ 10.41 $ 10.85 $ 9.28 $ 10.68 $ 10.36
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(4)(%) 8.35 12.76 (9.99) 20.87 0.20(5)
Total adjusted investment return at net asset
value(4,6)(%) 8.10 12.58 (10.13) 20.72 0.14(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted)($) 26,595 65,437 77,365 84,673 83,253
Ratio of expenses to average net assets(%) 1.35 1.44 1.50 1.50 1.52(7,8)
Ratio of adjusted expenses to average net
assets(9)(%) 1.60 1.62 1.64 1.65 1.59(7)
Ratio of net investment income (loss) to average
net assets(%) 5.43 4.82 5.10 4.97 4.81(7)
Ratio of adjusted net investment income (loss) to
average net assets(9)(%) 5.18 4.64 4.96 4.82 4.72(7)
Portfolio turnover rate(%) 34 51 62 37(10) 30
Fee reduction per share($) 0.03(3) 0.02 0.01 0.01(3) 0.01(3)
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the fund.
(2) Effective August 31, 1996, the fiscal period changed from December 31 to August 31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration fee reductions by the
adviser during the periods shown.
(7) Annualized.
(8) For the period ended August 31, 1996, the Ratio of Expenses to Average Net Assets for the Fund
excludes the effect of expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be 0.75% for Class A and 1.50% for Class B.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover excludes merger activity.
</TABLE>
CALIFORNIA TAX-FREE INCOME FUND 5
<PAGE>
HIGH YIELD TAX-FREE FUND
<TABLE>
<S> <C> <C> <C>
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST TICKER SYMBOL CLASS A: JHTFX CLASS B: TSHTX
</TABLE>
- --------------------------------------------------------------------------------
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 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 rated A, BBB/Baa or BB/Ba and their unrated equivalents. Up to
5% of assets may be invested in bonds rated B, CCC/Caa or CC/Ca. 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
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 higher-risk investments, including various derivative
securities primarily 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 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 securities).
Investors should expect greater fluctuations in share price, yield and total
return compared to less aggressive tax-free income funds. These fluctuations,
whether positive or negative, may be sharp and unanticipated.
Issuers of BBB/Baa rated bonds and junk bonds are typically in weaker financial
health than issuers of high quality bonds, and their ability to pay interest and
principal is less certain. These issuers are more likely to encounter financial
difficulties and to be materially affected by these difficulties when they do
encounter them. Junk bond markets 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 24.
PORTFOLIO MANAGEMENT
[A graphic image of a generic person.] Frank A. Lucibella, CFA, 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
<TABLE>
[A graphic image of a percent symbol.] 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.
<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 0.26% 0.26%
Total fund operating expenses 1.09% 1.84%
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%.
<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 $119 $196
Assuming no redemption $ 19 $ 58 $100 $196
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.
</TABLE>
6 HIGH YIELD TAX-FREE FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
[A graphic image of a dollar sign.] The figures below have been audited by the
fund's independent auditors, Ernst & Young LLP.
VOLATILITY, AS INDICATED BY CLASS B
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) (Bar Graph)
(scale varies from fund to fund)
<CAPTION>
=============================================================================================
CLASS A - PERIOD ENDED: 10/94(1) 10/95(2) 8/96(3)
=============================================================================================
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.85 $ 8.82 $ 9.47
Net investment income 0.48(4) 0.57 0.49(4)
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.94) 0.70 (0.30)
Total from investment operations (0.46) 1.27 0.19
Less distributions:
Dividends from net investment income (0.48) (0.58) (0.50)
Distributions in excess of net investment income (0.09) (0.04) --
Total distributions (0.57) (0.62) (0.50)
Net asset value, end of period $ 8.82 $ 9.47 $ 9.16
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5)(%) 4.96(6) 14.85 1.96(6)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted)($) 15,401 14,225 23,663
Ratio of expenses to average net assets(%) 1.15(7) 1.06 1.10(7)
Ratio of net investment income (loss) to average net assets(%) 6.08(7) 6.36 6.39(7)
Portfolio turnover rate(%) 62 64 38
<CAPTION>
=========================================================================================================================
CLASS B - PERIOD ENDED: 4/87(8) 10/87(9) 10/88 10/89 10/90
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.00 $ 9.49 $ 8.62 $ 9.25 $ 9.29
Net investment income 0.53 0.37 0.62 0.55 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)
Total from investment operations 0.02 (0.50) 1.32 0.68 0.41
Less distributions:
Dividends from net investment income (0.53) (0.37) (0.66) (0.51) (0.55)
Distributions in excess of net investment
income -- -- -- -- --
Distributions from net realized gain on
investments sold -- -- (0.03) -- --
Distributions from capital paid-in -- -- -- (0.13) (0.08)
Total distributions (0.53) (0.37) (0.69) (0.64) (0.63)
Net asset value, end of period $ 9.49 $ 8.62 $ 9.25 $ 9.29 $ 9.07
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(5)(%) 0.12(6) (5.13)(6) 15.88 7.54 4.60
Total adjusted investment return at net
asset value(5,10)(%) (0.39)(6) (5.34)(6) -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted)($) 15,753 15,026 24,278 29,841 35,820
Ratio of expenses to average net assets(%) 0.56(6) 0.61(6) 2.05 2.32 2.20
Ratio of adjusted expenses to average net
assets(11)(%) 1.07(6) 0.82(6) -- -- --
Ratio of net investment income to
average net assets(%) 4.96(6) 4.05(6) 6.66 5.79 5.96
Ratio of adjusted net investment income
(loss) to average net assets(11)(%) 4.45(6) 3.84(6) -- -- --
Portfolio turnover rate(%) 153 42 82 29 41
Fee reduction per share($) 0.05 0.02 -- -- --
<CAPTION>
================================================================================================================================
CLASS B - PERIOD ENDED: 10/91 10/92 10/93 10/94 10/95(2) 8/96(3)
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.07 $ 9.31 $ 9.39 $ 9.98 $ 8.82 $ 9.47
Net investment income 0.54 0.55 0.53 0.48 0.51 0.44(4)
Net realized and unrealized gain (loss) on
investments sold and financial futures
contracts 0.34 0.17 0.72 (0.90) 0.69 (0.31)
Total from investment operations 0.88 0.72 1.25 (0.42) 1.20 0.13
Less distributions:
Dividends from net investment income (0.54) (0.55) (0.56) (0.48) (0.51) (0.44)
Distributions in excess of net investment
income -- -- -- (0.07) (0.04) --
Distributions from net realized gain on
investments sold -- (0.09) (0.10) (0.19) -- --
Distributions from capital paid-in (0.10) -- -- -- -- --
Total distributions (0.64) (0.64) (0.66) (0.74) (0.55) (0.44)
Net asset value, end of period $ 9.31 $ 9.39 $ 9.98 $ 8.82 $ 9.47 $ 9.16
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(5)(%) 10.07 7.89 13.69 (4.44) 13.99 1.36(6)
Total adjusted investment return at net
asset value(5,10)(%) -- -- -- -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted)($) 51,467 65,933 113,442 151,069 155,234 147,669
Ratio of expenses to average net assets(%) 2.36 2.17 2.06 1.85 1.79 1.81(7)
Ratio of adjusted expenses to average net
assets(11)(%) -- -- -- -- -- --
Ratio of net investment income to
average net assets(%) 5.61 5.78 5.23 5.36 5.61 5.65(7)
Ratio of adjusted net investment income
(loss) to average net assets(11)(%) -- -- -- -- -- --
Portfolio turnover rate(%) 83 40 100 62 64 38
Fee reduction per share($) -- -- -- -- -- --
(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) Effective August 31, 1996, the fiscal period end changed from October 31 to August 31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(6) Not annualized.
(7) Annualized.
(8) For the period August 25, 1986 to April 30, 1987.
(9) For the period May 1, 1987 to October 31, 1987.
(10)An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(11)Unreimbursed, without fee reduction.
</TABLE>
HIGH YIELD TAX-FREE FUND 7
<PAGE>
MASSACHUSETTS TAX-FREE INCOME FUND
<TABLE>
<S> <C> <C>
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND TICKER SYMBOL CLASS A: JHMAX CLASS B: N/A
</TABLE>
- -------------------------------------------------------------------------------
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
municipal securities exempt from these taxes.
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 Massachusetts municipal securities. Up to 33.3% of assets may be
invested in municipal securities rated BBB/Baa or BB/Ba and their unrated
equivalents. The balance of the fund's investments must be rated at least A or
be of equivalent quality. Bonds rated BB/Ba are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of net assets in
taxable 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 higher-risk 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 funds, the value of your investment 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 securities).
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 its investments.
These factors 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 24.
PORTFOLIO MANAGEMENT
[A graphic image of a generic person.] Dianne Sales-Singer, CFA, leader of the
fund's portfolio management team since April 1995, is a second vice president of
the adviser. Ms. Sales-Singer joined John Hancock Funds in 1989 and has been in
the investment business since 1984.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
<TABLE>
[A graphic image of a percent symbol.] 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.
<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) 0.07% 0.07%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.33% 0.33%
Total fund operating expenses (after limitation)(3) 0.70% 1.40%
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%.
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
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 and the effect of expense offsets, management fees would be
0.50% for each class and total fund operating expenses would be 1.18% for
Class A and 1.88% 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.
</TABLE>
8 MASSACHUSETTS TAX-FREE INCOME FUND
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
[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 Graph]
(scale varies from fund to fund)
<CAPTION>
===============================================================================================================================
CLASS A - PERIOD ENDED: 8/88(1) 8/89 8/90 8/91 8/92 8/93 8/94 8/95 8/96
===============================================================================================================================
<S> <C> <C> <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 $11.56 $11.76
Net investment income 0.65 0.70 0.69 0.73 0.71 0.67 0.63 0.65 0.65
Net realized and unrealized gain (loss)
on investments 0.63 0.31 (0.31) 0.53 0.60 0.82 (0.75) 0.20 (0.10)
Total from investment operations 1.28 1.01 0.38 1.26 1.31 1.49 (0.12) 0.85 0.55
Less distributions:
Dividends from net investment income (0.65) (0.70) (0.69) (0.73) (0.71) (0.67) (0.63) (0.65) (0.65)
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) (0.65) (0.65)
Net asset value, end of period $10.63 $10.94 $10.63 $11.15 $11.75 $12.43 $11.56 $11.76 $11.66
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(2) (%) 13.13(3) 9.67 3.49 12.10 12.11 13.29 (0.97) 7.66 4.78
Total adjusted investment return at net asset
value(2,4) (%) 10.38(3) 9.16 2.72 10.66 10.93 12.38 (1.50) 7.21 4.30
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 4,757 9,138 9,968 15,015 29,113 50,019 54,122 54,416 55,169
Ratio of expenses to average net assets (%) 1.00(3) 1.00 1.00 0.60 0.60 0.67 0.70 0.70 0.75(5)
Ratio of adjusted expenses to average net
assets(6) (%) 3.75(3) 1.51 1.77 2.04 1.78 1.58 1.23 1.15 1.18
Ratio of net investment income (loss) to
average net assets (%) 6.28(3) 6.35 6.31 6.64 6.18 5.61 5.28 5.67 5.53
Ratio of adjusted net investment income
(loss) to average net assets(6) (%) 3.53(3) 5.84 5.54 5.20 5.00 4.70 4.75 5.22 5.05
Portfolio turnover rate (%) 20 2 2 29 56 79 29 24 36
Fee reduction per share ($) 0.28 0.11 0.08 0.16 0.14 0.11 0.06 0.05 0.06
<CAPTION>
==================================================================================================================================
CLASS B - PERIOD ENDED: 8/96(1)
==================================================================================================================================
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period --
Net investment income --
Net realized and unrealized gain (loss) on investments --
Total from investment operations --
Less distributions:
Dividends from net investment income --
Distributions from net realized gain on investments sold --
Total distributions --
Net asset value, end of period --
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) --
Total adjusted investment return at net asset value(2,4) (%) --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) --
Ratio of expenses to average net assets (%) --
Ratio of adjusted expenses to average net assets(6) (%) --
Ratio of net investment income (loss) to average net assets (%) --
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) --
Portfolio turnover rate (%) --
Fee reduction per share ($) --
(1) Class A shares commenced operations on September 3, 1987. Class B shares
commenced operations on September 30, 1996.
(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) For the year ended August 31, 1996, the Ratio of Expenses to Average Net
Assets for the fund excludes the effect of expense offsets. If expense
offsets were included, the Ratio of Expenses to Average Net Assets would be
0.70%.
(6) Unreimbursed, without fee reduction.
</TABLE>
MASSACHUSETTS TAX-FREE INCOME FUND 9
<PAGE>
NEW YORK TAX-FREE INCOME FUND
<TABLE>
<S> <C> <C>
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND TICKER SYMBOL CLASS A: JHNYX CLASS B: N/A
</TABLE>
- -------------------------------------------------------------------------------
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 municipal securities exempt from these
taxes.
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 New York municipal securities. Up to 33.3% of assets may be invested
in municipal securities rated BBB/Baa or BB/Ba and their unrated equivalents.
The balance of the fund's investments must be rated at least A or be of
equivalent quality. Bonds rated BB/Ba are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of net assets in
taxable 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 higher-risk 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 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 securities).
Because the fund is not diversified and because it concentrates in securities of
New York issuers, certain factors may disproportionately affect the fund's
investments. These factors 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 24.
PORTFOLIO MANAGEMENT
[A graphic image of a generic person.] Frank A. Lucibella, CFA, leader of the
fund's portfolio management team since April 1995, is a second vice president of
the adviser. He joined John Hancock Funds in 1988 and has been in the investment
business since 1982.
INVESTOR EXPENSES
<TABLE>
[A graphic image of a percent symbol.] 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.
<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) 0.09% 0.09%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.31% 0.31%
Total fund operating expenses (after limitation)(3) 0.70% 1.40%
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%.
<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
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 and the effect of expense
offseet, management fees would be 0.50% for each class and total fund operating expenses would be 1.14% for
Class A and 1.84% 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.
</TABLE>
10 NEW YORK TAX-FREE INCOME FUND
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
[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 Graph]
(scale varies from fund to fund)
<CAPTION>
==============================================================================================================================
CLASS A - PERIOD ENDED: 8/88(1) 8/89 8/90 8/91 8/92 8/93 8/94 8/95 8/96
==============================================================================================================================
<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 0.61 0.68 0.67 0.72 0.72 0.68 0.64 0.65 0.66
Net realized and unrealized gain (loss)
on investments 0.48 0.55 (0.25) 0.55 0.63 0.87 (0.77) 0.15 (0.05)
Total from investment operations 1.09 1.23 0.42 1.27 1.35 1.55 (0.13) 0.80 0.61
Less distributions:
Dividends from net investment income (0.61) (0.68) (0.67) (0.72) (0.72) (0.68) (0.64) (0.65) (0.66)
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) (0.66)
Net asset value, end of period $10.48 $11.01 $10.74 $11.29 $11.90 $12.63 $11.73 $11.88 $11.83
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(2) (%) 11.40(3) 11.87 3.74 12.24 12.17 13.70 (1.05) 7.19 5.21
Total adjusted investment return at net
asset value(2,4) (%) 7.56(3) 11.22 3.05 11.02 11.09 12.83 (1.58) 6.74 4.77
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 4,306 8,795 13,357 20,878 33,806 52,444 55,690 55,753 56,229
Ratio of expenses to average net assets (%) 1.00(3) 1.00 1.00 0.60 0.60 0.67 0.70 0.70 0.73(5)
Ratio of adjusted expenses to average net
assets(6) (%) 4.84(3) 1.65 1.69 1.82 1.68 1.54 1.23 1.15 1.14
Ratio of net investment income (loss) to
average net assets (%) 6.11(3) 6.30 6.17 6.57 6.22 5.63 5.28 5.67 5.51
Ratio of adjusted net investment income
(loss) to average
net assets(6) (%) 2.27(3) 5.65 5.48 5.35 5.14 4.76 4.75 5.22 5.07
Portfolio turnover rate (%) 16 10 10 12 48 56 23 70 76
Fee reduction per share ($) 0.38 0.13 0.08 0.13 0.13 0.11 0.06 0.05 0.05
<CAPTION>
==================================================================================================================================
CLASS B - PERIOD ENDED: 8/96 (1)
==================================================================================================================================
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period --
Net investment income --
Net realized and unrealized gain (loss) on investments --
Total from investment operations --
Less distributions:
Dividends from net investment income --
Distributions from net realized gain on investments sold
Total distributions --
Net asset value, end of period --
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) --
Total adjusted investment return at net asset value(2,4) (%) --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) --
Ratio of expenses to average net assets (%) --
Ratio of adjusted expenses to average net assets(6) (%) --
Ratio of net investment income (loss) to average net assets (%) --
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) --
Portfolio turnover rate (%) --
Fee reduction per share ($) --
(1) Class A shares commenced operations on September 11, 1987. Class B shares
commenced operations on September 30, 1996.
(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) For the year ended August 31, 1996, the Ratio of Expenses to Average Net
Assets for the fund excludes the effect of expense offsets. If expense
offsets were included, the Ratio of Expenses to Average Net Assets would be
0.70%.
(6) Unreimbursed, without fee reduction.
</TABLE>
NEW YORK TAX-FREE INCOME FUND 11
<PAGE>
TAX-FREE BOND FUND
<TABLE>
<S> <C> <C>
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST TICKER SYMBOL CLASS A: TAMBX CLASS B: TSMBX
</TABLE>
- ------------------------------------------------------------------------------
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 interest 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 of any maturity. Less than 35% of assets may be invested in municipal
bonds rated BB/Ba or B (junk bonds) and their unrated equivalents. The fund may
not invest more than 25% of assets in private activity bonds of issuers in any
one industry. There is no limit on the fund's investments in issuers located in
any one state.
For liquidity and flexibility, the fund may place up to 20% of
assets in taxable 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 higher-risk 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 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 securities). 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 24.
PORTFOLIO MANAGEMENT
[A graphic image of a generic person.] Thomas C. Goggins has been the leader of
the fund's portfolio management team since joining John Hancock Funds in April
1995. A senior vice president of the adviser, Mr. Goggins has been in the
investment business since 1986.
INVESTOR EXPENSES
<TABLE>
[A graphic image of a percent symbol.] 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.
<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 0.41% 0.41%
12b-1 fee(3,4) 0.15% 0.90%
Other expenses 0.29% 0.29%
Total fund operating expenses(4) 0.85% 1.60%
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%.
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
<S> <C> <C> <C> <C>
Class A shares $53 $71 $ 90 $145
Class B shares
Assuming redemption
at end of period $66 $81 $107 $170
Assuming no redemption $16 $51 $ 87 $170
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) The adviser has agreed to limit total fund operating expenses to 0.85% for
Class A and 1.60% for Class B. Without this limitation, management fees
would be 0.54% for each class and total fund operating expenses would be
0.98% for Class A and 1.73% for Class B.
</TABLE>
12 TAX-FREE BOND FUND
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
FINANCIAL HIGHLIGHTS
[A graphic image of a dollar sign.] The figures below have been audited by the fund's independent auditors, Ernst & Young LLP.
VOLATILITY, AS INDICATED BY CLASS A YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
(scale varies from fund to fund) [Bar Graph]
===============================================================================================================================
CLASS A - PERIOD ENDED: 12/90(1) 12/91 12/92 12/93 12/94(2) 12/95 8/96(3)
===============================================================================================================================
<S> <C> <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 $10.67
Net investment income 0.71 0.69 0.67 0.62 0.58 0.57(4) 0.40
Net realized and unrealized gain (loss) on investments (0.13) 0.72 0.42 0.93 (1.58) 1.28 (0.41)
Total from investment operations 0.58 1.41 1.09 1.55 (1.00) 1.85 (0.01)
Less distributions:
Dividends from net investment income (0.68) (0.68) (0.68) (0.62) (0.57) (0.57) (0.39)
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) (0.39)
Net asset value, end of period $9.90 $10.24 $10.47 $10.96 $9.39 $10.67 $10.27
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) 6.04(6) 14.78 10.97 15.15 (9.28) 20.20 (0.01)(6)
Total adjusted investment return at net asset value
(5,7) (%) 5.19(6) 14.40 10.67 14.98 (9.39) 20.08 (0.09)(6)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 45,437 73,393 99,523 136,521 114,539 118,797 560,863
Ratio of expenses to average net assets (%) 0.40(6) 0.60 0.66 0.78 0.85 0.85 0.85(8)
Ratio of adjusted expenses to average net assets(9) (%) 1.25(6) 0.98 0.96 0.95 0.96 0.97 0.98(8)
Ratio of net investment income (loss) to average net
assets (%) 7.09(6) 6.86 6.46 5.57 5.72 5.67 5.75(8)
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 6.24(6) 6.48 6.16 5.40 5.61 5.55 5.62(8)
Portfolio turnover rate (%) 64 123 79 116 107 113 116(10)
Fee reduction per share ($) 0.08 0.04 0.03 0.02 0.01 0.01(4) 0.01(4)
<CAPTION>
=======================================================================================================================
CLASS B - PERIOD ENDED: 12/92 12/93 12/94(2) 12/95 8/96(3)
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.24 $10.47 $10.96 $9.38 $10.67
Net investment income 0.59(4) 0.54 0.50 0.50(4) 0.34
Net realized and unrealized gain (loss) on investments 0.42 0.93 (1.58) 1.28 (0.40)
Total from investment operations 1.01 1.47 (1.08) 1.78 (0.06)
Less distributions:
Dividends from net investment income (0.60) (0.54) (0.50) (0.49) (0.34)
Distributions from net realized gain on investments sold (0.18) (0.44) -- -- --
Total distributions (0.78) (0.98) (0.50) (0.49) (0.34)
Net asset value, end of period $10.47 $10.96 $9.38 $10.67 $10.27
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) 10.15 14.30 (10.05) 19.41 (0.51)(6)
Total adjusted investment return at net asset value(5,7) (%) 9.85 14.13 (10.16) 19.29 (0.59)(6)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 18,272 56,384 70,243 76,824 81,177
Ratio of expenses to average net assets (%) 1.43 1.53 1.60 1.60 1.60(8)
Ratio of adjusted expenses to average net assets(9) (%) 1.73 1.70 1.71 1.72 1.73(8)
Ratio of net investment income (loss) to average net assets (%) 5.57 4.66 4.97 4.90 4.91(8)
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 5.27 4.49 4.86 4.78 4.78(8)
Portfolio turnover rate (%) 79 116 107 113 116(10)
Fee reduction per share ($) 0.03(4) 0.02 0.01 0.01(4) 0.01(4)
(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) Effective August 31, 1996, the fiscal period changed from December 31 to August 31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(6) Not annualized.
(7) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10)Portfolio turnover excludes merger activity.
</TABLE>
TAX-FREE BOND FUND 13
<PAGE>
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 CLASS B
- --------------------------------------------------------------------------------
- - Front-end sales charges, as - No front-end sales charge; all your
described below. There are money goes to work for you right away.
several ways to reduce these
charges, also described below. - Higher annual expenses than Class A
shares.
- - Lower annual expenses than
Class B 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
<TABLE>
CLASS A Sales charges are as follows:
<CAPTION>
================================================================================
CLASS A SALES CHARGES
================================================================================
<S> <C> <C>
AS A % OF AS A % OF YOUR
YOUR INVESTMENT OFFERING PRICE INVESTMENT
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 3.00% 3.09%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See 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
================================================================================
<S> <C>
YOUR INVESTMENT CDSC ON SHARES BEING SOLD
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
================================================================================
<S> <C>
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
1st year 5.00%
2nd year 4.00%
3rd or 4th year 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.
14 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
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 Signature Services to add these options (see
the back cover of this prospectus).
GROUP INVESTMENT PROGRAM Allows established groups of four or more investors to
invest as a group. Each investor has an individual account, but for sales charge
purposes the group's 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 Signature Services to find
out how to qualify.
CDSC WAIVERS As long as Signature Services is notified at the time you sell, the
CDSC for either share class will generally be waived in the following cases:
- - to make payments through certain systematic withdrawal plans
- - to make certain distributions from a retirement plan
- - because of shareholder death or disability
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI (see the back
cover of this prospectus).
REINSTATEMENT PRIVILEGE If you sell shares of a John Hancock fund, you may
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 Signature Services.
WAIVERS FOR CERTAIN INVESTORS Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
- - 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 usually applies)
- - participants in certain retirement 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
your financial representative or Signature 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 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 Signature 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.
15 YOUR ACCOUNT
<PAGE>
<TABLE>
================================================================================
BUYING SHARES
================================================================================
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C>
BY CHECK
[A graphic image of a blank check.] - Make out a check for the
- - Make out a check for the investment amount, payable to
investment amount, payable to "John Hancock Signature
"John Hancock Signature Services, Inc."
Services, Inc."
- - Deliver the check and your - Fill out the detachable
completed application to your investment slip from an account
financial representative, or mail statement. If no slip is available,
them to Signature Services include a note specifying the fund
(address on next page). 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 Signature Services
(address on next page).
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 - Call Signature Services to request
or Signature Services to request an an exchange.
exchange.
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 Signature Services.
- - Obtain your account number by
calling your financial
representative or Signature
Services.
- - Instruct your bank to wire the - Instruct your bank to wire the
amount of your investment to: amount of your investment to:
First Signature Bank & Trust First Signature Bank & Trust
Account # 900000260 Account # 900000260
Routing # 211475000 Routing # 211475000
Specify the fund name, your Specify the fund name, your share
choice of share class, the new class, your account number and
account number and the name(s) in the name(s) in which the account
which the account is registered. is registered. Your bank may
Your bank may charge a fee to charge a fee to wire funds.
wire funds.
BY PHONE
[A graphic image of a telephone.]
- - See "By wire" and "By exchange." - 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 Signature Services to verify
that these features are in place
on your account.
- Tell the Signature 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.
</TABLE>
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
16 YOUR ACCOUNT
<PAGE>
<TABLE>
================================================================================
SELLING SHARES
================================================================================
<CAPTION>
DESIGNED FOR TO SELL SOME OR ALL OF YOUR SHARES
<S> <C>
BY LETTER
[A graphic image of the back of an
envelope.]
- - Accounts of any type. - Write a letter of instruction or
complete a stock power indicating
- - Sales of any amount. 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 Signature
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.
BY PHONE
[A graphic image of a telephone.]
- - Most accounts. - For automated service 24 hours a
day using your touch-tone phone,
- - Sales of up to $100,000. call the EASI-Line at 1-800-338-
8080.
- To place your order with a
representative at John Hancock
Funds, call Signature Services
between 8 A.M. and 4 P.M. Eastern
Time on most business days.
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 - Fill out the "Telephone
amount (accounts of any type). Redemption" section of your new
account application.
- - Requests by phone to sell up to
$100,000 (accounts with telephone - To verify that the telephone
redemption privileges). redemption privilege is in place
on an account, or to request the
forms to add it to an existing
account, call Signature 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.
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. - Obtain a current prospectus for
the fund into which you are
- - Sales of any amount. exchanging by calling your
financial representative or
Signature Services.
- Call Signature Services to
request an exchange.
</TABLE>
- --------------------------------------------------------------------------------
Address
John Hancock Signature Services, Inc.
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 17
<PAGE>
SELLING SHARES IN WRITING In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, 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.
<TABLE>
=========================================================[A graphic image of the
back of an envelope.]
<CAPTION>
SELLER REQUIREMENTS FOR WRITTEN REQUESTS
=========================================================
<S> <C>
Owners of individual, joint, sole - Letter of instruction.
proprietorship, UGMA/UTMA
(custodial accounts for minors) or - On the letter, the signatures and
general partner 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 - Letter of instruction signed by
co-tenants are deceased. 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 - Call 1-800-225-5291 for
and other sellers or account types not instructions.
listed above.
</TABLE>
18 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
VALUATION OF SHARES The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time) 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 through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Signature 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, Signature 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, Signature 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 Signature Services. Certificated
shares can only be sold by returning the certificates to Signature Services,
along with a letter of instruction or a stock power and a signature guarantee.
SALES IN ADVANCE OF PURCHASE PAYMENTS When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten 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 19
<PAGE>
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 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, Signature Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
- - 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 Signature Services,
Inc." Deliver your check and application to your financial representative or
Signature Services.
SYSTEMATIC WITHDRAWAL PLAN This plan may be used for routine bill 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 Signature Services.
RETIREMENT PLANS John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SEPs, 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 Signature Services at 1-800-225-5291.
20 YOUR ACCOUNT
<PAGE>
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 that 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 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
hierarchy 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 Financial Service Firms and Distribution and
Shareholder Services.
Principal Distributor and Transfer Agent are shown on the third tier.
Investment Advisor and Custodian are shown on the fourth 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.
The fifth tier includes the Trustees.]
YOUR ACCOUNT 21
<PAGE>
ACCOUNTING COMPENSATION The funds compensate the adviser for performing tax and
financial management services. Annual compensation is not expected to 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 Massachusetts and New York Tax-Free
Income Funds, each fund's investment goal is fundamental and may only be changed
with shareholder approval. Each fund's policy of investing at least 80% in
municipal securities is fundamental and may not be changed without shareholder
approval. The High Yield Tax-Free Fund's 80% credit policy is also fundamental.
DIVERSIFICATION Except for the Massachusetts and New York Tax-Free Income Funds,
all of the tax-free income funds are diversified.
- --------------------------------------------------------------------------------
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 funds' 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. 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>
- --------------------------------------------------------------------------------
CLASS B UNREIMBURSED DISTRIBUTION EXPENSES(1)
- --------------------------------------------------------------------------------
<CAPTION>
UNREIMBURSED AS A % OF
FUND EXPENSES NET ASSETS
<S> <C> <C>
California Tax-Free Income $3,990,001 4.84%
High Yield Tax-Free $6,664,822 4.32%
Massachusetts Tax-Free Income N/A N/A
New York Tax-Free Income N/A N/A
Tax-Free Bond $3,773,863 4.84%
</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.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock Funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
22 FUND DETAILS
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A INVESTMENTS
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
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 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50%
Next $1 and more above that -- 0.00% 0.25% 0.25%
WAIVER INVESTMENTS(2) -- 0.00% 0.25% 0.25%
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS B INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
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 pay commissions
when there is no initial sales charge.
FUND DETAILS 23
<PAGE>
- --------------------------------------------------------------------------------
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 that 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 -- days,
months or years.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
CORRELATION RISK The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks.
CREDIT RISK The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. Common to all debt securities.
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 that the fund also
holds, any loss generated by the derivative should be substantially offset by
gains on the hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains.
- - 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.
NATURAL EVENT RISK The risk of losses attributable to natural disasters, such as
earthquakes and similar events.
OPPORTUNITY RISK The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
POLITICAL RISK The risk of losses attributable to government or political
actions of any sort.
VALUATION RISK The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
24 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
HIGHER-RISK SECURITIES AND PRACTICES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
This table shows each fund's investment CALIFORNIA TAX- HIGH YIELD MASSACHUSETTS TAX- NEW YORK TAX- TAX-FREE
limitations as a percentage of portfolio FREE INCOME TAX-FREE FREE INCOME FREE INCOME BOND
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
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICES CALIFORNIA TAX- HIGH YIELD MASSACHUSETTS TAX- NEW YORK TAX- TAX-FREE
FREE INCOME TAX-FREE FREE INCOME FREE INCOME BOND
BORROWING; REVERSE REPURCHASE AGREEMENTS --------------- ---------- ------------------ ------------- --------
The borrowing of money from banks or
through reverse repurchase agreements.
Leverage, credit risks. 15 33.3(1) 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
NON-INVESTMENT-GRADE DEBT SECURITIES
Debt securities rated below BBB/Baa are
considered junk bonds. Credit, market,
interest rate, liquidity, valuation,
information risks. 20 85 33.3 33.3 35
PRIVATE ACTIVITY BONDS Municipal debt
obligations that are backed primarily by
revenues from non-governmental entities.
Credit, information, interest rate,
political, natural event risks. + + + + +
RESTRICTED AND ILLIQUID SECURITIES
Securities not traded on the open
market. May include illiquid Rule 144A
securities. Liquidity, valuation, market
risks. 10 10 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. * * * * *
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. + + + + +
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.
FUND DETAILS 25
<PAGE>
ANALYSIS OF FUNDS WITH 5% OR MORE IN JUNK BONDS(1)
<TABLE>
<CAPTION>
QUALITY RATING
(S&P/MOODY'S)(2) HIGH YIELD TAX-FREE FUND TAX-FREE BOND FUND
- ---------------- ------------------------ ------------------
<S> <C> <C>
INVESTMENT-GRADE BONDS
AAA/Aaa 5.4% 24.5%
AA/Aa 0.0% 6.1%
A/A 3.6% 18.2%
BBB/Baa 32.8% 38.2%
- ----------------------------------------------------------------------------
JUNK BONDS
BB/Ba 51.5% 11.9%
B/B 6.7% 1.1%
CCC/Caa 0.0% 0.0%
CC/Ca 0.0% 0.0%
C/C 0.0% 0.0%
% OF PORTFOLIO IN BONDS 100.0 100.0
</TABLE>
[ ] Rated by Standard & Poor's or Moody's [ ] Rated by the adviser
(1) Data as of fund's last fiscal year end.
(2) 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.
26 FUND DETAILS
<PAGE>
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 (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 Signature Services, Inc.
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 LOGO]
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts 02199-7603
<PAGE>
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
CLASS A AND CLASS B SHARES
Statement Of Additional Information
January 1, 1997
This Statement of Additional Information provides information about
John Hancock California Tax-Free Income Fund (the "Fund"), a diversified
open-end investment company, in addition to the information that is contained in
the combined Tax-Free Income Funds' Prospectus (the "Prospectus").
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus, a copy of which can be obtained free
of charge by writing or telephoning:
John Hancock Signature Services, Inc.
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Organization of the Fund..................................................2
Investment Objective and Policies.........................................2
Investment Restrictions..................................................22
Those Responsible for Management.........................................24
Investment Advisory and other Services...................................34
Distribution Contracts...................................................36
Initial Sales Charge on Class A Shares...................................38
Deferred Sales Charge on Class B Shares..................................40
Net Asset Value..........................................................43
Special Redemptions......................................................44
Additional Services and Programs.........................................44
Description of the Fund's Shares.........................................45
Tax Status...............................................................47
Calculation of Performance...............................................53
Brokerage Allocation.....................................................55
Transfer Agent Services..................................................57
Custody of Portfolio.....................................................57
Independent Auditors.....................................................57
Appendix A...............................................................A-1
Financial Statements.....................................................F-1
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"), the Fund's adviser
effective December 22, 1994, the Fund was known as Transamerica California
Tax-Free Income Fund. The Adviser is 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.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. The Fund's investment objective is to provide as
high a level of current income exempt from both federal income taxes and
California personal income taxes as is consistent with preservation of capital.
This objective may not be changed without a vote of shareholders.
As a fundamental investment policy, the Fund normally invests
substantially all of its assets (at least 80%) 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 at the time of purchase:
(1) Bonds must be rated at least BB/Ba by a nationally recognized
statistical rating organization or, if unrated, be of
equivalent quality. Not more than 20% of the fund's total
assets will be invested in bonds rated BB or Ba and no more
than 25% of its total assets to be invested in unrated debt
obligations.
(2) Other types of California Tax Exempt Securities, including
variable and floating rate obligations 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
2
<PAGE>
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 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.
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) for liquidity and flexibility, the fund may place up to 20%
of total assets in taxable and tax-free investment grade short-term securities.
For defensive purposes, it may invest more assets in these securities. The
income from some 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 these investments will be subject to California
and/or federal income taxes. At the end of each quarter of its taxable year,
these investments can 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.
Description of Tax-Exempt Securities. 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.
3
<PAGE>
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.
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
4
<PAGE>
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 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 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
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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 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. In the early 1990's, California experienced a prolonged
recession coupled with deteriorating fiscal and budget conditions. The state
also contended with natural disasters including fires, a prolonged drought and a
major earthquake in the Los Angeles area (January 1994), rapidly growing
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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
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 (34%)
and bank and corporation taxes (13%). 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 not carried a positive balance since 1991; in FY 96-97,
the Legislature has appropriated $305 million to the Fund the SFEU.
Orange County, California emerged from under court supervision in June
1996, 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 1997
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
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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
to the General Fund was adopted by the County and approved by the State
Legislature in the fall of 1995. The final form of the Recovery plan was
approved in June 1996, and 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. Some repayment is contingent upon the
outcome of litigation filed by the County against brokerage firms and
professional advisers. The remainder was raised from bond financing. The final
bond financing of the Recovery Plan was completed in June, allowing the County
to emerge from bankruptcy on June 12, 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
FY 1995-96 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
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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 FY
1995-96 Budget projections hinge on the continuation of the economic recovery
into 1996 and the maintenance of fiscal discipline by the state.
The FY 1996-97 budget was signed on July 15, 1996, and calls for
General Fund expenditures of $47.25 billion against expected revenues of $47.64
billion, a general increase of 4% over FY 1995-96. Specific features of the
proposal include additional investments in infrastructure, educational
technology and programs, reductions in welfare expenditures and renter tax
credits. Following enactment of the 1996-97 Budget, a federal welfare reform
act, the "Personal Responsibility and Work Opportunity Act" was signed into law.
The Law includes lifetime limits on certain welfare assistance, denial of
benefits to illegal immigrants, a reduction in benefits to certain legal
noncitizens and changes in the Food Stamp program, including lower benefits and
a work requirement. The Law requires states to implement the program not later
than 7/1/97, and provides CA approximately $3.7 billion in block grant funds for
FY 96-97. CA plans to implement the Law effective 1/1/97, however, since the
federal law did not include all the changes anticipated by CA when the state
budget was signed into effect, the State anticipates that it will realize only
$360 million of the $600 million in welfare reductions originally anticipated.
An overall assessment of the effect of these changes on the State's General Fund
will not be known for some time, and will depend on how the State implements the
Law.
Rating Agencies. The ongoing structural imbalances, and sluggish
recovery of the California economy have placed the State under ongoing scrutiny
from the municipal credit rating agencies. However, recent actions by the rating
agencies have been more positive. In July, 1996 S&P upgraded the States general
obligation ratings to an A+ from an A.
Constitutional Considerations. Changes in California laws during the
last two decades have limited the ability of California State and municipal
issuers to obtain sufficient revenue to pay their bond obligations.
In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13. Proposition 13 limits ad valorem
(according to value) taxes on real property and restricts the ability of taxing
entities to increase real property taxes and assessments, and limits the ability
of local governments to raise other taxes.
Article XIII B of the California Constitution (the "Appropriation
Limit") imposes a limit on annual appropriations. Originally adopted in 1979,
Article XIII B was modified by Proposition 98 in 1988 and Proposition 111 in
1990. The appropriations subject to the Article consist of tax proceeds which
include tax revenues and certain other funds. Excluded from the Appropriation
Limits are prior (pre 1979) debt service and subsequent debt incurred as the
result of voter authorizations, court mandates, qualified capital outlay
projects and certain increases in gasoline taxes and motor vehicle weight fees.
Certain civil disturbance emergencies declared by the Governor and
appropriations approved by a two-thirds vote of the legislature are excluded
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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.
During the recent recession, original Prop. 98 appropriations turned
out to be higher than the minimum percentage provided in the law. The
Legislature responded by designated the "extra" payments as a "loan" from future
years. In July, 1996, a lawsuit that challenged the validity of these loans was
settled. It requires that the State and schools share in the repayment of these
loans with repayments spread over an eight year period to mitigate any adverse
fiscal impact.
Certain debt obligations held by the Fund may be payable solely from
lease payments on real property leased to the State, counties, cities or various
public entities structured in such a way as to not constitute a debt to the
leasing entity. To ensure that a debt is not technically created, California law
requires that the lessor can proportionally reduce its lease payments equal to
its loss of beneficial use and occupancy. Moreover, the lessor does not agree to
pay lease payments beyond the current period; it only agrees to include lease
payments in its annual budget every year. In the event of a default, the only
remedy available against the lessor is that of reletting the property or suing
annually for the rents due; no acceleration of lease payments is permitted.
The Fund also holds debt obligations payable solely from the revenues
of health care institutions. Certain provisions under California state law may
adversely affect these revenues and, consequently, payment of those debt
obligations.
The Federally sponsored Medicaid program for health care services to
eligible welfare recipients is known as the Medi-Cal program. In the past, the
Medi-Cal program has provided a cost-based system of reimbursement for impatient
care furnished to Medi-Cal beneficiaries by any eligible hospital. The State now
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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 or foreclosing the mortgage and requesting the State
Treasurer to issue debentures payable from a reserve fund established under the
insurance fund or payable from appropriated state funds.
Security for certain debt obligations held by the Fund may be in form
of a mortgage or deed of trust on real property. California has statutory
provisions which limit the remedies of a creditor secured by a mortgage or deed
of trust. Principally, the provisions establish conditions governing the limits
of a creditor's right to a deficiency judgment. In the case of a default, the
creditor's rights under the mortgage or deed of trust are subject to constraints
imposed by California real property law upon transfers of title to real property
by private power of sale. These laws require that the loan must have been in
arrears for at least seven months before foreclosure proceedings can begin.
Under California's anti-deficiency legislation, there is no personal recourse
against a mortgagor of single-family residence regardless of whether the
creditor chooses judicial or non-judicial foreclosure. These disruptions could
disrupt the stream of revenues available to the issuer for paying debt service.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment changes on such
mortgage loans may be imposed only with respect to voluntary payments made
during the first five years of the mortgage loan, and cannot in any event exceed
six months, advance interest on the amount prepaid in excess of 20% of the
original principal amount of the mortgage loan. This limitation could affect the
flow of revenues available to the issuer for debt service on these outstanding
debt obligations.
Substantially all of California is located within an active geologic
region subject to major seismic activity. Any California municipal obligation in
the Fund could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (1) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (2) an issuer to perform on its contract
of insurance in the event of widespread losses; or (3) the Federal or State
government to appropriate sufficient funds within their respective budget
limitations.
The January 1994 major earthquake in greater Los Angeles (Northridge)
was estimated to have resulted in up to $20 billion in property damage.
Significant damage was incurred by public and private facilities in four
counties. Los Angeles, Ventura, Orange and San Bernadino Counties were declared
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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.
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 the transaction. The failure of the issuer or seller to consummate
the transaction may result in the Fund losing the opportunity to obtain a price
and yield considered to be advantageous. The purchase of securities on a
when-issued and forward commitment basis also involves a risk of loss if the
value of the security to be purchased declines prior to the settlement date. 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 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 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. In a repurchase
agreement the Fund would buy a security for a relatively short period (generally
not more than 7 days) subject to the obligation to sell it back to the issuer at
a fixed time and price plus accrued interest. The Fund will enter into
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repurchase agreements only with member banks of the Federal Reserve System and
with "primary dealers" in U.S. Government securities. The Adviser will
continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements.
The Fund has established a procedure providing that the securities
serving as collateral for each repurchase agreement must be delivered to the
Fund's custodian either physically or in book-entry form and that the collateral
must be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income, decline in
value of the underlying securities or lack of access to income during this
period, as well as the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements which involve the sale of U.S. Government securities held
in its portfolio to a bank with an agreement that the Fund will buy back the
securities at a fixed future date at a fixed price plus an agreed amount of
"interest" which may be reflected in the repurchase price. Reverse repurchase
agreements are considered to be borrowings by the Fund. Reverse repurchase
agreements involve the risk that the market value of securities purchased by the
Fund with proceeds of the transaction may decline below the repurchase price of
the securities sold by the Fund which it is obligated to repurchase. The Fund
will also continue to be subject to the risk of a decline in the market value of
the securities sold under the agreements because it will reacquire those
securities upon effecting their repurchase. The Fund will not enter into reverse
repurchase agreements and other borrowings exceeding in the aggregate 15% 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. 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 lease
equal to the repurchase prices of these securities (plus accrued interest
thereon) under such agreements. In addition, the Fund will not purchase
additional securities while all borrowings exceed 5% of the value of its total
assets. The Fund will enter into reverse repurchase agreements only with
federally insured banks or savings and loan associations which are approved in
advance as being creditworthy by the Trustees. Under procedures established by
the Trustees, the Adviser will monitor the creditworthiness of the banks
involved.
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 and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
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Options on Securities and Securities Indices. The Fund may purchase and
write (sell) call and put options on debt securities in which it may invest or
on any securities index based on debt securities in which it may invest. These
options may be listed on national domestic securities exchanges or foreign
securities exchanges or traded in the over-the-counter market. The Fund may
write covered put and call options and purchase put and call options as a
substitute for the purchase or sale of securities or to protect against declines
in the value of portfolio securities and against increases in the cost of
securities to be acquired.
Writing Covered Options. A call option on securities written by the
Fund obligates the Fund to sell specified securities to the holder of the option
at a specified price if the option is exercised at any time before the
expiration date. A put option on securities written by the Fund obligates the
Fund to purchase specified securities from the option holder at a specified
price if the option is exercised at any time before the expiration date. Options
on securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
All call and put options written by the Fund are covered. A written
call option or put option may be covered by (i) maintaining cash or liquid
securities in a segregated account maintained by the Fund's custodian with a
value at least equal to the Fund's obligation under the option, (ii) entering
into an offsetting forward commitment and/or (iii) purchasing an offsetting
option or any other option which, by virtue of its exercise price or otherwise,
reduces the Fund's net exposure on its written option position. A written call
option on securities is typically covered by maintaining the securities that are
subject to the option in a segregated account. The Fund may cover call options
on a securities index by owning securities whose price changes are expected to
be similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written.
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the
premium paid, to purchase specified securities at a specified price during the
option period. The Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities exceeded
the sum of the exercise price, the premium paid and transaction costs; otherwise
15
<PAGE>
the Fund would realize either no gain or a loss on the purchase of the call
option.
The purchase of a put option would entitle the Fund, in exchange for
the premium paid, to sell specified securities at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities. The
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying securities or currency decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise the Fund
would realize either no gain or a loss on the purchase of the put option. Gains
and losses on the purchase of put options may be offset by countervailing
changes in the value of the Fund's portfolio securities. Under certain
circumstances, the Fund may not be treated as the tax owner of a security if the
Fund has purchase a put option on the same security. If this occurred, the
interest on the security would be taxable.
The Fund's options transactions will be subject to limitations
established by each of the exchanges, boards of trade or other trading
facilities on which such options are traded. These limitations govern the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which the
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Adviser. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that
a liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If the Fund is unable to
effect a closing purchase transaction with respect to covered options it has
written, the Fund will not be able to sell the underlying securities or dispose
of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
16
<PAGE>
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more
limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. The Adviser will determine the liquidity of each over-the-counter
option in accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To hedge against
changes in interest rates or securities prices, the Fund may purchase and sell
futures contracts on debt securities and debt securities indices, and purchase
and write call and put options on these futures contracts. The Fund may also
enter into closing purchase and sale transactions with respect to any of these
contracts and options. All futures contracts entered into by the Fund are traded
on U.S. exchanges or boards of trade that are licensed, regulated or approved by
the Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures contracts on securities will usually
be liquidated in this manner, the Fund may instead make, or take, delivery of
the underlying securities whenever it appears economically advantageous to do
so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire. When
interest rates are rising or securities prices are falling, the Fund can seek to
offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When interest rates are falling or securities prices
are rising, the Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
The Fund may, for example, take a "short" position in the futures
market by selling futures contracts in an attempt to hedge against an
anticipated rise in interest rates or a decline in market prices that would
17
<PAGE>
adversely affect the value of the Fund's portfolio securities. Such futures
contracts may include contracts for the future delivery of securities held by
the Fund or securities with characteristics similar to those of the Fund's
portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for the Fund's portfolio securities and futures
contracts based on other debt securities or indices, the Fund may also enter
into such futures contracts as part of its hedging strategy. Although under some
circumstances prices of securities in the Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Adviser will attempt to
estimate the extent of this volatility difference based on historical patterns
and compensate for any differential by having the Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting the Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the
value of portfolio securities will be substantially offset by appreciation in
the value of the futures position. On the other hand, any unanticipated
appreciation in the value of the Fund's portfolio securities would be
substantially offset by a decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing
futures contracts. This would be done, for example, when the Fund anticipates
the subsequent purchase of particular securities when it has the necessary cash,
but expects the prices then available in the applicable market to be less
favorable than prices that are currently available. The Fund may also purchase
futures contracts as a substitute for transactions in securities to alter the
investment characteristics of portfolio securities or to gain or increase its
exposure to a particular securities market.
Options on Futures Contracts. The Fund may purchase and write options
on futures for the same purposes as its transactions in futures contracts. The
purchase of put and call options on futures contracts will give the Fund the
right (but not the obligation) for a specified price to sell or to purchase,
respectively, the underlying futures contract at any time during the option
period. As the purchaser of an option on a futures contract, the Fund obtains
the benefit of the futures position if prices move in a favorable direction but
limits its risk of loss in the event of an unfavorable price movement to the
loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Fund's assets. By
writing a call option, the Fund becomes obligated, in exchange for the premium
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that the Fund intends to
purchase. However, the Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. The loss incurred by the Fund in writing options
on futures is potentially unlimited and may exceed the amount of the premium
received.
18
<PAGE>
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related
options transactions solely for bona fide hedging purposes as permitted by the
CFTC. To the extent that the Fund is using futures and related options for
hedging purposes, futures contracts will be sold to protect against a decline in
the price of securities that the Fund owns or futures contracts will be
purchased to protect the Fund against an increase in the price of securities it
intends to purchase. The Fund will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. As evidence of its
hedging intent, the Fund expects that on 75% or more of the occasions on which
it takes a long futures or option position (involving the purchase of futures
contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities in the cash market at the
time when the futures or option position is closed out. However, in particular
cases, when it is economically advantageous for the Fund to do so, a long
futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
The Fund will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for
maintaining its qualifications as a regulated investment company for federal
income tax purposes.
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts and
options obligating the Fund to purchase securities, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
securities in an amount equal to the underlying value of such contracts and
options.
While transactions in futures contracts and options on futures may
reduce certain risks, these transactions themselves entail certain other risks.
For example, unanticipated changes in interest rates, securities prices may
result in a poorer overall performance for the Fund than if it had not entered
into any futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities and securities indices. In the event of an imperfect
correlation between a futures position and a portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
19
<PAGE>
Some futures contracts or options on futures may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit trading in a futures contract or related
option, which may make the instrument temporarily illiquid and difficult to
price. Commodity exchanges may also establish daily limits on the amount that
the price of a futures contract or related option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses
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 commitments
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.
Restricted Securities. The Fund may purchase securities that are not
registered ("restricted securities") under the Securities Act of 1933 ("1933
Act"), including commercial paper issued in reliance on Section 4(2) of the 1933
Act and securities offered and sold to "qualified institutional buyers" under
Rule 144A under the 1933 Act. However, the Fund will not invest more than 10% of
its net assets in illiquid investments, which include repurchase agreements
maturing in more than seven days, securities that are not readily marketable and
restricted securities. However, if the Trustees determines, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, then such securities may be purchased
without regard to the 10% limit. The Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
The Fund may acquire other restricted securities including securities
for which market quotations are not readily available. These securities may be
sold only in privately negotiated transactions or in public offerings with
respect to which a registration statement is in effect under the 1933 Act. Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
20
<PAGE>
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted securities will be priced at
fair market value as determined in good faith by the Fund's Trustees.
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. A high
rate of portfolio turnover (100% or greater) involves correspondingly greater
brokerage expenses and may make it more difficult for the Fund to qualify as a
regulated investment company for federal income tax purposes. The Fund's
portfolio turnover rate is set forth in the table under the caption "Financial
Highlights" in the Prospectus.
Swaps, Caps, Floor and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps, and
other types of swap agreements such as caps, collars and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate exceeds
an agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
the Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
21
<PAGE>
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions upon
its investments set forth below which may not be changed without approval by the
holders of a majority of the outstanding shares of the Fund. A majority for this
purpose means: (a) more than 50% of the outstanding shares of the Fund or (b)
67% or more of the shares represented at a meeting where more than 50% of the
outstanding shares of the Fund are represented, whichever is less. Under these
restrictions, the Fund may not:
1. Borrow money except from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption
requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at
the time the borrowing was made. While borrowings exceed 5% of
the value of the Fund's total assets, the Fund will not
purchase any additional securities. Interest paid on
borrowings will reduce the Fund's net investment income.
2. Pledge, hypothecate, mortgage or otherwise encumber its
assets, except in an amount up to 10% of the value of its
total assets but only to secure borrowings for temporary or
emergency purposes or as may be necessary in connection with
maintaining collateral in connection with writing put and call
options or making initial margin deposits in connection with
the purchase or sale of financial futures, index futures
contracts and related options.
3. With respect to 75% of its total assets, purchase securities
(other than obligations issued or guaranteed by the United
States government, its agencies or instrumentalities and
shares of other investment companies) of any issuer if the
purchase would cause immediately thereafter more than 5% of
the value of the Fund's total assets 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.
22
<PAGE>
6. Purchase or retain the securities of any issuer, if those
officers and Trustees of the Fund or the Adviser who own
beneficially more than 1/2 of 1% of the securities of such
issuer, together own more than 5% of the securities of such
issuer.
7. Write, purchase or sell puts, calls or combinations thereof,
except put and call options on debt securities, futures
contracts based on debt securities, indices of debt securities
and futures contracts based on indices of debt securities,
sell securities on margin or make short sales of securities or
maintain a short position, unless at all times when a short
position is open it owns an equal amount of such securities or
securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and
unless not more than 10% of the Fund's net assets (taken at
current value) is held as collateral for such sales at any one
time.
8. Underwrite the securities of other issuers, except insofar as
the Fund may be deemed an underwriter under the Securities Act
of 1933 in disposing of a portfolio security.
9. Invest more than 25% of its assets in the securities of
"issuers" in any single industry; provided that there shall be
no limitation on the purchase of obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities or by any state or political subdivision
thereof. For purposes of this limitation when the assets and
revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the
government creating the issuing entity and a security is
backed only by the assets and revenues of the entity, the
entity would be deemed to be the sole issuer of the security.
Similarly, in the case of an industrial development or
pollution control bond, if that bond is backed only by the
assets and revenues of the nongovernmental user, then such
nongovernmental user would be deemed to be the sole issuer.
If, however, in either case, the creating government or some
other entity guarantees a security, such a guarantee would be
considered a separate security and would be treated as an
issue of such government or other entity unless all securities
issued or guaranteed by the government or other entity owned
by the Fund 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
23
<PAGE>
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.
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, 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/or Trustees of
the Fund are also officers and/or directors of the Adviser or officers and
Trustees of the Fund's principal distributor, John Hancock Funds, Inc. ("John
Hancock Funds").
24
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 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 Signature Services, Inc.
("Signature Services"), First
Signature Bank and Trust Company and
Sovereign Asset Management
Corporation ("SAMCorp."); Director,
John Hancock Freedom Securities
Corporation, John Hancock Insurance
Agency, Inc. ("Insurance Agency,
Inc."), 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).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
25
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the 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) 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 of 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.
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
26
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
Anne C. Hodsdon * President and Director (1, 2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Director,
Boston, MA 02199 The Berkeley Group, John Hancock
April 1953 Funds, Signature Services (since
October 1996); Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
27
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
28
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, Signature Services, John
August 1937 Hancock Distributors, Inc.,
Insurance Agency, Inc., John Hancock
Subsidiaries, Inc., SAMCorp. and NM
Capital; Trustee, The Berkeley
Group; Director, JH Networking
Insurance Agency, Inc.; Director,
John Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993),
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
29
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); 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 Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, Signature
Services, SAMCorp., Insurance
Agency, Inc., Southeastern Thrift &
Bank Fund and NM Capital; Senior
Vice President, The Berkeley Group;
President, the Adviser (until
December 1994);
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
30
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds and Signature Services.
February 1935
Susan S. Newton Vice President and Secretary Vice President and Assistant
101 Huntington Avenue Secretary, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds,
March 1950 Signature Services; Secretary,
SAMCorp; Vice President, The
Berkeley Group, John Hancock
Distributors, Inc. (until 1994).
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Counsel, John Hancock Mutual
Life Insurance Company.
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
31
<PAGE>
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
trustees of one or more of the other funds for which the Adviser serves as
investment adviser.
As of November 29, 1996, the officers and Trustees of the Fund as a
group beneficially owned less than 1% of these outstanding shares. As of
November 29, 1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deerlake Dr. East,
Jacksonville, FL held 1,748,920 shares representing 6.19% of the Fund's
outstanding Class A Shares and 815,918 shares representing 10.08% 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.
Between December 22, 1994 and December 22, 1996, the Trustees
established an Advisory Board to facilitate a smooth transition of management
between Transamerica Fund Management Company ("TFMC"), the prior investment
adviser, and the Adviser. The members of the Advisory Board were distinct from
the Trustees, did not serve the Fund in any other capacity and were persons who
had no power to determine what securities were purchased or sold and behalf of
the Fund.
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 Fund are interested persons of the Adviser or affiliated
companies, are compensated by the Adviser/or affiliated companies and received
no compensation from the Fund for their services.
32
<PAGE>
Total Compensation
from all Funds in John
Aggregate Compensation Hancock Funds Complex
Trustees from the Fund(1) to Trustees(2)
- -------- ---------------- --------------
James F. Carlin $ 3,826 $ 74,250
William H. Cunningham + 4,050 74,250
Charles F. Fretz 3,790 74,500
Harold R. Hiser, Jr.+ 3,790 70,250
Charles L. Ladner 3,790 74,500
Leo E. Linbeck, Jr. 5,060 74,250
Patricia P. McCarter + 3,790 74,250
Steven R. Pruchansky + 3,869 77,500
Norman H. Smith + 3,869 77,500
John P. Toolan + 3,776 74,250
------- --------
Total: $39,610 $745,500
(1) Compensation for the fiscal year ended August 31, 1996.
(2) The total compensation paid by the John Hancock Funds Complex to the
Independent Trustees is as of the calendar years ended December 31,
1996. As of such date there were 68 funds in the John Hancock Funds
Complex, of which each of these Independent Trustees serve 32.
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 trustees of one or more of the other funds for which the Adviser serves
as investment adviser.
As of November 30, 1996, the value of the aggregate accrued deferred
compensation from all funds in the John Hancock Funds Complex for Mr. Cunningham
was $131,671, for Mr. Hiser was $90,742, for Ms. McCarter was $69,177, for Mr.
Smith was $32,582 and for Mr. Toolan was $165,963 under the John Hancock Group
of Funds Deferred Compensation Plan for Independent Trustees.
33
<PAGE>
Total Compensation from
Certain Funds in John
Aggregate Compensation Hancock Fund Complex to
Advisory Board from the Fund* Advisory Board*
- -------------- -------------- ---------------
R. Trent Campbell $ 6,228 $47,000
Mrs. Lloyd Bentsen 6,244 47,000
Thomas R. Powers 6,213 47,000
Thomas B. McDade 6,118 47,000
------- --------
Total: $24,803 $188,000
*As of December 31, 1996.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603 was organized in 1968 and presently 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 an affiliate of the Life Company, one of the most recognized and
respected financial institutions in the nation. With total assets under
management of $80 billion, the Life Company is one of the 10 largest life
insurance companies in the United States, and carries a high rating from
Standard & Poor's and A.M. Best's. Founded in 1862, the Life Company has been
serving clients for over 130 years.
The Trust, on behalf of 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 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. The Adviser is
responsible for the management of the Fund's portfolio assets.
The Fund bears all costs of its organization and operation, including
expenses of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund; the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association membership; insurance premiums; and any
34
<PAGE>
extraordinary expenses. For two years, the Fund also paid the fees of the
members of the Fund's Advisory Board (described above).
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.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or its affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser or for other funds or clients for which the Adviser
renders investment advice arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
Pursuant to the 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 gross negligence on the part of the Adviser in the performance of its
duties or from its reckless disregard of its obligations and duties under the
contract.
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.
The investment management contract, and the distribution contract
discussed below, continue in effect from year to year if approved annually by
vote of a majority of the Trustees 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 the Trustees or the holders of a majority
of the Fund's outstanding voting securities. Each contract automatically
35
<PAGE>
terminates upon assignment and may be terminated without penalty on 60 days'
notice at the option of either party to the contract or by vote of a majority of
the outstanding voting securities of the Fund.
For the fiscal year ended December 31, 1994 advisory fees payable by
the Fund to TFMC, the Fund's former investment adviser, amounted to $1,919,101.
For the fiscal year ended December 31, 1995 and for the period ended August 31,
1996, advisory fees payable by the Fund to the Adviser amounted to $1,907,146
and $1,392,170, respectively. However, a portion of such fees were not imposed
pursuant to the voluntary fee and expense limitation arrangements then in
effect.
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 1995.
For the fiscal year ended December 31, 1994, the Fund paid to TFMC
(pursuant to the Services Agreement) $158,594, of which $109,540 was paid to
TFMC and $49,054, were paid for certain data processing and pricing information
services, respectively. No fee relating to the Services Agreement was paid or
incurred during the fiscal year 1995.
Accounting and Legal Services Agreement. The Trust, on behalf of the
Fund, is a party to an Accounting and Legal Services Agreement with the Adviser.
Pursuant to this agreement, the Adviser provides the Fund with certain tax,
accounting and legal services. For the fiscal year ended August 31, 1996, the
Fund paid Adviser $11,694 for services under this agreement.
DISTRIBUTION CONTRACT
The Fund has a Distribution Agreement contract with John Hancock Funds. Under
the agreement, John Hancock Funds is obligated to use its best efforts to sell
shares on behalf of each class of the Fund. Shares of the Fund are also sold by
selected broker-dealers (the "Selling Brokers") which have entered into selling
agency agreements with John Hancock Funds. John Hancock Funds accepts orders for
the purchase of the shares of the Fund which are continually offered at net
asset value next determined, plus an applicable sales charge, if any. In
connection with the sale of Class A or Class B shares, John Hancock Funds and
Selling Brokers receive compensation in the form of a sales charge imposed, in
the case of Class A shares, at the time of sale or, in the case of Class B
shares, on a deferred basis. The sales charges are discussed further in the
Prospectus.
36
<PAGE>
The Fund's Trustees adopted Distribution Plans with respect to Class A and Class
B shares (the "Plans"), pursuant to Rule 12b-1 under the Investment Company Act
of 1940. Under the Plans, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.15% and 1.00%, respectively, of the Fund's
daily net assets attributable to shares of that class. However, the service fee
will not exceed 0.15% and 0.25% of the Fund's average daily net assets
attributable to Class A and Class B shares, respectively. John Hancock Funds has
agreed to limit the payment of expenses under the Fund's Class B Plan to 0.90%
of the average daily net assets of its Class B shares. In each case, up to 0.25%
is for service expenses and the remaining amount is for distribution expenses.
The distribution fee will be used to reimburse John Hancock Funds for their
distribution expenses, including but not limited to: (i) initial and ongoing
sales compensation to Selling Brokers and others (including affiliates of John
Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional
and overhead expenses incurred in connection with the distribution of Fund
shares; and (iii) with respect to Class B shares only, interest expenses on
unreimbursed distribution expenses. The service fees will be used to compensate
Selling Brokers for providing personal and account maintenance services to
shareholders. In the event the John Hancock Funds is not fully reimbursed for
payments or expenses they incur under the Class A Plan, these expenses will not
be carried beyond twelve months from the date they were incurred. Unreimbursed
expenses under the Class B Plan will be carried forward together with interest
on the balance of these unreimbursed expenses. The Fund does not treat
unreimbursed expenses under the Class B Plan as a liability of the Fund because
the Trustees may terminate Class B Plan expenses at any time. For the fiscal
year ended August 31, 1996, an aggregate of $3,990,001 of Distribution Expenses
or 4.84% 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.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plans (the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provide the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans provide that they may be terminated without
penalty, (a) by the vote of a majority of the Independent Trustees, (b) by the
vote of a majority of the Fund's outstanding shares of the applicable class upon
60 days' written notice to John Hancock Funds, and (c) automatically in the
event of assignment. The Plans further provide that they may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to that Plan. Each plan provides, that
no material amendment to the Plans will, in any event, be effective unless it is
approved by a vote of a majority of the Trustees and the Independent Trustees of
37
<PAGE>
the Fund. The holders of Class A and Class B shares have exclusive voting rights
with respect to the Plan applicable to their respective class of shares. In
adopting the Plans, the Trustees concluded that, in their judgment, there is a
reasonable likelihood that the Plans will benefit the holders of the applicable
class of shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Fund may participate in joint distribution activities
with other Funds and the costs of those activities will be borne by each Fund in
proportion to the relative net asset value of the participating Fund.
<TABLE>
<CAPTION>
Printing and Interest,
Mailing of Compensation Carrying or
Prospectuses to to Selling Expenses of Other Finance
Advertising New Shareholders Brokers Distributor Charges
----------- ---------------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Class A shares $26,796 $3,258 $189,189 $ 77,813 - 0 -
Class B shares $38,202 $5,016 $166,514 $109,049 $190,931
</TABLE>
INITIAL SALES CHARGE ON CLASS A SHARES
The sales charges applicable to purchases of Class A Shares of the Fund
are described in the 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 Signature Services, Inc. ("Signature Services") is notified by the
investor's dealer or the investor at the time of the purchase, the cost of the
Class A Shares owned.
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 Signature
Services or a Selling Broker's.
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
38
<PAGE>
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.
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/Director or officer of the Fund; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, grandchildren, 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.1
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed defined contribution plans with at least 100 eligible
employees at the inception of the Fund account, may purchase Class A
shares with no initial sales charge. However, if the shares are
redeemed within 12 months after the end of the calendar year in which
the purchase was made, a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
- --------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
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.
- ------------
1 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.
39
<PAGE>
Letter of Intention. The reduced sales loads are also applicable to
investments made over a specified period pursuant to a Letter of Intention
("LOI"), which should be read carefully prior to its execution by an investor.
The Fund offers two options regarding the specified period for making
investments under the LOI. All investors have the option of making their
investments over a period of thirteen (13) months. Investors who are using the
Fund as a funding medium for a qualified retirement plan, however, may opt to
make the necessary investments called for by the LOI over a forty-eight (48)
month period. These qualified retirement plans include IRA, SEP, SARSEP, 401(k),
403(b) (including TSA's) 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 Signature Services. The sales charge
applicable to all amounts invested under the LOI is computed as if the aggregate
amount intended to be invested had been invested immediately. If such aggregate
amount is not actually invested, the difference in the sales charge actually
paid and the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made within the specified period,
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 Signature Services to hold in escrow sufficient
Class A shares (approximately 5% of the aggregate) to make up any difference in
sales charges on the amount intended to be invested and the amount actually
invested, until such investment is completed within the specified period, at
which time the 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 Signature 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 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.
40
<PAGE>
Class B shares are not available to full-service defined contribution
plans administered by Signature Services or the Life Company that had more than
100 eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B Shares until the time
of redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the 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. However, you cannot redeem appreciation value only in order to
avoid a CDSC.
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
Proceeds from the CDSC are paid to John Hancock Funds and are used in
whole or in part by John Hancock Funds to defray its expenses related to
providing distribution-related services to the Fund in connection with the sale
of the Class B 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.
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<PAGE>
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 $100.
* 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.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account
value, including reinvested dividends, at the time you established your
periodic withdrawal plan and 12% of the value of subsequent investments
(less redemptions) in that account at the time you notify Signature
Services. (Please note, this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC.)
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other qualified plans as
described in the Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under Section
401(a) of the Code (such as 401(k), Money Purchase Pension Plans and
Profit-Sharing Plans).
* 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.
42
<PAGE>
Please see matrix for reference.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-
Distribution (401(k), MPP, Rollover retirement
PSP)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ---------------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually in
distributions periodic payments
- ---------------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or value annually in
12% of account periodic payments
value annually
in periodic
payments
- ---------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of account
annuity payments annuity payments annuity payments value annually in
(72t) or 12% of (72t) or 12% of (72t) or 12% of periodic payments
account value account value account value
annually in annually in annually in
periodic payments periodic payments periodic payments
- ---------------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ---------------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you
must notify Signature Services at the time you make your redemption. The waiver
will be granted once Signature Services has confirmed that you are entitled to
the waiver.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
shares, the following procedures are utilized wherever applicable.
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<PAGE>
Debt investment securities are valued on the basis of valuations
furnished by a principal market maker or a pricing service, both of which
generally utilize electronic data processing techniques to determine valuations
for normal institutional size trading units of debt securities without exclusive
reliance upon quoted prices.
Short-Term debt investments which have a remaining maturity of 60 days
or less are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
The NAV for each fund and class is determined each business day at the
close of regular trading on the New York Stock Exchange (typically 4:00 p.m.
Eastern Time) by dividing a class's net assets by the number of its shares
outstanding.
SPECIAL REDEMPTIONS
Although it is the Fund's present policy to make payment of redemption
proceeds in cash, if the Trustees determine that a material adverse effect would
otherwise be experienced by remaining investors, redemption proceeds may be paid
in whole or in part by a distribution in kind of securities from the Fund in
conformity with rules of the Securities and Exchange Commission, valuing such
securities in the same manner they are valued in determining NAV, and selecting
the securities in such manner as the Board may deem fair and equitable. If such
a distribution occurs, investors receiving securities and selling them before
their maturity could receive less than the redemption value of such securities
and, in addition, could incur certain transaction costs. Such a redemption is
not as liquid as a redemption paid in cash or federal funds. The Fund has
elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to which the
Fund is obligated to redeem shares solely in cash up to the lesser of $250,000
or 1% of the net asset value of the Fund during any 90 day period for any one
account.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. As described more fully in the Prospectus, the Fund
permits exchanges of shares of any class of the Fund for shares of the same
class in any other John Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Prospectus, the
Fund permits the establishment of a Systematic Withdrawal Plan. Payments under
this plan represent proceeds arising from the redemption of Fund shares. Since
the redemption price of Fund shares may be more or less than the shareholder's
cost, depending upon the market value of the securities owned by the Fund at the
time of redemption, the distribution of cash pursuant to this plan may result in
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
the purchases of Class A Shares and the CDSC imposed on redemptions of Class B
Shares and because redemptions are taxable events. Therefore, a shareholder
44
<PAGE>
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 Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is
explained more fully in the Prospectus. The program, as it relates to automatic
investment checks, is subject to the following conditions;
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Signature Services without prior notice
if any investment is not honored by the shareholder's bank. The bank shall be
under no obligation to notify the shareholder as to the non-payment of any
checks.
The program may be discontinued by the shareholder either by calling
Signature Services or upon written notice to Signature Services which is
received at least five (5) business days prior to the 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
45
<PAGE>
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 of 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.
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.
Holders of Class A and Class B shares have certain exclusive voting rights on
matters relating to their respective distribution plans. The different classes
of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except for differences resulting from the
facts that (i) the distribution and service fees relating to 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
that class of shares, subject to the conditions the Internal Revenue Service
imposes with respect to 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 of each class are entitled to
share pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable by the Fund, except as set
forth below.
Unless otherwise required by the 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.
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. The
Declaration of Trust also provides that no series of the Fund shall be liable
for the liabilities of any other series. Furthermore, no Fund included in this
Fund's prospectus shall be liable for the liabilities of any other John Hancock
fund. Liability is therefor limited to circumstances in which the Fund itself
would be unable to meet its obligations, and the possibility of this occurrence
is remote.
46
<PAGE>
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.
A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts.
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-exempt obligations and the value of the Fund's portfolio may
be affected by restrictive federal income tax legislation enacted in recent
years or by similar future legislation.
47
<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 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.
48
<PAGE>
Distributions, if any, in excess of E&P will constitute a return of
capital under the Code, which will first reduce an investor's federal tax basis
in Fund shares and then, to the extent such basis is exceeded, will generally
give rise to capital gains. Amounts that are not allowable as a deduction in
computing taxable income, including expenses associated with earning tax-exempt
interest income, do not reduce the Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of the Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders who have chosen automatic reinvestment of their distributions will
have a federal tax basis in each share received pursuant to such a reinvestment
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received in the
reinvestment.
After the close of each calendar year, the Fund will inform
shareholders of the federal income tax status of its dividends and distributions
for such year, including the portion of such dividends that qualifies as
tax-exempt and the portion, if any, that should be treated as a tax preference
item for purposes of the federal alternative minimum tax. Shareholders who have
not held shares of the Fund for its full taxable year may have designated as
tax-exempt or as a tax preference item a percentage of distributions which is
not equal to the actual amount of 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.
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
49
<PAGE>
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be disallowed to the extent of all
exempt-interest dividends paid with respect to such shares and, to the extent in
excess of the amount disallowed, will be treated as a long-term capital loss to
the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares.
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 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 $7,860,974 of capital loss carryforwards. Of this
amount $44,815 expires August 31, 2001, $267,864 expires August 31, 2002 and
$5,169,717 expires August 31, 2003 and $2,378,578 expires August 31, 2004.
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.
50
<PAGE>
The Fund will be required to report to the Internal Revenue Service
(the "IRS") all taxable distributions to shareholders, as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt recipients, i.e., corporations and certain other investors distributions
to which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. However, the Fund's
taxable distributions may not be subject to backup withholding if the Fund can
reasonably estimate that at least 95% of its distributions for the year will be
exempt-interest dividends. The Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
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.
51
<PAGE>
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 W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
State 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.
52
<PAGE>
Shares of the Fund will not be excludable from the taxable estates of
deceased California resident shareholders for purposes of the California estate
and generation skipping taxes. California estate and generation skipping taxes
are creditable against the corresponding Federal taxes.
The foregoing is a general, abbreviated summary of certain of the
provisions of California law presently in effect as it directly governs the
taxation of the shareholders of the Fund. These provisions are subject to change
by legislative or administrative action, and any such change may be retroactive
with respect to the Fund's transactions. Shareholders are advised to consult
with their own tax advisers for more detailed information concerning California
tax matters.
CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1996, the annualized yields of
the Fund's Class A Shares and Class B Shares were 5.15% and 4.63%, respectively.
As of August 31, 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 2.72%, 6.56% and 6.99%, respectively As of August 31, 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 1.87% and 5.99%, 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
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
53
<PAGE>
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 August 31, 1996 were
____% and ____%, 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:
n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the 1-year and life-of-fund periods.
Because each share has its own sales charge and fee structure, the
classes have different performance results. 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.
In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest is
used in lieu of the yield to maturity. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value exceeds the then-remaining portion of original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value is less than the then-remaining portion of original issue discount
(market premium), the yield to maturity is based on the market value.
54
<PAGE>
From time to time, in reports and promotional literature, the Fund's
yield and total return will be compared to indices of mutual funds and bank
deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed
Income Fund Performance Analysis," a monthly publication which tracks net
assets, total return, and yield on fixed income mutual funds in the United
States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well as the Russell and Wilshire Indices.
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 Fund's promotional and sales literature may make reference
to the Fund's "beta." Beta is a reflection of the market-related risk of the
Fund by showing how responsive the fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and
the allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates and 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 these
transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. and 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.
55
<PAGE>
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 period ended
August 31, 1996 the Fund paid negotiated brokerage commissions of $18,144 and
for the fiscal years ended December 31, 1995 and 1994, 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. For the period ended August 31, 1996, 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 Distributors, Inc. ("John Hancock Distributors" or
Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Affiliated Brokers. For the
period ended August 31, 1996, 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.
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
56
<PAGE>
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.
Other investment advisory clients advised by the Adviser may also
invest in the same securities and the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser may average the
transaction as to price and allocate the amount of available investments in a
manner which the Adviser believes to be equitable to each client, including the
Fund. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtainable for
it. On the other hand, to the extent permitted by law, the adviser may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 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 a monthly
transfer agent fee of $20 per account for the Class A Shares and $22.50 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.
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.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116,
has been selected as the independent auditors of the Fund. The financial
statements of the Fund included in the Prospectus and this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
indicated in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
57
<PAGE>
APPENDIX A
TAX EXEMPT BOND RATINGS
Below is a description of the five ratings that may apply to the Fund's
investments in Tax-Exempt Bonds.
Tax-Exempt Bond Ratings
Moody's describes its five highest ratings for Tax-Exempt Bonds as
follows:
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge'. Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
The five highest ratings of Standard & Poor's for Tax-Exempt Bonds are
AAA (Prime), AA (High Grade), A (Good Grade), BBB (Medium Grade) and BB:
AAA This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to
pay principal and interest.
A-1
<PAGE>
AA Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in
the majority of instances they differ from AAA issues only in
small degree.
A Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
to pay principal and interest for bonds in this category than
for bonds in the A category.
BB Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB-rating.
Fitch describes its ratings for Tax-Exempt Bonds as follows:
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foresee
future developments, short-term debt of these issuers is
generally rated F-1+.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than
for bonds with higher ratings.
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
A-2
<PAGE>
alternatives can be identified that could assist the obligor
in satisfying its debt service requirements.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short-term run. Symbols
used will be as follows:
MIG 1 Loans bearing this designation are of the best quality,
enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2 Loans bearing this designation are of high quality, with
margins of protection ample although not so large as in the
preceding group.
MIG 3 Loans bearing this designation are of favorable quality, with
all securities elements accounted for but lacking the
undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well
established.
Standard & Poor's ratings for state and municipal notes and other
short-term loans are designated Standard & Poor's Grade (SP).
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
Fitch Ratings for short-term debt obligations that are payable on
demand or have original maturities of up to three years including commercial
paper, certificates of deposits, medium term notes and municipal and investment
notes are designated by the following ratings:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
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-3
<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%.
<TABLE>
<CAPTION>
IN CALIFORNIA, A TAX-EXEMPT YIELD OF:
------------------------------------------------------------------------------------
Marginal
Combined
California
and Federal
Single Return Joint Return Income Tax
(Taxable Income) Bracket* 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
---------------- -------- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IS EQUIVALENT TO A TAXABLE YIELD OF:
$ -4,831 $ 0-9,662 15.85% 4.75% 5.94% 7.13% 8.32% 9.51% 10.70% 11.88%
$ 4,832- $ 9,663- 16.70% 4.80% 6.00% 7.20% 8.40% 9.60% 10.80% 12.00%
11,449 22,898
$ 11,450- $ 22,899- 18.40% 4.90% 6.13% 7.35% 8.58% 9.80% 11.03% 12.25%
18,068 36,136
$ 18,069- $ 37,137- 20.10% 5.01% 6.26% 7.51% 8.76% 10.01% 11.26% 12.52%
23,350 39,000
$ 23,351 $ 39,001- 32.32% 5.91% 7.39% 8.87% 10.34% 11.82% 13.30% 14.78%
25,083 50,166
$ 25,084- $ 50,167- 33.76% 6.04% 7.55% 9.06% 10.57% 12.08% 13.59% 15.10%
31,700 63,400
$ 31,701- $ 63,401- 34.70% 6.13% 7.66% 9.19% 10.72% 12.25% 13.78% 15.31%
56,550 94,250
$ 56,551- $ 94,251- 37.42% 6.39% 7.99% 9.59% 11.19% 12.78% 14.38% 15.98%
109,936 143,600
$109,937- --- 37.90% 6.44% 8.05% 9.66% 11.27% 12.88% 14.49% 16.10%
117,950
$ --- $ 143,601- 41.95% 6.89% 8.61% 10.34% 12.06% 13.78% 15.50% 17.23%
219,872
$117,951- $ 219,873- 42.40% 6.94% 8.68% 10.42% 12.15% 13.89% 15.63% 17.36%
219,872 256,500
$219,873- $ --- 43.04% 7.02% 8.78% 10.53% 12.29% 14.04% 15.80% 17.56%
256,500
$ --- $ 256,501- 45.64% 7.36% 9.20% 11.04% 12.88% 14.72% 16.56% 18.40%
439,744
$256,501- $ 439,745- 46.24% 7.44% 9.30% 11.16% 13.02% 14.88% 16.74% 18.60%
OVER OVER
</TABLE>
- ----------
* The marginal combined bracket includes the effect of deducting state taxes on
your federal tax return.
A-4
<PAGE>
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 1997. This may result in higher or lower actual rates. The above chart is
intended for estimation only.
A-5
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
PART C.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements listed below are included in and incorporated
by reference into Part B of the Registration Statement from the California Tax
Free Income Fund 1996 Annual Report to Shareholders for the year ended August
31, 1996 (filed electronically on October 24, 1996; file nos. 811-5979 and
33-31675; accession number 0001005477-96-000335).
John Hancock California Tax Free Income Fund
Statement of Assets and Liabilities as of August 31, 1996.
Statement of Operations of the year ended August 31, 1996.
Statement of Changes in Net Asset for each of the two years in the
period ended August 31, 1996.
Notes to Financial Statements.
Financial Highlights for each of the years in the period ended
August 31, 1996.
Schedule of Investments as of August 31, 1996.
Report of Independent Auditors.
(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 November 29, 1996, the number of record holders of shares of the
Registrant was as follows:
Title of Class Number of Record Holders
Class A Shares - 6,987
Class B Shares - 2,251
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 John Hancock Investment Trust IV.
(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 Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
Karen Walsh 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
Anne C. Hodsdon Director President
101 Huntington Avenue
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 certifies that it meets all of
the requirements for effectiveness of the Registration Statement pursuant to
Rule 485(b) under the Securities And Exchange Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Boston, and the Commonwealth of
Massachusetts on the 20th day of December, 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 December 20, 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 December 20, 1996
-------------------
Susan S. Newton
under Powers of Attorney dated
June 25, 1996, filed herewith
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.B1 Amended and Restated Declaration of Trust dated
July 1, 1996.+
99.B2 Amended and Restated By-Laws dated November 19, 1996.+
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 24e Opinion.+
99.B11 Consent of Independent Auditor.+
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.**
99.27 Class A - Annual+
99.27 Class B - Annual+
* 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
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
101 Huntington Avenue
Boston, Massachusetts 02199
Dated July 1, 1996
AMENDED AND RESTATED DECLARATION OF TRUST made this 1st day of July,
1996 by the undersigned (together with all other persons from time to time duly
elected, qualified and serving as Trustees in accordance with the provisions of
Article II hereof, the "Trustees");
WHEREAS, pursuant to a declaration of trust executed and delivered on
October 17, 1989 (the "Original Declaration"), the Trustees established a trust
for the investment and reinvestment of funds contributed thereto;
WHEREAS, the Trustees divided the beneficial interest in the trust
assets into transferable shares of beneficial interest, as provided therein;
WHEREAS, the Trustees declared that all money and property contributed
to the trust established thereunder be held and managed in trust for the benefit
of the holders, from time to time, of the shares of beneficial interest issued
thereunder and subject to the provisions thereof;
WHEREAS, the Trustees desire to amend and restate the Original
Declaration;
NOW, THEREFORE, in consideration of the foregoing premises and the
agreements contained herein, the undersigned, being all of the Trustees of the
trust, hereby amend and restate the Original Declaration as follows:
ARTICLE I
NAME AND DEFINITIONS
Section 1.1. Name. The name of the trust created hereby is "John
Hancock California Tax-Free Income Fund" (the "Trust").
Section 1.2. Definitions. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to the
contract described in Section 3.3 hereof.
(b) "By-laws" means the By-laws referred to in Section 2.8 hereof, as
amended from time to time.
<PAGE>
(c) "Class" means any division of shares within a Series in accordance
with the provisions of Article V.
(d) The terms "Commission" and "Interested Person" have the meanings
given them in the 1940 Act. Except as such term may be otherwise defined by the
Trustees in conjunction with the establishment of any Series, the term "vote of
a majority of the Outstanding Shares entitled to vote" shall have the same
meaning as is assigned to the term "vote of a majority of the outstanding voting
securities" in the 1940 Act.
(e) "Custodian" means any Person other than the Trust who has custody
of any Trust Property as required by Section 17(f) of the 1940 Act, but does not
include a system for the central handling of securities described in said
Section 17(f).
(f) "Declaration" means this Declaration of Trust as amended from time
to time. Reference in this Declaration of Trust to "Declaration," "hereof,"
"herein," and "hereunder" shall be deemed to refer to this Declaration rather
than exclusively to the article or section in which such words appear.
(g) "Distributor" means the party, other than the Trust, to the
contract described in Section 3.1 hereof.
(h) "Fund" or "Funds" individually or collectively, means the separate
Series of the Trust, together with the assets and liabilities assigned thereto.
(i) "Fundamental Restrictions" means the investment restrictions set
forth in the Prospectus and Statement of Additional Information for any Series
and designated as fundamental restrictions therein with respect to such Series.
(j) "His" shall include the feminine and neuter, as well as the
masculine, genders.
(k) "Investment Adviser" means the party, other than the Trust, to the
contract described in Section 3.2 hereof.
(l) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
(m) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof.
(n) "Prospectus" means the Prospectuses and Statements of Additional
Information included in the Registration Statement of the Trust under the
Securities Act of 1933, as amended, as such Prospectuses and Statements of
Additional Information may be amended or supplemented and filed with the
Commission from time to time.
(o) "Series" individually or collectively means the separately managed
component(s) of the Trust (or, if the Trust shall have only one such component,
then that one) as may be established and designated from time to time by the
Trustees pursuant to Section 5.11 hereof.
2
<PAGE>
(p) "Shareholder" means a record owner of Outstanding Shares.
(q) "Shares" means the equal proportionate units of interest into which
the beneficial interest in the Trust shall be divided from time to time,
including the Shares of any and all Series or of any Class within any Series (as
the context may require) which may be established by the Trustees, and includes
fractions of Shares as well as whole Shares. "Outstanding" Shares means those
Shares shown from time to time on the books of the Trust or its Transfer Agent
as then issued and outstanding, but shall not include Shares which have been
redeemed or repurchased by the Trust and which are at the time held in the
treasury of the Trust.
(r) "Transfer Agent" means any Person other than the Trust who
maintains the Shareholder records of the Trust, such as the list of
Shareholders, the number of Shares credited to each account, and the like.
(s) "Trust" means John Hancock California Tax-Free Income Fund.
(t) "Trustees" means the persons who have signed this Declaration, so
long as they shall continue in office in accordance with the terms hereof, and
all other persons who now serve or may from time to time be duly elected,
qualified and serving as Trustees in accordance with the provisions of Article
II hereof, and reference herein to a Trustee or the Trustees shall refer to such
person or persons in this capacity or their capacities as trustees hereunder.
(u) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees, including any and all assets of or allocated to any
Series or Class, as the context may require.
ARTICLE II
TRUSTEES
Section 2.1. General Powers. The Trustees shall have exclusive and
absolute control over the Trust Property and over the business of the Trust to
the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without The Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to promote the
interests of the Trust although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust made by
the Trustees in good faith shall be conclusive. In construing the provisions of
this Declaration, the presumption shall be in favor of a grant of power to the
Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid powers. Such powers of the Trustees may be exercised
without order of or resort to any court.
3
<PAGE>
Section 2.2. Investments. The Trustees shall have the power:
(a) To operate as and carry on the business of an investment company,
and exercise all the powers necessary and appropriate to the conduct of such
operations.
(b) To invest in, hold for investment, or reinvest in, cash;
securities, including common, preferred and preference stocks; warrants;
subscription rights; profit-sharing interests or participations and all other
contracts for or evidence of equity interests; bonds, debentures, bills, time
notes and all other evidences of indebtedness; negotiable or non-negotiable
instruments; government securities, including securities of any state,
municipality or other political subdivision thereof, or any governmental or
quasi-governmental agency or instrumentality; and money market instruments
including bank certificates of deposit, finance paper, commercial paper,
bankers' acceptances and all kinds of repurchase agreements, of any corporation,
company, trust, association, firm or other business organization however
established, and of any country, state, municipality or other political
subdivision, or any governmental or quasi-governmental agency or
instrumentality; any other security, instrument or contract the acquisition or
execution of which is not prohibited by any Fundamental Restriction; and the
Trustees shall be deemed to have the foregoing powers with respect to any
additional securities in which the Trust may invest should the Fundamental
Restrictions be amended.
(c) To acquire (by purchase, subscription or otherwise), to hold, to
trade in and deal in, to acquire any rights or options to purchase or sell, to
sell or otherwise dispose of, to lend and to pledge any such securities, to
enter into repurchase agreements, reverse repurchase agreements, firm commitment
agreements, forward foreign currency exchange contracts, interest rate, mortgage
or currency swaps, and interest rate caps, floors and collars, to purchase and
sell options on securities, indices, currency, swaps or other financial assets,
futures contracts and options on futures contracts of all descriptions and to
engage in all types of hedging, risk management or income enhancement
transactions.
(d) To exercise all rights, powers and privileges of ownership or
interest in all securities and repurchase agreements included in the Trust
Property, including the right to vote thereon and otherwise act with respect
thereto and to do all acts for the preservation, protection, improvement and
enhancement in value of all such securities and repurchase agreements.
(e) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop and dispose of (by sale or otherwise) any property, real or
personal, including cash or foreign currency, and any interest therein.
(f) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; and to endorse, guarantee,
or undertake the performance of any obligation or engagement of any other Person
and to lend Trust Property.
4
<PAGE>
(g) To aid by further investment any corporation, company, trust,
association or firm, any obligation of or interest in which is included in the
Trust Property or in the affairs of which the Trustees have any direct or
indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest; and to guarantee or
become surety on any or all of the contracts, stocks, bonds, notes, debentures
and other obligations of any such corporation, company, trust, association or
firm.
(h) To enter into a plan of distribution and any related agreements
whereby the Trust may finance directly or indirectly any activity which is
primarily intended to result in the distribution and/or servicing of Shares.
(i) To adopt on behalf of the Trust or any Series thereof an
alternative purchase plan providing for the issuance of multiple Classes of
Shares (as authorized herein at Section 5.11).
(j) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or arising out of or connected with the aforesaid business or
purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers,
and the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
Notwithstanding any other provision herein, the Trustees shall have
full power in their discretion as contemplated in Section 8.5, without any
requirement of approval by Shareholders, to invest part or all of the Trust
Property (or part or all of the assets of any Series), or to dispose of part or
all of the Trust Property (or part or all of the assets of any Series) and
invest the proceeds of such disposition, in securities issued by one or more
other investment companies registered under the 1940 Act. Any such other
investment company may (but need not) be a trust (formed under the laws of any
state) which is classified as a partnership or corporation for federal income
tax purposes.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
Section 2.3. Legal Title. Legal title to all the Trust Property shall
be vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust or any Series of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine, provided that the interest of the Trust therein is
deemed appropriately protected. The right, title and interest of the Trustees in
the Trust Property and the Property of each Series of the Trust shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
termination of the term of office, resignation, removal or death of a Trustee he
5
<PAGE>
shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 2.4. Issuance and Repurchase of Shares. The Trustees shall have
the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold,
resell, reissue, dispose of, transfer, and otherwise deal in Shares and, subject
to the provisions set forth in Articles VI and VII and Section 5.11 hereof, to
apply to any such repurchase, redemption, retirement, cancellation or
acquisition of Shares any funds or property of the Trust or of the particular
Series with respect to which such Shares are issued, whether capital or surplus
or otherwise, to the full extent now or hereafter permitted by the laws of The
Commonwealth of Massachusetts governing business corporations.
Section 2.5. Delegation; Committees. The Trustees shall have power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of such things
and the execution of such instruments either in the name of the Trust or any
Series of the Trust or the names of the Trustees or otherwise as the Trustees
may deem expedient, to the same extent as such delegation is permitted by the
1940 Act.
Section 2.6. Collection and Payment. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
Section 2.7. Expenses. The Trustees shall have the power to incur and
pay any expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of this Declaration, and to pay
reasonable compensation from the funds of the Trust to themselves as Trustees.
The Trustees shall fix the compensation of all officers, employees and Trustees.
Section 2.8. Manner of Acting; By-laws. Except as otherwise provided
herein or in the By-laws, any action to be taken by the Trustees may be taken by
a majority of the Trustees present at a meeting of Trustees, including any
meeting held by means of a conference telephone circuit or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, or by written consents of a majority of Trustees
then in office. The Trustees may adopt By-laws not inconsistent with this
Declaration to provide for the conduct of the business of the Trust and may
amend or repeal such By-laws to the extent such power is not reserved to the
Shareholders.
Notwithstanding the foregoing provisions of this Section 2.8 and in
addition to such provisions or any other provision of this Declaration or of the
By-laws, the Trustees may by resolution appoint a committee consisting of less
than the whole number of Trustees then in office, which committee may be
empowered to act for and bind the Trustees and the Trust, as if the acts of such
committee were the acts of all the Trustees then in office, with respect to the
institution, prosecution, dismissal, settlement, review or investigation of any
action, suit or proceeding which shall be pending or threatened to be brought
before any court, administrative agency or other adjudicatory body.
6
<PAGE>
Section 2.9. Miscellaneous Powers. The Trustees shall have the power
to: (a) employ or contract with such Persons as the Trustees may deem desirable
for the transaction of the business of the Trust or any Series thereof; (b)
enter into joint ventures, partnerships and any other combinations or
associations; (c) remove Trustees, fill vacancies in, add to or subtract from
their number, elect and remove such officers and appoint and terminate such
agents or employees as they consider appropriate, and appoint from their own
number, and terminate, any one or more committees which may exercise some or all
of the power and authority of the Trustees as the Trustees may determine; (d)
purchase, and pay for out of Trust Property or the property of the appropriate
Series of the Trust, insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, administrators, distributors,
selected dealers or independent contractors of the Trust against all claims
arising by reason of holding any such position or by reason of any action taken
or omitted by any such Person in such capacity, whether or not constituting
negligence, or whether or not the Trust would have the power to indemnify such
Person against such liability; (e) establish pension, profit-sharing, share
purchase, and other retirement, incentive and benefit plans for any Trustees,
officers, employees and agents of the Trust; (f) to the extent permitted by law,
indemnify any person with whom the Trust or any Series thereof has dealings,
including the Investment Adviser, Administrator, Distributor, Transfer Agent and
selected dealers, to such extent as the Trustees shall determine; (g) guarantee
indebtedness or contractual obligations of others; (h) determine and change the
fiscal year and taxable year of the Trust or any Series thereof and the method
by which its or their accounts shall be kept; and (i) adopt a seal for the
Trust, but the absence of such seal shall not impair the validity of any
instrument executed on behalf of the Trust.
Section 2.10. Principal Transactions. Except for transactions not
permitted by the 1940 Act or rules and regulations adopted, or orders issued, by
the Commission thereunder, the Trustees may, on behalf of the Trust, buy any
securities from or sell any securities to, or lend any assets of the Trust or
any Series thereof to any Trustee or officer of the Trust or any firm of which
any such Trustee or officer is a member acting as principal, or have any such
dealings with the Investment Adviser, Distributor or Transfer Agent or with any
Interested Person of such Person; and the Trust or a Series thereof may employ
any such Person, or firm or company in which such Person is an Interested
Person, as broker, legal counsel, registrar, transfer agent, dividend disbursing
agent or custodian upon customary terms.
Section 2.11. Litigation. The Trustees shall have the power to engage
in and to prosecute, defend, compromise, abandon, or adjust by arbitration, or
otherwise, any actions, suits, proceedings, disputes, claims, and demands
relating to the Trust, and out of the assets of the Trust or any Series thereof
to pay or to satisfy any debts, claims or expenses incurred in connection
therewith, including those of litigation, and such power shall include without
limitation the power of the Trustees or any appropriate committee thereof, in
the exercise of their or its good faith business judgment, to dismiss any
action, suit, proceeding, dispute, claim, or demand, derivative or otherwise,
brought by any person, including a Shareholder in its own name or the name of
the Trust, whether or not the Trust or any of the Trustees may be named
individually therein or the subject matter arises by reason of business for or
on behalf of the Trust.
Section 2.12. Number of Trustees. The initial Trustees shall be the
persons initially signing the Original Declaration. The number of Trustees
(other than the initial Trustees) shall be such number as shall be fixed from
time to time by vote of a majority of the Trustees, provided, however, that the
number of Trustees shall in no event be less than one (1).
7
<PAGE>
Section 2.13. Election and Term. Except for the Trustees named herein
or appointed to fill vacancies pursuant to Section 2.15 hereof, the Trustees may
succeed themselves and shall be elected by the Shareholders owning of record a
plurality of the Shares voting at a meeting of Shareholders on a date fixed by
the Trustees. Except in the event of resignations or removals pursuant to
Section 2.14 hereof, each Trustee shall hold office until such time as less than
a majority of the Trustees holding office has been elected by Shareholders. In
such event the Trustees then in office shall call a Shareholders' meeting for
the election of Trustees. Except for the foregoing circumstances, the Trustees
shall continue to hold office and may appoint successor Trustees.
Section 2.14. Resignation and Removal. Any Trustee may resign his trust
(without the need for any prior or subsequent accounting) by an instrument in
writing signed by him and delivered to the other Trustees and such resignation
shall be effective upon such delivery, or at a later date according to the terms
of the instrument. Any of the Trustees may be removed (provided the aggregate
number of Trustees after such removal shall not be less than one) with cause, by
the action of two-thirds of the remaining Trustees or by action of two-thirds of
the outstanding Shares of the Trust (for purposes of determining the
circumstances and procedures under which any such removal by the Shareholders
may take place, the provisions of Section 16(c) of the 1940 Act (or any
successor provisions) shall be applicable to the same extent as if the Trust
were subject to the provisions of that Section). Upon the resignation or removal
of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of conveying to the Trust or the remaining Trustees any Trust Property held in
the name of the resigning or removed Trustee. Upon the incapacity or death of
any Trustee, his legal representative shall execute and deliver on his behalf
such documents as the remaining Trustees shall require as provided in the
preceding sentence.
Section 2.15. Vacancies. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of his death, retirement,
resignation, removal, bankruptcy, adjudicated incompetence or other incapacity
to perform the duties of the office of a Trustee. No such vacancy shall operate
to annul the Declaration or to revoke any existing agency created pursuant to
the terms of the Declaration. In the case of an existing vacancy, including a
vacancy existing by reason of an increase in the number of Trustees, subject to
the provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall
fill such vacancy by the appointment of such other person as they in their
discretion shall see fit, made by vote of a majority of the Trustees then in
office. Any such appointment shall not become effective, however, until the
person named in the vote approving the appointment shall have accepted in
writing such appointment and agreed in writing to be bound by the terms of the
Declaration. An appointment of a Trustee may be made in anticipation of a
vacancy to occur at a later date by reason of retirement, resignation or
increase in the number of Trustees, provided that such appointment shall not
become effective prior to such retirement, resignation or increase in the number
of Trustees. Whenever a vacancy in the number of Trustees shall occur, until
such vacancy is filled as provided in this Section 2.15, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by the Declaration.
The vote by a majority of the Trustees in office, fixing the number of Trustees
shall be conclusive evidence of the existence of such vacancy.
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Section 2.16. Delegation of Power to Other Trustees. Any Trustee may,
by power of attorney, delegate his power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall fewer than two (2) Trustees personally exercise the powers granted to
the Trustees under this Declaration except as herein otherwise expressly
provided.
ARTICLE III
CONTRACTS
Section 3.1. Distribution Contract. The Trustees may in their
discretion from time to time enter into an exclusive or non-exclusive
distribution contract or contracts providing for the sale of the Shares to net
the Trust or the applicable Series of the Trust not less than the amount
provided for in Section 7.1 of Article VII hereof, whereby the Trustees may
either agree to sell the Shares to the other party to the contract or appoint
such other party as their sales agent for the Shares, and in either case on such
terms and conditions, if any, as may be prescribed in the By-laws, and such
further terms and conditions as the Trustees may in their discretion determine
not inconsistent with the provisions of this Article III or of the By-laws; and
such contract may also provide for the repurchase of the Shares by such other
party as agent of the Trustees.
Section 3.2. Advisory or Management Contract. The Trustees may in their
discretion from time to time enter into one or more investment advisory or
management contracts or, if the Trustees establish multiple Series, separate
investment advisory or management contracts with respect to one or more Series
whereby the other party or parties to any such contracts shall undertake to
furnish the Trust or such Series management, investment advisory,
administration, accounting, legal, statistical and research facilities and
services, promotional or marketing activities, and such other facilities and
services, if any, as the Trustees shall from time to time consider desirable and
all upon such terms and conditions as the Trustees may in their discretion
determine. Notwithstanding any provisions of the Declaration, the Trustees may
authorize the Investment Advisers, or any of them, under any such contracts
(subject to such general or specific instructions as the Trustees may from time
to time adopt) to effect purchases, sales, loans or exchanges of portfolio
securities and other investments of the Trust on behalf of the Trustees or may
authorize any officer, employee or Trustee to effect such purchases, sales,
loans or exchanges pursuant to recommendations of such Investment Advisers, or
any of them (and all without further action by the Trustees). Any such
purchases, sales, loans and exchanges shall be deemed to have been authorized by
all of the Trustees. The Trustees may, in their sole discretion, call a meeting
of Shareholders in order to submit to a vote of Shareholders at such meeting the
approval or continuance of any such investment advisory or management contract.
If the Shareholders of any one or more of the Series of the Trust should fail to
approve any such investment advisory or management contract, the Investment
Adviser may nonetheless serve as Investment Adviser with respect to any Series
whose Shareholders approve such contract.
Section 3.3. Administration Agreement. The Trustees may in their
discretion from time to time enter into an administration agreement or, if the
Trustees establish multiple Series or Classes, separate administration
agreements with respect to each Series or Class, whereby the other party to such
agreement shall undertake to manage the business affairs of the Trust or of a
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Series or Class thereof and furnish the Trust or a Series or a Class thereof
with office facilities, and shall be responsible for the ordinary clerical,
bookkeeping and recordkeeping services at such office facilities, and other
facilities and services, if any, and all upon such terms and conditions as the
Trustees may in their discretion determine.
Section 3.4. Service Agreement. The Trustees may in their discretion
from time to time enter into Service Agreements with respect to one or more
Series or Classes thereof whereby the other parties to such Service Agreements
will provide administration and/or support services pursuant to administration
plans and service plans, and all upon such terms and conditions as the Trustees
in their discretion may determine.
Section 3.5. Transfer Agent. The Trustees may in their discretion from
time to time enter into a transfer agency and shareholder service contract
whereby the other party to such contract shall undertake to furnish transfer
agency and shareholder services to the Trust. The contract shall have such terms
and conditions as the Trustees may in their discretion determine not
inconsistent with the Declaration. Such services may be provided by one or more
Persons.
Section 3.6. Custodian. The Trustees may appoint or otherwise engage
one or more banks or trust companies, each having an aggregate capital, surplus
and undivided profits (as shown in its last published report) of at least two
million dollars ($2,000,000) to serve as Custodian with authority as its agent,
but subject to such restrictions, limitations and other requirements, if any, as
may be contained in the By-laws of the Trust. The Trustees may also authorize
the Custodian to employ one or more sub-custodians, including such foreign banks
and securities depositories as meet the requirements of applicable provisions of
the 1940 Act, and upon such terms and conditions as may be agreed upon between
the Custodian and such sub-custodian, to hold securities and other assets of the
Trust and to perform the acts and services of the Custodian, subject to
applicable provisions of law and resolutions adopted by the Trustees.
Section 3.7. Affiliations of Trustees or Officers, Etc. The fact that:
(i) any of the Shareholders, Trustees or officers of the
Trust or any Series thereof is a shareholder, director, officer,
partner, trustee, employee, manager, adviser or distributor of or for
any partnership, corporation, trust, association or other organization
or of or for any parent or affiliate of any organization, with which a
contract of the character described in Sections 3.1, 3.2, 3.3 or 3.4
above or for services as Custodian, Transfer Agent or disbursing agent
or for providing accounting, legal and printing services or for related
services may have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a Shareholder of
or has an interest in the Trust, or that
(ii) any partnership, corporation, trust, association or other
organization with which a contract of the character described in
Sections 3.1, 3.2, 3.3 or 3.4 above or for services as Custodian,
Transfer Agent or disbursing agent or for related services may have
been or may hereafter be made also has any one or more of such
contracts with one or more other partnerships, corporations, trusts,
associations or other organizations, or has other business or
interests,
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shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
Section 3.8. Compliance with 1940 Act. Any contract entered into
pursuant to Sections 3.1 or 3.2 shall be consistent with and subject to the
requirements of Section 15 of the 1940 Act (including any amendment thereof or
other applicable Act of Congress hereafter enacted), as modified by any
applicable order or orders of the Commission, with respect to its continuance in
effect, its termination and the method of authorization and approval of such
contract or renewal thereof.
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust or any Series thereof. No Trustee, officer, employee or agent of the Trust
or any Series thereof shall be subject to any personal liability whatsoever to
any Person, other than to the Trust or its Shareholders, in connection with
Trust Property or the affairs of the Trust, except to the extent arising from
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties with respect to such Person; and all such Persons shall look solely to
the Trust Property, or to the Property of one or more specific Series of the
Trust if the claim arises from the conduct of such Trustee, officer, employee or
agent with respect to only such Series, for satisfaction of claims of any nature
arising in connection with the affairs of the Trust. If any Shareholder,
Trustee, officer, employee, or agent, as such, of the Trust or any Series
thereof, is made a party to any suit or proceeding to enforce any such liability
of the Trust or any Series thereof, he shall not, on account thereof, be held to
any personal liability. The Trust shall indemnify and hold each Shareholder
harmless from and against all claims and liabilities, to which such Shareholder
may become subject by reason of his being or having been a Shareholder, and
shall reimburse such Shareholder or former Shareholder (or his or her heirs,
executors, administrators or other legal representatives or in the case of a
corporation or other entity, its corporate or other general successor) out of
the Trust Property for all legal and other expenses reasonably incurred by him
in connection with any such claim or liability. The indemnification and
reimbursement required by the preceding sentence shall be made only out of
assets of the one or more Series whose Shares were held by said Shareholder at
the time the act or event occurred which gave rise to the claim against or
liability of said Shareholder. The rights accruing to a Shareholder under this
Section 4.1 shall not impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of the
Trust or any Series thereof to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer,
employee or agent of the Trust or any Series thereof shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee, officer, employee, or
agent thereof for any action or failure to act (including without limitation the
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failure to compel in any way any former or acting Trustee to redress any breach
of trust) except for his own bad faith, willful misfeasance, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the exceptions
and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee, officer,
employee or agent of the Trust (including any individual who serves at
its request as director, officer, partner, trustee or the like of
another organization in which it has any interest as a shareholder,
creditor or otherwise) shall be indemnified by the Trust, or by one or
more Series thereof if the claim arises from his or her conduct with
respect to only such Series, to the fullest extent permitted by law
against all liability and against all expenses reasonably incurred or
paid by him in connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal, or other, including appeals), actual or threatened; and the
words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust, a Series thereof or
the Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust or a
Series thereof;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(ii)
resulting in a payment by a Trustee or officer, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office:
(A) by the court or other body approving the
settlement or other disposition;
(B) based upon a review of readily available facts
(as opposed to a full trial-type inquiry) by (x) vote of a
majority of the Non-interested Trustees acting on the matter
(provided that a majority of the Non-interested Trustees then
in office act on the matter) or (y) written opinion of
independent legal counsel; or
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(C) by a vote of a majority of the Shares outstanding
and entitled to vote (excluding Shares owned of record or
beneficially by such individual).
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee or officer may now or hereafter be
entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors, administrators
and assigns of such a person. Nothing contained herein shall affect any rights
to indemnification to which personnel of the Trust or any Series thereof other
than Trustees and officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph (a) of this
Section 4.3 may be advanced by the Trust or a Series thereof prior to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by a surety bond or some
other appropriate security provided by the recipient, or the Trust or
Series thereof shall be insured against losses arising out of any such
advances; or
(ii) a majority of the Non-interested Trustees acting on the
matter (provided that a majority of the Non-interested Trustees act on
the matter) or an independent legal counsel in a written opinion shall
determine, based upon a review of readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who (i)
is not an "Interested Person" of the Trust (including anyone who has been
exempted from being an "Interested Person" by any rule, regulation or order of
the Commission), and (ii) is not involved in the claim, action, suit or
proceeding.
Section 4.4. No Bond Required of Trustees. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
Section 4.5. No Duty of Investigation; Notice in Trust Instruments,
Etc. No purchaser, lender, transfer agent or other Person dealing with the
Trustees or any officer, employee or agent of the Trust or a Series thereof
shall be bound to make any inquiry concerning the validity of any transaction
purporting to be made by the Trustees or by said officer, employee or agent or
be liable for the application of money or property paid, loaned, or delivered to
or on the order of the Trustees or of said officer, employee or agent. Every
obligation, contract, instrument, certificate, Share, other security of the
Trust or a Series thereof or undertaking, and every other act or thing
whatsoever executed in connection with the Trust shall be conclusively presumed
to have been executed or done by the executors thereof only in their capacity as
Trustees under this Declaration or in their capacity as officers, employees or
agents of the Trust or a Series thereof. Every written obligation, contract,
instrument, certificate, Share, other security of the Trust or a Series thereof
or undertaking made or issued by the Trustees may recite that the same is
executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of the Trust or a Series thereof under any
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such instrument are not binding upon any of the Trustees or Shareholders
individually, but bind only the Trust Property or the Trust Property of the
applicable Series, and may contain any further recital which they may deem
appropriate, but the omission of such recital shall not operate to bind the
Trustees individually. The Trustees shall at all times maintain insurance for
the protection of the Trust Property or the Trust Property of the applicable
Series, its Shareholders, Trustees, officers, employees and agents in such
amount as the Trustees shall deem adequate to cover possible tort liability, and
such other insurance as the Trustees in their sole judgment shall deem
advisable.
Section 4.6. Reliance on Experts, Etc. Each Trustee, officer or
employee of the Trust or a Series thereof shall, in the performance of his
duties, be fully and completely justified and protected with regard to any act
or any failure to act resulting from reliance in good faith upon the books of
account or other records of the Trust or a Series thereof, upon an opinion of
counsel, or upon reports made to the Trust or a Series thereof by any of its
officers or employees or by the Investment Adviser, the Administrator, the
Distributor, Transfer Agent, selected dealers, accountants, appraisers or other
experts or consultants selected with reasonable care by the Trustees, officers
or employees of the Trust, regardless of whether such counsel or expert may also
be a Trustee.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
Section 5.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable Shares of beneficial interest
without par value. The number of such Shares of beneficial interest authorized
hereunder is unlimited. The Trustees shall have the exclusive authority without
the requirement of Shareholder approval to establish and designate one or more
Series of shares and one or more Classes thereof as the Trustees deem necessary
or desirable. Each Share of any Series shall represent an equal proportionate
Share in the assets of that Series with each other Share in that Series. Subject
to the provisions of Section 5.11 hereof, the Trustees may also authorize the
creation of additional Series of Shares (the proceeds of which may be invested
in separate, independently managed portfolios) and additional Classes of Shares
within any Series. All Shares issued hereunder including, without limitation,
Shares issued in connection with a dividend in Shares or a split in Shares,
shall be fully paid and nonassessable.
Section 5.2. Rights of Shareholders. The ownership of the Trust
Property of every description and the right to conduct any business hereinbefore
described are vested exclusively in the Trustees, and the Shareholders shall
have no interest therein other than the beneficial interest conferred by their
Shares, and they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can they be called
upon to share or assume any losses of the Trust or suffer an assessment of any
kind by virtue of their ownership of Shares. The Shares shall be personal
property giving only the rights specifically set forth in this Declaration. The
Shares shall not entitle the holder to preference, preemptive, appraisal,
conversion or exchange rights, except as the Trustees may determine with respect
to any Series or Class of Shares.
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Section 5.3. Trust Only. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.
Section 5.4. Issuance of Shares. The Trustees in their discretion may,
from time to time without a vote of the Shareholders, issue Shares, in addition
to the then issued and outstanding Shares and Shares held in the treasury, to
such party or parties and for such amount and type of consideration, including
cash or property, at such time or times and on such terms as the Trustees may
deem best, except that only Shares previously contracted to be sold may be
issued during any period when the right of redemption is suspended pursuant to
Section 6.9 hereof, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection with the assumption of,
liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue fractional Shares and Shares held in the treasury. The
Trustees may from time to time divide or combine the Shares of the Trust or, if
the Shares be divided into Series or Classes, of any Series or any Class thereof
of the Trust, into a greater or lesser number without thereby changing the
proportionate beneficial interests in the Trust or in the Trust Property
allocated or belonging to such Series or Class. Contributions to the Trust or
Series thereof may be accepted for, and Shares shall be redeemed as, whole
Shares and/or 1/1000ths of a Share or integral multiples thereof.
Section 5.5. Register of Shares. A register shall be kept at the
principal office of the Trust or an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by them respectively and a record of all transfers thereof. Such register
shall be conclusive as to who are the holders of the Shares and who shall be
entitled to receive dividends or distributions or otherwise to exercise or enjoy
the rights of Shareholders. No Shareholder shall be entitled to receive payment
of any dividend or distribution, nor to have notice given to him as provided
herein or in the By-laws, until he has given his address to the Transfer Agent
or such other officer or agent of the Trustees as shall keep the said register
for entry thereon. It is not contemplated that certificates will be issued for
the Shares; however, the Trustees, in their discretion, may authorize the
issuance of share certificates and promulgate appropriate rules and regulations
as to their use.
Section 5.6. Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be required. Upon such delivery the transfer shall be recorded on the
register of the Trust. Until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any transfer agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or the Transfer
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Agent, but until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer or agent of the
Trust shall be affected by any notice of such death, bankruptcy or incompetence,
or other operation of law.
Section 5.7. Notices. Any and all notices to which any Shareholder may
be entitled and any and all communications shall be deemed duly served or given
if mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
Section 5.8. Treasury Shares. Shares held in the treasury shall, until
resold pursuant to Section 5.4, not confer any voting rights on the Trustees,
nor shall such Shares be entitled to any dividends or other distributions
declared with respect to the Shares.
Section 5.9. Voting Powers. The Shareholders shall have power to vote
only (i) for the election of Trustees as provided in Section 2.13; (ii) with
respect to any investment advisory contract entered into pursuant to Section
3.2; (iii) with respect to termination of the Trust or a Series or Class thereof
as provided in Section 8.2; (iv) with respect to any amendment of this
Declaration to the limited extent and as provided in Section 8.3; (v) with
respect to a merger, consolidation or sale of assets as provided in Section 8.4;
(vi) with respect to incorporation of the Trust to the extent and as provided in
Section 8.5; (vii) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or should not be brought or maintained derivatively or as a class action
on behalf of the Trust or a Series thereof or the Shareholders of either; (viii)
with respect to any plan adopted pursuant to Rule 12b-1 (or any successor rule)
under the 1940 Act, and related matters; and (ix) with respect to such
additional matters relating to the Trust as may be required by this Declaration,
the By-laws or any registration of the Trust as an investment company under the
1940 Act with the Commission (or any successor agency) or as the Trustees may
consider necessary or desirable. As determined by the Trustees without the vote
or consent of shareholders, on any matter submitted to a vote of Shareholders
either (i) each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote or (ii) each dollar of net asset value (number of
Shares owned times net asset value per share of such Series or Class, as
applicable) shall be entitled to one vote on any matter on which such Shares are
entitled to vote and each fractional dollar amount shall be entitled to a
proportionate fractional vote. The Trustees may, in conjunction with the
establishment of any further Series or any Classes of Shares, establish
conditions under which the several Series or Classes of Shares shall have
separate voting rights or no voting rights. There shall be no cumulative voting
in the election of Trustees. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required by law, this
Declaration or the By-laws to be taken by Shareholders. The By-laws may include
further provisions for Shareholders' votes and meetings and related matters.
Section 5.10. Meetings of Shareholders. No annual or regular meetings
of Shareholders are required. Special meetings of the Shareholders, including
meetings involving only the holders of Shares of one or more but less than all
Series or Classes thereof, may be called at any time by the Chairman of the
Board, President, or any Vice-President of the Trust, and shall be called by the
President or the Secretary at the request, in writing or by resolution, of a
majority of the Trustees, or at the written request of the holder or holders of
ten percent (10%) or more of the total number of Outstanding Shares of the Trust
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entitled to vote at such meeting. Meetings of the Shareholders of any Series
shall be called by the President or the Secretary at the written request of the
holder or holders of ten percent (10%) or more of the total number of
Outstanding Shares of such Series of the Trust entitled to vote at such meeting.
Any such request shall state the purpose of the proposed meeting.
Section 5.11. Series or Class Designation. (a) Without limiting the
authority of the Trustees set forth in Section 5.1 to establish and designate
any further Series or Classes, the Trustees hereby establish the following
Series, which consists of two Classes of Shares: John Hancock California
Tax-Free Income Fund (the "Existing Series").
(b) The Shares of the Existing Series and Class thereof herein
established and designated and any Shares of any further Series and Classes
thereof that may from time to time be established and designated by the Trustees
shall be established and designated, and the variations in the relative rights
and preferences as between the different Series shall be fixed and determined,
by the Trustees (unless the Trustees otherwise determine with respect to further
Series or Classes at the time of establishing and designating the same);
provided, that all Shares shall be identical except that there may be variations
so fixed and determined between different Series or Classes thereof as to
investment objective, policies and restrictions, purchase price, payment
obligations, distribution expenses, right of redemption, special and relative
rights as to dividends and on liquidation, conversion rights, exchange rights,
and conditions under which the several Series or Classes shall have separate
voting rights, all of which are subject to the limitations set forth below. All
references to Shares in this Declaration shall be deemed to be Shares of any or
all Series or Classes as the context may require.
(c) As to any Existing Series and Classes herein established and
designated and any further division of Shares of the Trust into additional
Series or Classes, the following provisions shall be applicable:
(i) The number of authorized Shares and the number of Shares
of each Series or Class thereof that may be issued shall be unlimited. The
Trustees may classify or reclassify any unissued Shares or any Shares previously
issued and reacquired of any Series or Class into one or more Series or one or
more Classes that may be established and designated from time to time. The
Trustees may hold as treasury shares (of the same or some other Series or
Class), reissue for such consideration and on such terms as they may determine,
or cancel any Shares of any Series or Class reacquired by the Trust at their
discretion from time to time.
(ii) All consideration received by the Trust for the issue or
sale of Shares of a particular Series or Class, together with all assets in
which such consideration is invested or reinvested, all income, earnings,
profits, and proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to the rights
of creditors of such Series and except as may otherwise be required by
applicable tax laws, and shall be so recorded upon the books of account of the
Trust. In the event that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable as
belonging to any particular Series, the Trustees shall allocate them among any
one or more of the Series established and designated from time to time in such
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manner and on such basis as they, in their sole discretion, deem fair and
equitable. Each such allocation by the Trustees shall be conclusive and binding
upon the Shareholders of all Series for all purposes. No holder of Shares of any
Series shall have any claim on or right to any assets allocated or belonging to
any other Series.
(iii) The assets belonging to each particular Series shall be
charged with the liabilities of the Trust in respect of that Series or the
appropriate Class or Classes thereof and all expenses, costs, charges and
reserves attributable to that Series or Class or Classes thereof, and any
general liabilities, expenses, costs, charges or reserves of the Trust which are
not readily identifiable as belonging to any particular Series shall be
allocated and charged by the Trustees to and among any one or more of the Series
established and designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all Series and Classes for all
purposes. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items are capital; and each
such determination and allocation shall be conclusive and binding upon the
Shareholders. The assets of a particular Series of the Trust shall under no
circumstances be charged with liabilities attributable to any other Series or
Class thereof of the Trust. All persons extending credit to, or contracting with
or having any claim against a particular Series or Class of the Trust shall look
only to the assets of that particular Series for payment of such credit,
contract or claim.
(iv) The power of the Trustees to pay dividends and make
distributions shall be governed by Section 7.2 of this Declaration. With respect
to any Series or Class, dividends and distributions on Shares of a particular
Series or Class may be paid with such frequency as the Trustees may determine,
which may be daily or otherwise, pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Trustees may
determine, to the holders of Shares of that Series or Class, from such of the
income and capital gains, accrued or realized, from the assets belonging to that
Series, as the Trustees may determine, after providing for actual and accrued
liabilities belonging to that Series or Class. All dividends and distributions
on Shares of a particular Series or Class shall be distributed pro rata to the
Shareholders of that Series or Class in proportion to the number of Shares of
that Series or Class held by such Shareholders at the time of record established
for the payment of such dividends or distribution.
(v) Each Share of a Series of the Trust shall represent a
beneficial interest in the net assets of such Series. Each holder of Shares of a
Series or Class thereof shall be entitled to receive his pro rata share of
distributions of income and capital gains made with respect to such Series or
Class net of expenses. Upon redemption of his Shares or indemnification for
liabilities incurred by reason of his being or having been a Shareholder of a
Series or Class, such Shareholder shall be paid solely out of the funds and
property of such Series of the Trust. Upon liquidation or termination of a
Series or Class thereof of the Trust, Shareholders of such Series or Class
thereof shall be entitled to receive a pro rata share of the net assets of such
Series. A Shareholder of a particular Series of the Trust shall not be entitled
to participate in a derivative or class action on behalf of any other Series or
the Shareholders of any other Series of the Trust.
(vi) On each matter submitted to a vote of Shareholders, all
Shares of all Series and Classes shall vote as a single class; provided,
however, that (1) as to any matter with respect to which a separate vote of any
Series or Class is required by the 1940 Act or is required by attributes
applicable to any Series or Class or is required by any Rule 12b-1 plan, such
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requirements as to a separate vote by that Series or Class shall apply, (2) to
the extent that a matter referred to in clause (1) above, affects more than one
Class or Series and the interests of each such Class or Series in the matter are
identical, then, subject to clause (3) below, the Shares of all such affected
Classes or Series shall vote as a single Class; (3) as to any matter which does
not affect the interests of a particular Series or Class, only the holders of
Shares of the one or more affected Series or Classes shall be entitled to vote;
and (4) the provisions of the following sentence shall apply. On any matter that
pertains to any particular Class of a particular Series or to any Class expenses
with respect to any Series which matter may be submitted to a vote of
Shareholders, only Shares of the affected Class or that Series, as the case may
be, shall be entitled to vote except that: (i) to the extent said matter affects
Shares of another Class or Series, such other Shares shall also be entitled to
vote, and in such cases Shares of the affected Class, as the case may be, of
such Series shall be voted in the aggregate together with such other Shares; and
(ii) to the extent that said matter does not affect Shares of a particular Class
of such Series, said Shares shall not be entitled to vote (except where
otherwise required by law or permitted by the Trustees acting in their sole
discretion) even though the matter is submitted to a vote of the Shareholders of
any other Class or Series.
(vii) Except as otherwise provided in this Article V, the
Trustees shall have the power to determine the designations, preferences,
privileges, payment obligations, limitations and rights, including voting and
dividend rights, of each Class and Series of Shares. Subject to compliance with
the requirements of the 1940 Act, the Trustees shall have the authority to
provide that the holders of Shares of any Series or Class shall have the right
to convert or exchange said Shares into Shares of one or more Series or Classes
of Shares in accordance with such requirements, conditions and procedures as may
be established by the Trustees.
(viii) The establishment and designation of any Series or
Classes of Shares shall be effective upon the execution by a majority of the
then Trustees of an instrument setting forth such establishment and designation
and the relative rights and preferences of such Series or Classes, or as
otherwise provided in such instrument. At any time that there are no Shares
outstanding of any particular Series or Class previously established and
designated, the Trustees may by an instrument executed by a majority of their
number abolish that Series or Class and the establishment and designation
thereof. Each instrument referred to in this section shall have the status of an
amendment to this Declaration.
Section 5.12. Assent to Declaration of Trust. Every Shareholder, by
virtue of having become a Shareholder, shall be held to have expressly assented
and agreed to the terms hereof and to have become a party hereto.
ARTICLE VI
REDEMPTION AND REPURCHASE OF SHARES
Section 6.1. Redemption of Shares. (a) All Shares of the Trust shall be
redeemable, at the redemption price determined in the manner set out in this
Declaration. Redeemed or repurchased Shares may be resold by the Trust. The
Trust may require any Shareholder to pay a sales charge to the Trust, the
underwriter, or any other person designated by the Trustees upon redemption or
repurchase of Shares in such amount and upon such conditions as shall be
determined from time to time by the Trustees.
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(b) The Trust shall redeem the Shares of the Trust or any Series or
Class thereof at the price determined as hereinafter set forth, upon the
appropriately verified written application of the record holder thereof (or upon
such other form of request as the Trustees may determine) at such office or
agency as may be designated from time to time for that purpose by the Trustees.
The Trustees may from time to time specify additional conditions, not
inconsistent with the 1940 Act, regarding the redemption of Shares in the
Trust's then effective Prospectus.
Section 6.2. Price. Shares shall be redeemed at a price based on their
net asset value determined as set forth in Section 7.1 hereof as of such time as
the Trustees shall have theretofore prescribed by resolution. In the absence of
such resolution, the redemption price of Shares deposited shall be based on the
net asset value of such Shares next determined as set forth in Section 7.1
hereof after receipt of such application. The amount of any contingent deferred
sales charge or redemption fee payable upon redemption of Shares may be deducted
from the proceeds of such redemption.
Section 6.3. Payment. Payment of the redemption price of Shares of the
Trust or any Series or Class thereof shall be made in cash or in property to the
Shareholder at such time and in the manner, not inconsistent with the 1940 Act
or other applicable laws, as may be specified from time to time in the Trust's
then effective Prospectus(es), subject to the provisions of Section 6.4 hereof.
Notwithstanding the foregoing, the Trustees may withhold from such redemption
proceeds any amount arising (i) from a liability of the redeeming Shareholder to
the Trust or (ii) in connection with any Federal or state tax withholding
requirements.
Section 6.4. Effect of Suspension of Determination of Net Asset Value.
If, pursuant to Section 6.9 hereof, the Trustees shall declare a suspension of
the determination of net asset value with respect to Shares of the Trust or of
any Series or Class thereof, the rights of Shareholders (including those who
shall have applied for redemption pursuant to Section 6.1 hereof but who shall
not yet have received payment) to have Shares redeemed and paid for by the Trust
or a Series or Class thereof shall be suspended until the termination of such
suspension is declared. Any record holder who shall have his redemption right so
suspended may, during the period of such suspension, by appropriate written
notice of revocation at the office or agency where application was made, revoke
any application for redemption not honored and withdraw any Share certificates
on deposit. The redemption price of Shares for which redemption applications
have not been revoked shall be based on the net asset value of such Shares next
determined as set forth in Section 7.1 after the termination of such suspension,
and payment shall be made within seven (7) days after the date upon which the
application was made plus the period after such application during which the
determination of net asset value was suspended.
Section 6.5. Repurchase by Agreement. The Trust may repurchase Shares
directly, or through the Distributor or another agent designated for the
purpose, by agreement with the owner thereof at a price not exceeding the net
asset value per share determined as of the time when the purchase or contract of
purchase is made or the net asset value as of any time which may be later
determined pursuant to Section 7.1 hereof, provided payment is not made for the
Shares prior to the time as of which such net asset value is determined.
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Section 6.6. Redemption of Shareholder's Interest. The Trustees, in
their sole discretion, may cause the Trust to redeem all of the Shares of one or
more Series or Class thereof held by any Shareholder if the value of such Shares
held by such Shareholder is less than the minimum amount established from time
to time by the Trustees.
Section 6.7. Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding. (a) If the Trustees shall, at any
time and in good faith, be of the opinion that direct or indirect ownership of
Shares or other securities of the Trust has or may become concentrated in any
Person to an extent which would disqualify the Trust or any Series of the Trust
as a regulated investment company under the Internal Revenue Code of 1986, then
the Trustees shall have the power by lot or other means deemed equitable by them
(i) to call for redemption by any such Person a number, or principal amount, of
Shares or other securities of the Trust or any Series of the Trust sufficient to
maintain or bring the direct or indirect ownership of Shares or other securities
of the Trust or any Series of the Trust into conformity with the requirements
for such qualification and (ii) to refuse to transfer or issue Shares or other
securities of the Trust or any Series of the Trust to any Person whose
acquisition of the Shares or other securities of the Trust or any Series of the
Trust in question would result in such disqualification. The redemption shall be
effected at the redemption price and in the manner provided in Section 6.1.
(b) The holders of Shares or other securities of the Trust or any
Series of the Trust shall upon demand disclose to the Trustees in writing such
information with respect to direct and indirect ownership of Shares or other
securities of the Trust or any Series of the Trust as the Trustees deem
necessary to comply with the provisions of the Internal Revenue Code of 1986, as
amended, or to comply with the requirements of any other taxing authority.
Section 6.8. Reductions in Number of Outstanding Shares Pursuant to Net
Asset Value Formula. The Trust may also reduce the number of outstanding Shares
of the Trust or of any Series of the Trust pursuant to the provisions of Section
7.3.
Section 6.9. Suspension of Right of Redemption. The Trust may declare a
suspension of the right of redemption or postpone the date of payment or
redemption for the whole or any part of any period (i) during which the New York
Stock Exchange is closed other than customary weekend and holiday closings, (ii)
during which trading on the New York Stock Exchange is restricted, (iii) during
which an emergency exists as a result of which disposal by the Trust or a Series
thereof of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Trust or a Series thereof fairly to determine the
value of its net assets, or (iv) during any other period when the Commission may
for the protection of Shareholders of the Trust by order permit suspension of
the right of redemption or postponement of the date of payment or redemption;
provided that applicable rules and regulations of the Commission shall govern as
to whether the conditions prescribed in clauses (ii), (iii), or (iv) exist. Such
suspension shall take effect at such time as the Trust shall specify but not
later than the close of business on the business day next following the
declaration of suspension, and thereafter there shall be no right of redemption
or payment on redemption until the Trust shall declare the suspension at an end,
except that the suspension shall terminate in any event on the first day on
which said stock exchange shall have reopened or the period specified in (ii) or
(iii) shall have expired (as to which in the absence of an official ruling by
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the Commission, the determination of the Trust shall be conclusive). In the case
of a suspension of the right of redemption, a Shareholder may either withdraw
his request for redemption or receive payment based on the net asset value
existing after the termination of the suspension.
ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
Section 7.1. Net Asset Value. The net asset value of each outstanding
Share of the Trust or of each Series or Class thereof shall be determined on
such days and at such time or times as the Trustees may determine. The value of
the assets of the Trust or any Series thereof may be determined (i) by a pricing
service which utilizes electronic pricing techniques based on general
institutional trading, (ii) by appraisal of the securities owned by the Trust or
any Series of the Trust, (iii) in certain cases, at amortized cost, or (iv) by
such other method as shall be deemed to reflect the fair value thereof,
determined in good faith by or under the direction of the Trustees. From the
total value of said assets, there shall be deducted all indebtedness, interest,
taxes, payable or accrued, including estimated taxes on unrealized book profits,
expenses and management charges accrued to the appraisal date, net income
determined and declared as a distribution and all other items in the nature of
liabilities which shall be deemed appropriate, as incurred by or allocated to
the Trust or any Series or Class of the Trust. The resulting amount which shall
represent the total net assets of the Trust or Series or Class thereof shall be
divided by the number of Shares of the Trust or Series or Class thereof
outstanding at the time and the quotient so obtained shall be deemed to be the
net asset value of the Shares of the Trust or Series or Class thereof. The net
asset value of the Shares shall be determined at least once on each business
day, as of the close of regular trading on the New York Stock Exchange or as of
such other time or times as the Trustees shall determine. The power and duty to
make the daily calculations may be delegated by the Trustees to the Investment
Adviser, the Administrator, the Custodian, the Transfer Agent or such other
Person as the Trustees by resolution may determine. The Trustees may suspend the
daily determination of net asset value to the extent permitted by the 1940 Act.
It shall not be a violation of any provision of this Declaration if Shares are
sold, redeemed or repurchased by the Trust at a price other than one based on
net asset value if the net asset value is affected by one or more errors
inadvertently made in the pricing of portfolio securities or in accruing income,
expenses or liabilities.
Section 7.2. Distributions to Shareholders. (a) The Trustees shall from
time to time distribute ratably among the Shareholders of the Trust or of a
Series or Class thereof such proportion of the net profits, surplus (including
paid-in surplus), capital, or assets of the Trust or such Series held by the
Trustees as they may deem proper. Such distributions may be made in cash or
property (including without limitation any type of obligations of the Trust or
Series or Class or any assets thereof), and the Trustees may distribute ratably
among the Shareholders of the Trust or Series or Class thereof additional Shares
of the Trust or Series or Class thereof issuable hereunder in such manner, at
such times, and on such terms as the Trustees may deem proper. Such
distributions may be among the Shareholders of the Trust or Series or Class
thereof at the time of declaring a distribution or among the Shareholders of the
Trust or Series or Class thereof at such other date or time or dates or times as
the Trustees shall determine. The Trustees may in their discretion determine
that, solely for the purposes of such distributions, Outstanding Shares shall
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exclude Shares for which orders have been placed subsequent to a specified time
on the date the distribution is declared or on the next preceding day if the
distribution is declared as of a day on which Boston banks are not open for
business, all as described in the then effective Prospectus under the Securities
Act of 1933. The Trustees may always retain from the net profits such amount as
they may deem necessary to pay the debts or expenses of the Trust or a Series or
Class thereof or to meet obligations of the Trust or a Series or Class thereof,
or as they may deem desirable to use in the conduct of its affairs or to retain
for future requirements or extensions of the business. The Trustees may adopt
and offer to Shareholders such dividend reinvestment plans, cash dividend payout
plans or related plans as the Trustees shall deem appropriate. The Trustees may
in their discretion determine that an account administration fee or other
similar charge may be deducted directly from the income and other distributions
paid on Shares to a Shareholder's account in each Series or Class.
(b) Inasmuch as the computation of net income and gains for Federal
income tax purposes may vary from the computation thereof on the books, the
above provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust or a Series or Class thereof to avoid or reduce liability for
taxes.
Section 7.3. Determination of Net Income; Constant Net Asset Value;
Reduction of Outstanding Shares. Subject to Section 5.11 hereof, the net income
of the Series and Classes thereof of the Trust shall be determined in such
manner as the Trustees shall provide by resolution. Expenses of the Trust or of
a Series or Class thereof, including the advisory or management fee, shall be
accrued each day. Each Class shall bear only expenses relating to its Shares and
an allocable share of Series expenses in accordance with such policies as may be
established by the Trustees from time to time and as are not inconsistent with
the provisions of this Declaration or of any applicable document filed by the
Trust with the Commission or of the Internal Revenue Code of 1986, as amended.
Such net income may be determined by or under the direction of the Trustees as
of the close of regular trading on the New York Stock Exchange on each day on
which such market is open or as of such other time or times as the Trustees
shall determine, and, except as provided herein, all the net income of any
Series or Class, as so determined, may be declared as a dividend on the
Outstanding Shares of such Series or Class. If, for any reason, the net income
of any Series or Class determined at any time is a negative amount, or for any
other reason, the Trustees shall have the power with respect to such Series or
Class (i) to offset each Shareholder's pro rata share of such negative amount
from the accrued dividend account of such Shareholder, or (ii) to reduce the
number of Outstanding Shares of such Series or Class by reducing the number of
Shares in the account of such Shareholder by that number of full and fractional
Shares which represents the amount of such excess negative net income, or (iii)
to cause to be recorded on the books of the Trust an asset account in the amount
of such negative net income, which account may be reduced by the amount,
provided that the same shall thereupon become the property of the Trust with
respect to such Series or Class and shall not be paid to any Shareholder, of
dividends declared thereafter upon the Outstanding Shares of such Series or
Class on the day such negative net income is experienced, until such asset
account is reduced to zero. The Trustees shall have full discretion to determine
whether any cash or property received shall be treated as income or as principal
and whether any item of expense shall be charged to the income or the principal
account, and their determination made in good faith shall be conclusive upon the
Shareholders. In the case of stock dividends received, the Trustees shall have
full discretion to determine, in the light of the particular circumstances, how
much if any of the value thereof shall be treated as income, the balance, if
any, to be treated as principal.
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Section 7.4. Power to Modify Foregoing Procedures. Notwithstanding any
of the foregoing provisions of this Article VII, but subject to Section 5.11
hereof, the Trustees may prescribe, in their absolute discretion, such other
bases and times for determining the per Share net asset value of the Shares of
the Trust or a Series or Class thereof or net income of the Trust or a Series or
Class thereof, or the declaration and payment of dividends and distributions as
they may deem necessary or desirable. Without limiting the generality of the
foregoing, the Trustees may establish several Series or Classes of Shares in
accordance with Section 5.11, and declare dividends thereon in accordance with
Section 5.11(d)(iv).
ARTICLE VIII
DURATION; TERMINATION OF TRUST OR A SERIES OR CLASS;
AMENDMENT; MERGERS, ETC.
Section 8.1. Duration. The Trust shall continue without limitation of
time but subject to the provisions of this Article VIII.
Section 8.2. Termination of the Trust or a Series or a Class. The Trust
or any Series or Class thereof may be terminated by (i) the affirmative vote of
the holders of not less than two-thirds of the Outstanding Shares entitled to
vote and present in person or by proxy at any meeting of Shareholders of the
Trust or the appropriate Series or Class thereof, (ii) by an instrument or
instruments in writing without a meeting, consented to by the holders of
two-thirds of the Outstanding Shares of the Trust or a Series or Class thereof;
provided, however, that, if such termination as described in clauses (i) and
(ii) is recommended by the Trustees, the vote or written consent of the holders
of a majority of the Outstanding Shares of the Trust or a Series or Class
thereof entitled to vote shall be sufficient authorization, or (iii) notice to
Shareholders by means of an instrument in writing signed by a majority of the
Trustees, stating that a majority of the Trustees has determined that the
continuation of the Trust or a Series or a Class thereof is not in the best
interest of such Series or a Class, the Trust or their respective shareholders
as a result of factors or events adversely affecting the ability of such Series
or a Class or the Trust to conduct its business and operations in an
economically viable manner. Such factors and events may include (but are not
limited to) the inability of a Series or Class or the Trust to maintain its
assets at an appropriate size, changes in laws or regulations governing the
Series or Class or the Trust or affecting assets of the type in which such
Series or Class or the Trust invests or economic developments or trends having a
significant adverse impact on the business or operations of such Series or Class
or the Trust. Upon the termination of the Trust or the Series or Class,
(i) The Trust, Series or Class shall carry on no business
except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust, Series or Class and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust, Series or
Class shall have been wound up, including the power to fulfill or
discharge the contracts of the Trust, Series or Class, collect its
assets, sell, convey, assign, exchange, transfer or otherwise dispose
of all or any part of the remaining Trust Property or Trust Property
allocated or belonging to such Series or Class to one or more persons
at public or private sale for consideration which may consist in whole
or in part of cash, securities or other property of any kind, discharge
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or pay its liabilities, and do all other acts appropriate to liquidate
its business; provided that any sale, conveyance, assignment, exchange,
transfer or other disposition of all or substantially all the Trust
Property or Trust Property allocated or belonging to such Series or
Class that requires Shareholder approval in accordance with Section 8.4
hereof shall receive the approval so required.
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the
Trustees may distribute the remaining Trust Property or the remaining
property of the terminated Series or Class, in cash or in kind or
partly each, among the Shareholders of the Trust or the Series or Class
according to their respective rights.
(b) After termination of the Trust, Series or Class and distribution to
the Shareholders as herein provided, a majority of the Trustees shall execute
and lodge among the records of the Trust and file with the Office of the
Secretary of The Commonwealth of Massachusetts an instrument in writing setting
forth the fact of such termination, and the Trustees shall thereupon be
discharged from all further liabilities and duties with respect to the Trust or
the terminated Series or Class, and the rights and interests of all Shareholders
of the Trust or the terminated Series or Class shall thereupon cease.
Section 8.3. Amendment Procedure. (a) This Declaration may be amended
by a vote of the holders of a majority of the Shares outstanding and entitled to
vote or by any instrument in writing, without a meeting, signed by a majority of
the Trustees and consented to by the holders of a majority of the Shares
outstanding and entitled to vote.
(b) This Declaration may be amended by a vote of a majority of
Trustees, without approval or consent of the Shareholders, except that no
amendment can be made by the Trustees to impair any voting or other rights of
shareholders prescribed by Federal or state law. Without limiting the foregoing,
the Trustees may amend this Declaration without the approval or consent of
Shareholders (i) to change the name of the Trust or any Series, (ii) to add to
their duties or obligations or surrender any rights or powers granted to them
herein; (iii) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein or to make any
other provisions with respect to matters or questions arising under this
Declaration which will not be inconsistent with the provisions of this
Declaration; and (iv) to eliminate or modify any provision of this Declaration
which (a) incorporates, memorializes or sets forth an existing requirement
imposed by or under any Federal or state statute or any rule, regulation or
interpretation thereof or thereunder or (b) any rule, regulation, interpretation
or guideline of any Federal or state agency, now or hereafter in effect,
including without limitation, requirements set forth in the 1940 Act and the
rules and regulations thereunder (and interpretations thereof), to the extent
any change in applicable law liberalizes, eliminates or modifies any such
requirements, but the Trustees shall not be liable for failure to do so.
(c) The Trustees may also amend this Declaration without the approval
or consent of Shareholders if they deem it necessary to conform this Declaration
to the requirements of applicable Federal or state laws or regulations or the
requirements of the regulated investment company provisions of the Internal
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Revenue Code of 1986, as amended, or if requested or required to do so by any
Federal agency or by a state Blue Sky commissioner or similar official, but the
Trustees shall not be liable for failing so to do.
(d) Nothing contained in this Declaration shall permit the amendment of
this Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to permit
assessments upon Shareholders.
(e) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Trustees or by the
Shareholders as aforesaid or a copy of the Declaration, as amended, and executed
by a majority of the Trustees, shall be conclusive evidence of such amendment
when lodged among the records of the Trust.
Section 8.4. Merger, Consolidation and Sale of Assets. The Trust or any
Series may merge or consolidate into any other corporation, association, trust
or other organization or may sell, lease or exchange all or substantially all of
the Trust Property or Trust Property allocated or belonging to such Series,
including its good will, upon such terms and conditions and for such
consideration when and as authorized at any meeting of Shareholders called for
the purpose by the affirmative vote of the holders of two-thirds of the Shares
of the Trust or such Series outstanding and entitled to vote and present in
person or by proxy at a meeting of Shareholders, or by an instrument or
instruments in writing without a meeting, consented to by the holders of
two-thirds of the Shares of the Trust or such Series; provided, however, that,
if such merger, consolidation, sale, lease or exchange is recommended by the
Trustees, the vote or written consent of the holders of a majority of the
Outstanding Shares of the Trust or such Series entitled to vote shall be
sufficient authorization; and any such merger, consolidation, sale, lease or
exchange shall be deemed for all purposes to have been accomplished under and
pursuant to Massachusetts law.
Section 8.5. Incorporation. The Trustees may cause to be organized or
assist in organizing a corporation or corporations under the laws of any
jurisdiction or any other trust, partnership, association or other organization
to take over all or any portion of the Trust Property or the Trust Property
allocated or belonging to such Series or to carry on any business in which the
Trust shall directly or indirectly have any interest, and to sell, convey and
transfer all or any portion of the Trust Property or the Trust Property
allocated or belonging to such Series to any such corporation, trust,
association or organization in exchange for the shares or securities thereof or
otherwise, and to lend money to, subscribe for the shares or securities of, and
enter into any contracts with any such corporation, trust, partnership,
association or organization, or any corporation, partnership, trust, association
or organization in which the Trust or such Series holds or is about to acquire
shares or any other interest. The Trustees may also cause a merger or
consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders for
the Trustees to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and selling, conveying
or transferring all or a portion of the Trust Property to such organization or
entities.
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ARTICLE IX
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders of
each Series a written financial report of the transactions of the Trust and
Series thereof, including financial statements which shall at least annually be
certified by independent public accountants.
ARTICLE X
MISCELLANEOUS
Section 10.1. Execution and Filing. This Declaration and any amendment
hereto shall be filed in the office of the Secretary of The Commonwealth of
Massachusetts and in such other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that such action was
duly taken in a manner provided herein, and unless such amendment or such
certificate sets forth some later time for the effectiveness of such amendment,
such amendment shall be effective upon its execution. A restated Declaration,
integrating into a single instrument all of the provisions of the Declaration
which are then in effect and operative, may be executed from time to time by a
majority of the Trustees and filed with the Secretary of The Commonwealth of
Massachusetts. A restated Declaration shall, upon execution, be conclusive
evidence of all amendments contained therein and may thereafter be referred to
in lieu of the original Declaration and the various amendments thereto.
Section 10.2. Governing Law. This Declaration is executed by the
Trustees and delivered in The Commonwealth of Massachusetts and with reference
to the laws thereof, and the rights of all parties and the validity and
construction of every provision hereof shall be subject to and construed
according to the laws of said Commonwealth.
Section 10.3. Counterparts. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
Section 10.4. Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust appears to be a Trustee
hereunder, certifying (a) the number or identity of Trustees or Shareholders,
(b) the due authorization of the execution of any instrument or writing, (c) the
form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact
that the number of Trustees or Shareholders present at any meeting or executing
any written instrument satisfies the requirements of this Declaration, (e) the
form of any By-laws adopted by or the identity of any officers elected by the
Trustees, or (f) the existence of any fact or facts which in any manner relate
to the affairs of the Trust, shall be conclusive evidence as to the matters so
certified in favor of any Person dealing with the Trustees and their successors.
27
<PAGE>
Section 10.5. Provisions in Conflict with Law or Regulations. (a) The
provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code of 1986 or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this
Declaration; provided, however, that such determination shall not affect any of
the remaining provisions of this Declaration or render invalid or improper any
action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have executed this instrument as of
the 1st of July, 1996.
/s/Edward J. Boudreau, Jr.
Edward J. Boudreau, Jr.
as Trustee and not individually,
34 Swan Road
Winchester, Massachusetts 01890
/s/James F. Carlin
James F. Carlin
as Trustee and not individually,
619 Washington Street
Wellesley, Massachusetts 02181
/s/William H. Cunningham
William H. Cunningham
as Trustee and not individually,
1909 Hill Oaks Court
Austin, Texas 78703
/s/Charles F. Fretz
Charles F. Fretz
as Trustee and not individually,
Clothier Springs Road
Malvern, Pennsylvania 19355
28
<PAGE>
/s/Harold R. Hiser, Jr.
Harold R. Hiser, Jr.
as Trustee and not individually,
123 Highland Avenue
Short Hill, New Jersey 07078
/s/Anne C. Hodsdon
Anne C. Hodsdon
as Trustee and not individually,
135 Woodland Road
Hampton, New Hampshire 03842
Charles L. Ladner
Charles L. Ladner
as Trustee and not individually,
182 Beaumont Road
Devon, Pennsylvania 19333
/s/Leo E. Linbeck, Jr.
Leo E. Linbeck, Jr.
as Trustee and not individually,
3404 Chevy Chase
Houston, Texas 77027
/s/Patricia P. McCarter
Patricia P. McCarter
as Trustee and not individually,
1230 Brentford Road
Malvern, Pennsylvania 19355
Steven R. Pruchansky
Steven R. Pruchansky
as Trustee and not individually,
6920 Daniels Road
Naples, Florida 33999
29
<PAGE>
Richard S. Scipione
Richard S. Scipione
as Trustee and not individually,
4 Sentinel Road
Hingham, Massachusetts 02043
/s/Norman H. Smith
Norman H. Smith
as Trustee and not individually,
243 Mount Oriole Lane
Linden, Virginia 22642
/s/John P. Toolan
John P. Toolan
as Trustee and not individually,
13 Chadwell Place
Morristown, New Jersey 07960
30
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
SUFFOLK COUNTY, MASSACHUSETTS
July 1, 1996
Then personally appeared the above-named persons, Edward J. Boudreau,
Jr., James F. Carlin, William H. Cunningham, Charles F. Fretz, Harold R. Hiser,
Jr., Anne C. Hodsdon, Charles L. Ladner, Leo E. Linbeck, Jr., Patricia P.
McCarter, Steven R. Pruchansky, Richard S. Scipione, Norman H. Smith, and John
P. Toolan, who acknowledged the foregoing instrument to be his free act and
deed.
Before me,
/s/ Ann Marie White
---------------------------
Ann Marie White
Notary Public
My commission expires: 10/20/00
31
AMENDED AND RESTATED
BY-LAWS
OF
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
NOVEMBER 19, 1996
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
<S> <C> <C>
ARTICLE I -- Definitions .................................................................................1
ARTICLE II -- Offices .....................................................................................1
Section 2.1 Principal Office.........................................................1
Section 2.2 Other Offices............................................................1
ARTICLE III -- Shareholders ...............................................................................1
Section 3.1 Meetings.................................................................1
Section 3.2 Notice of Meetings.......................................................1
Section 3.3 Record Date for Meetings and Other Purposes..............................1
Section 3.4 Proxies..................................................................2
Section 3.5 Abstentions and Broker Non-Votes.........................................2
Section 3.6 Inspection of Records....................................................2
Section 3.7 Action without Meeting...................................................3
ARTICLE IV -- Trustees ....................................................................................3
Section 4.1 Meetings of the Trustees.................................................3
Section 4.2 Quorum and Manner of Acting..............................................3
ARTICLE V -- Committees ...................................................................................4
Section 5.1 Executive and Other Committees...........................................4
Section 5.2 Meetings, Quorum and Manner of Acting....................................4
ARTICLE VI -- Officers ....................................................................................4
Section 6.1 General Provisions.......................................................4
Section 6.2 Election, Term of Office and Qualifications..............................5
Section 6.3 Removal..................................................................5
Section 6.4 Powers and Duties of the Chairman........................................5
Section 6.5 Powers and Duties of the Vice Chairman...................................5
Section 6.6 Powers and Duties of the President.......................................5
Section 6.7 Powers and Duties of Vice Presidents.....................................5
Section 6.8 Powers and Duties of the Treasurer.......................................6
Section 6.9 Powers and Duties of the Secretary.......................................6
i
<PAGE>
Section 6.10 Powers and Duties of Assistant Officers..................................6
Section 6.11 Powers and Duties of Assistant Secretaries...............................6
Section 6.12 Compensation of Officers and Trustees and
Members of the Advisory Board........................................6
ARTICLE VII -- Fiscal Year ................................................................................7
ARTICLE VIII -- Seal ......................................................................................7
ARTICLE IX -- Sufficiency and Waivers of Notice............................................................7
ARTICLE X -- Amendments ...................................................................................7
</TABLE>
ii
<PAGE>
ARTICLE I
DEFINITIONS
All capitalized terms have the respective meanings given them in the Amended and
Restated Declaration of Trust of John Hancock California Tax-Free Income Fund
dated July 1, 1996, as amended or restated from time to time.
ARTICLE II
OFFICES
Section 2.1. Principal Office. Until changed by the Trustees, the principal
office of the Trust shall be in Boston, Massachusetts.
Section 2.2. Other Offices. The Trust may have offices in such other places
without as well as within The Commonwealth of Massachusetts as the Trustees may
from time to time determine.
ARTICLE III
SHAREHOLDERS
Section 3.1. Meetings. Meetings of the Shareholders of the Trust or a Series or
Class thereof shall be held as provided in the Declaration of Trust at such
place within or without The Commonwealth of Massachusetts as the Trustees shall
designate. The holders of a majority the Outstanding Shares of the Trust or a
Series or Class thereof present in person or by proxy and entitled to vote shall
constitute a quorum at any meeting of the Shareholders of the Trust or a Series
or Class thereof.
Section 3.2. Notice of Meetings. Notice of all meetings of the Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail or telegraphic means to each Shareholder at his address as
recorded on the register of the Trust mailed at least seven (7) days before the
meeting, provided, however, that notice of a meeting need not be given to a
Shareholder to whom such notice need not be given under the proxy rules of the
Commission under the 1940 Act and the Securities Exchange Act of 1934, as
amended. Any adjourned meeting may be held as adjourned without further notice.
No notice need be given to any Shareholder who shall have failed to inform the
Trust of his current address or if a written waiver of notice, executed before
or after the meeting by the Shareholder or his attorney thereunto authorized, is
filed with the records of the meeting.
Section 3.3. Record Date for Meetings and Other Purposes. For the purpose of
determining the Shareholders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any other
action, the Trustees may from time to time close the transfer books for such
period, not exceeding sixty (60) days, as the Trustees may determine; or without
1
<PAGE>
closing the transfer books the Trustees may fix a date not more than ninety (90)
days prior to the date of any meeting of Shareholders or distribution or other
action as a record date for the determination of the persons to be treated as
Shareholders of record for such purposes, except for dividend payments which
shall be governed by the Declaration of Trust.
Section 3.4. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken. A
proxy shall be deemed signed if the shareholder's name is placed on the proxy
(whether by manual signature, typewriting or telegraphic transmission) by the
shareholder or the shareholder's attorney-in-fact. Proxies may be solicited in
the name of one or more Trustees or one or more of the officers of the Trust.
Only Shareholders of record shall be entitled to vote. Each whole share shall be
entitled to one vote as to any matter on which it is entitled by the Declaration
of Trust to vote and fractional shares shall be entitled to a proportionate
fractional vote. When any Share is held jointly by several persons, any one of
them may vote at any meeting in person or by proxy in respect of such Share, but
if more than one of them shall be present at such meeting in person or by proxy,
and such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy,
including a photographic or similar reproduction thereof and a telegram,
cablegram, wireless or similar transmission thereof, purporting to be executed
by or on behalf of a Shareholder shall be deemed valid unless challenged at or
prior to its exercise, and the burden of proving invalidity shall rest on the
challenger. If the holder of any such Share is a minor or a person of unsound
mind, and subject to guardianship or the legal control of any other person as
regards the charge or management of such Share, he may vote by his guardian or
such other person appointed or having such control, and such vote may be given
in person or by proxy. The placing of a Shareholder's name on a proxy pursuant
to telephonic or electronically transmitted instructions obtained pursuant to
procedures reasonably designed to verify that such instructions have been
authorized by such Shareholder shall constitute execution of such proxy by or on
behalf of such Shareholder.
Section 3.5. Abstentions and Broker Non-Votes. Outstanding Shares represented in
person or by proxy (including Shares which abstain or do not vote with respect
to one or more of any proposals presented for Shareholder approval) will be
counted for purposes of determining whether a quorum is present at a meeting.
Abstentions will be treated as Shares that are present and entitled to vote for
purposes of determining the number of Shares that are present and entitled to
vote with respect to any particular proposal, but will not be counted as a vote
in favor of such proposal. If a broker or nominee holding Shares in "street
name" indicates on the proxy that it does not have discretionary authority to
vote as to a particular proposal, those Shares will not be considered as present
and entitled to vote with respect to such proposal.
Section 3.6. Inspection of Records. The records of the Trust shall be open to
inspection by Shareholders to the same extent as is permitted shareholders of a
Massachusetts business corporation.
2
<PAGE>
Section 3.7. Action without Meeting. For as long as there are under one hundred
fifty (150) shareholders, any action which may be taken by Shareholders may be
taken without a meeting if a majority of Outstanding Shares entitled to vote on
the matter (or such larger proportion thereof as shall be required by law, the
Declaration of Trust, or the By-laws) consent to the action in writing and the
written consents are filed with the records of the meetings of Shareholders.
Such consents shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
ARTICLE IV
TRUSTEES
Section 4.1. Meetings of the Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the President, the Chairman
or by any one of the Trustees, at the time being in office. Notice of the time
and place of each meeting other than regular or stated meetings shall be given
by the Secretary or an Assistant Secretary or by the officer or Trustee calling
the meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be given by telephone, cable, wireless, facsimilie or
electronic means to each Trustee at his business address, or personally
delivered to him at least one day before the meeting. Such notice may, however,
be waived by any Trustee. Notice of a meeting need not be given to any Trustee
if a written waiver of notice, executed by him before or after the meeting, is
filed with the records of the meeting, or to any Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him. A notice or waiver of notice need not specify the purpose of any meeting.
The Trustees may meet by means of a telephone conference circuit or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall be deemed to have been held at a place designated by the Trustees at the
meeting. Participation in a telephone conference meeting shall constitute
presence in person at such meeting. Any action required or permitted to be taken
at any meeting of the Trustees may be taken by the Trustees without a meeting if
a majority of the Trustees consent to the action in writing and the written
consents are filed with the records of the Trustees' meetings. Such consents
shall be treated as a vote for all purposes.
Section 4.2. Quorum and Manner of Acting. A majority of the Trustees shall be
present in person at any regular or special meeting of the Trustees in order to
constitute a quorum for the transaction of business at such meeting and (except
as otherwise required by law, the Declaration of Trust or these By-laws) the act
of a majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may adjourn the meeting from time to time until
a quorum shall be present. Notice of an adjourned meeting need not be given.
3
<PAGE>
ARTICLE V
COMMITTEES
Section 5.1. Executive and Other Committees. The Trustees by vote of a majority
of all the Trustees may elect from their own number an Executive Committee to
consist of not less than two (2) members to hold office at the pleasure of the
Trustees, which shall have the power to conduct the current and ordinary
business of the Trust while the Trustees are not in session, including the
purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust or a Series thereof, and such
other powers of the Trustees as the Trustees may, from time to time, delegate to
them except those powers which by law, the Declaration of Trust or these By-laws
they are prohibited from delegating. The Trustees may also elect from their own
number other Committees from time to time; the number composing such Committees,
the powers conferred upon the same (subject to the same limitations as with
respect to the Executive Committee) and the term of membership on such
Committees to be determined by the Trustees. The Trustees may designate a
chairman of any such Committee. In the absence of such designation the Committee
may elect its own Chairman.
Section 5.2. Meetings, Quorum and Manner of Acting. The Trustees may (1) provide
for stated meetings of any Committee, (2) specify the manner of calling and
notice required for special meetings of any Committee, (3) specify the number of
members of a Committee required to constitute a quorum and the number of members
of a Committee required to exercise specified powers delegated to such
Committee, (4) authorize the making of decisions to exercise specified powers by
written assent of the requisite number of members of a Committee without a
meeting, and (5) authorize the members of a Committee to meet by means of a
telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and records
of decisions taken without a meeting and cause them to be recorded in a book
designated for that purpose and kept in the office of the Trust.
ARTICLE VI
OFFICERS
Section 6.1. General Provisions. The officers of the Trust shall be a Chairman,
a President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers or agents.
4
<PAGE>
Section 6.2. Election, Term of Office and Qualifications. The officers of the
Trust and any Series thereof (except those appointed pursuant to Section 6.10)
shall be elected by the Trustees. Except as provided in Sections 6.3 and 6.4 of
this Article VI, each officer elected by the Trustees shall hold office at the
pleasure of the Trustees. Any two or more offices may be held by the same
person. The Chairman of the Board shall be selected from among the Trustees and
may hold such office only so long as he/she continue to be a Trustee. Any
Trustee or officer may be but need not be a Shareholder of the Trust.
Section 6.3. Removal. The Trustees, at any regular or special meeting of the
Trustees, may remove any officer with or without cause, by a vote of a majority
of the Trustees then in office. Any officer or agent appointed by an officer or
committee may be removed with or without cause by such appointing officer or
committee.
Section 6.4. Powers and Duties of the Chairman. The Chairman shall preside at
the meetings of the Shareholders and of the Trustees. He may call meetings of
the Trustees and of any committee thereof whenever he deems it necessary. He
shall be the Chief Executive Officer of the Trust and shall have, with the
President, general supervision over the business and policies of the Trust.
Section 6.5. Powers and Duties of the Vice Chairman. The Trustees may, but need
not, appoint one or more Vice Chairman of the Trust. A Vice Chairman shall be an
executive officer of the Trust and shall have the powers and duties of a Vice
President of the Trust as provided in Section 7 of this Article VI. The Vice
Chairman shall perform such duties as may be assigned to him or her from time to
time by the Trustees or the Chairman.
Section 6.6. Powers and Duties of the President. The President shall preside at
all meetings of the Shareholders in the absence of the Chairman. Subject to the
control of the Trustees and to the control of any Committees of the Trustees,
within their respective spheres as provided by the Trustees, he shall at all
times exercise general supervision over the business and policies of the Trust.
He shall have the power to employ attorneys and counsel for the Trust or any
Series or Class thereof and to employ such subordinate officers, agents, clerks
and employees as he may find necessary to transact the business of the Trust or
any Series or Class thereof. He shall also have the power to grant, issue,
execute or sign such powers of attorney, proxies or other documents as may be
deemed advisable or necessary in furtherance of the interests of the Trust or
any Series thereof. The President shall have such other powers and duties, as
from time to time may be conferred upon or assigned to him by the Trustees.
Section 6.7. Powers and Duties of Vice Presidents. In the absence or disability
of the President, the Vice President or, if there be more than one Vice
President, any Vice President designated by the Trustees, shall perform all the
duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him from time to time by the Trustees and the President.
5
<PAGE>
Section 6.8. Powers and Duties of the Treasurer. The Treasurer shall be the
principal financial and accounting officer of the Trust. He shall deliver all
funds of the Trust or any Series or Class thereof which may come into his hands
to such Custodian as the Trustees may employ. He shall render a statement of
condition of the finances of the Trust or any Series or Class thereof to the
Trustees as often as they shall require the same and he shall in general perform
all the duties incident to the office of a Treasurer and such other duties as
from time to time may be assigned to him by the Trustees. The Treasurer shall
give a bond for the faithful discharge of his duties, if required so to do by
the Trustees, in such sum and with such surety or sureties as the Trustees shall
require.
Section 6.9. Powers and Duties of the Secretary. The Secretary shall keep the
minutes of all meetings of the Trustees and of the Shareholders in proper books
provided for that purpose; he shall have custody of the seal of the Trust; he
shall have charge of the Share transfer books, lists and records unless the same
are in the charge of a transfer agent. He shall attend to the giving and serving
of all notices by the Trust in accordance with the provisions of these By-laws
and as required by law; and subject to these By-laws, he shall in general
perform all duties incident to the office of Secretary and such other duties as
from time to time may be assigned to him by the Trustees.
Section 6.10. Powers and Duties of Assistant Officers. In the absence or
disability of the Treasurer, any officer designated by the Trustees shall
perform all the duties, and may exercise any of the powers, of the Treasurer.
Each officer shall perform such other duties as from time to time may be
assigned to him by the Trustees. Each officer performing the duties and
exercising the powers of the Treasurer, if any, and any Assistant Treasurer,
shall give a bond for the faithful discharge of his duties, if required so to do
by the Trustees, in such sum and with such surety or sureties as the Trustees
shall require.
Section 6.11. Powers and Duties of Assistant Secretaries. In the absence or
disability of the Secretary, any Assistant Secretary designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Secretary. Each Assistant Secretary shall perform such other duties as from time
to time may be assigned to him by the Trustees.
Section 6.12. Compensation of Officers and Trustees and Members of the Advisory
Board. Subject to any applicable provisions of the Declaration of Trust, the
compensation of the officers and Trustees and members of an advisory board shall
be fixed from time to time by the Trustees or, in the case of officers, by any
Committee or officer upon whom such power may be conferred by the Trustees. No
officer shall be prevented from receiving such compensation as such officer by
reason of the fact that he is also a Trustee.
6
<PAGE>
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust and any Series thereof shall be established
by resolution of the Trustees.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall have such
inscription thereon as the Trustees may from time to time prescribe but the
absence of a seal shall not impair the validity or execution of any document.
ARTICLE IX
SUFFICIENCY AND WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the Declaration of
Trust or these By-laws, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been sent by mail, telegraph, cable, wireless, facsimilie or electronic means
for the purposes of these By-laws when it has been delivered to a representative
of any entity holding itself out as capable of sending notice by such means with
instructions that it be so sent.
ARTICLE X
AMENDMENTS
These By-laws, or any of them, may be altered, amended or repealed, or new
By-laws may be adopted by a vote of a majority of the Trustees, provided,
however, that no By-law may be amended, adopted or repealed by the Trustees if
such amendment, adoption or repeal requires, pursuant to federal or state law,
the Declaration of Trust or these By-laws, a vote of the Shareholders.
END OF BY-LAWS
7
December 20, 1996
EDGAR FILING
John Hancock California Tax-Free Income Fund
101 Huntington Avenue
Boston, MA 02199
Re: John Hancock California Tax-Free Income Fund (the "Trust")
(File Nos.: 33-31675 and 811-5979) (0000856671)
Ladies and Gentlemen:
In connection with the filing of Post-Effective Amendment No. 17 pursuant to
Rule 24e-2 under the Investment Company Act of 1940, as amended, registering by
Post-Effective Amendment No. 14 under the Securities Act of 1933, as amended,
766,612 shares of the John Hancock Fund (the "Fund") sold in reliance upon Rule
24e-2 during the fiscal year ending August 31, 1996, it is the opinion of the
undersigned that such shares will be legally issued, fully paid and
nonassessable.
In connection with this opinion it should be noted that the Trust is an entity
of the type generally known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of a Massachusetts business trust may be held
personally liable for the obligations of the Trust. However, the Trust's
Declaration of Trust disclaims shareholder liability for obligations of the
Trust and indemnifies any shareholder of the Trust, with this indemnification to
be paid solely out of the assets of the Trust. Therefore, the shareholder's risk
is limited to circumstances in which the assets of the Trust are insufficient to
meet the obligations asserted against Trust assets.
Sincerely,
/s/ Theresa Apruzzese
Theresa Apruzzese
Assistant Secretary
Member of Massachusetts Bar
Consent of Ernst & Young LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" for California Tax-Free Income Fund in the Tax-Free Income Funds'
Prospectus and "Independent Auditors " in the John Hancock California Tax-Free
Income Fund Class A and Class B Shares Statement of Additional Information and
to the incorporation by reference in Post-Effective Amendment No. 14 to
Registration Statement (Form N-1A No. 33-31675) of our report dated October 9,
1996 on the financial statements and financial highlights of John Hancock
California Tax-Free Income Fund.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
December 20, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 354,028,163
<INVESTMENTS-AT-VALUE> 363,342,475
<RECEIVABLES> 7,662,333
<ASSETS-OTHER> 3,926,790
<OTHER-ITEMS-ASSETS> 9,314,312
<TOTAL-ASSETS> 374,931,598
<PAYABLE-FOR-SECURITIES> 5,400
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 600,978
<TOTAL-LIABILITIES> 606,378
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 372,692,998
<SHARES-COMMON-STOCK> 28,098,621
<SHARES-COMMON-PRIOR> 28,947,194
<ACCUMULATED-NII-CURRENT> 107,130
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,290,569)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,815,661
<NET-ASSETS> 374,325,220
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,989,775
<OTHER-INCOME> 0
<EXPENSES-NET> 2,313,381
<NET-INVESTMENT-INCOME> 13,676,394
<REALIZED-GAINS-CURRENT> (1,771,705)
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<TABLE> <S> <C>
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<NUMBER> 002
<NAME> JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND - CLASS B
<S> <C>
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