John Hancock
Tax-Free Income
Funds
Prospectus
May 1, 2000
- --------------------------------------------------------------------------------
California Tax-Free Income Fund
High Yield Tax-Free Fund
Massachusetts Tax-Free Income Fund
New York Tax-Free Income Fund
Tax-Free Bond Fund
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these funds or determined whether the information in
this prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
Contents
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A fund-by-fund summary of California Tax-Free Income Fund 4
goals, strategies, risks,
performance and expenses. 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 an account in any Choosing a share class 14
tax-free income fund. How sales charges are calculated 14
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
Further information on the Fund details
tax-free income funds.
Business structure 21
Financial highlights 22
For more information back cover
<PAGE>
Overview
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FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[Clip Art] Your expenses The overall costs borne by an investor in the fund,
including sales charges and annual expenses.
JOHN HANCOCK TAX-FREE INCOME FUNDS
These 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
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.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are in higher income brackets
o want regular monthly income
o are interested in lowering their income tax burden
o pay California, Massachusetts or New York income tax (state-specific funds)
Tax-free income funds may NOT be appropriate if you:
o are not subject to a high level of state or federal income tax
o are seeking an investment for a tax-deferred retirement account
o are investing for maximum return over a long time horizon
o require absolute stability of your principal
RISKS OF MUTUAL FUNDS
Mutual funds are not bank deposits and are not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Because
you could lose money by investing in these funds, be sure to read all risk
disclosure carefully before investing.
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 Financial Services, Inc. and manages more than $30 billion in assets.
3
<PAGE>
California Tax-Free Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income, consistent with
preservation of capital, that is exempt from federal and California personal
income taxes. In pursuing this goal, the fund normally invests at least 80% of
assets in California municipal debt obligations of any maturity. Most of these
securities are investment-grade when purchased, but the fund may invest up to
20% of assets in junk bonds rated BB/Ba and their unrated equivalents.
In managing the portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the team uses a strategy designed to find
undervalued bonds, based on research into specific municipal issuers, their
creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The team also favors
bonds with limitations on whether they can be called, or redeemed, by the issuer
before maturity. This enables the team to minimize the effect of declining
interest rates on the fund's income.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these and other
cases, the fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- ------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began business career in 1986
Dianne Sales, CFA
- ------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began business career in 1984
Frank A. Lucibella, CFA
- ------------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began business career in 1982
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. The average annual figures reflect sales charges; the
year-by-year and index figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
6.69% 11.70% 9.06% 13.60% -9.29% 21.91% 4.48% 10.13% 6.65% -2.84%
2000 total return as of March 31: 2.46%
Best quarter: Q1 '95, 9.23% Worst quarter: Q1 '94, -6.58%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A -7.23% 6.78% 6.40% --
Class B - began 12/31/91 -8.18% 6.66% -- 5.54%
Class C - began 4/1/99 -- -- -- --
Index -2.06% 6.91% 6.89% 6.20%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of municipal
bonds.
4
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk. There
is no limit on the fund's average maturity.
Because the fund invests primarily in California issuers, its performance is
affected by local, state and regional factors. These may include economic or
policy changes, erosion of the tax base, state legislative changes (especially
those regarding taxes) and the possibility of credit problems, such as the 1994
bankruptcy of Orange County.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments do not perform as the fund expects, it could
under-perform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from their
underlying facilities decline, causing the fund to lose money.
o Junk bonds could make the fund more sensitive to market or economic shifts.
o Certain derivatives could produce disproportionate losses.
o In a down market, certain securities and derivatives could become harder to
value or to sell at a fair price.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none 1.00%
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.55% 0.55% 0.55%
Distribution and service (12b-1) fees 0.15% 1.00% 1.00%
Other expenses 0.12% 0.12% 0.12%
Total fund operating expenses 0.82% 1.67% 1.67%
Distribution and service (12b-1) fee
reduction (until 12/31/00) -- 0.10% --
Expense reimbursement (at least
until 12/31/00) 0.07% 0.07% 0.07%
Actual operating expenses 0.75% 1.50% 1.60%
The hypothetical example below shows what your expenses would be after the
expense reimbursement (first year only) if you invested $10,000 over the time
frames indicated, assuming you reinvested all distributions and that the average
annual return was 5%. The example is for comparison only, and does not represent
the fund's actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $ 523 $ 693 $ 878 $1,412
Class B - with redemption $ 653 $ 810 $1,091 $1,735
- without redemption $ 153 $ 510 $ 891 $1,735
Class C - with redemption $ 360 $ 614 $ 992 $2,051
- without redemption $ 261 $ 614 $ 992 $2,051
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ---------------------------
Ticker TACAX
CUSIP 41014R108
Newspaper CATxFA
SEC number 811-5979
Class B
- ---------------------------
Ticker TSCAX
CUSIP 41014R207
Newspaper CATxFB
SEC number 811-5979
Class C
- ---------------------------
Ticker --
CUSIP 41014R306
Newspaper --
SEC number 811-5979
5
<PAGE>
High Yield Tax-Free Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income that is largely exempt
from federal income tax consistent with preservation of capital. In pursuing
this goal, the fund normally invests at least 80% of assets in tax-exempt
municipal debt obligations of any maturity with credit ratings from A to BB/Ba
and their unrated equivalents. The fund may also invest up to 5% of assets in
bonds rated as low as CC/Ca and their unrated equivalents. Bonds that are in or
below the BB/Ba category are considered junk bonds.
In managing the portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the team uses a strategy designed to find
undervalued bonds, based on research into specific municipal issuers, their
creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The team also favors
bonds with limitations on whether they can be called, or redeemed, by the issuer
before maturity. This enables the team to minimize the effect of declining
interest rates on the fund's income.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these and other
cases, the fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- -------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began business career in 1986
Frank A. Lucibella, CFA
- -------------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began business career in 1982
Dianne Sales, CFA
- -------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began business career in 1984
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. The average annual figures reflect sales charges; the
year-by-year and index figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
3.80% 12.30% 8.35% 11.58% -5.70% 18.89% 0.60% 8.81% 4.69% -4.84%
2000 total return as of March 31: 0.31%
Best quarter: Q1 '95, 7.62% Worst quarter: Q1 '94, -4.18%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class A
Class A - began 12/31/93 -8.43% 5.13% -- 3.38%
Class B -9.36% 5.01% 5.59% --
Class C - began 4/1/99 -- -- -- --
Index -2.06% 6.91% 6.89% 4.80%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of municipal
bonds.
6
<PAGE>
MAIN RISKS
[Clip Art] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk. There is no limit on the fund's average maturity.
Because their issuers are often in relatively weak financial health, junk bonds
could make the fund more sensitive to market or economic shifts, and to the risk
of default of a particular bond. In general, investors should expect
fluctuations in share price, yield and total return that are above average for
bond funds.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments do not perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund invests in securities with additional risks, those
risks could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from their
underlying facilities decline, causing the fund to lose money.
o If the fund invests heavily in securities from a given state or region, its
performance could be disproportionately affected by political or demographic
factors in that state or region.
o Certain derivatives could produce disproportionate losses.
o In a down market, certain securities and derivatives could become harder to
value or to sell at a fair price.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none 1.00%
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.58% 0.58% 0.58%
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
Other expenses 0.17% 0.17% 0.17%
Total fund operating expenses 1.00% 1.75% 1.75%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $ 547 $ 754 $ 978 $1,620
Class B - with redemption $ 678 $ 851 $1,149 $1,864
- without redemption $ 178 $ 551 $ 949 $1,864
Class C - with redemption $ 375 $ 646 $1,039 $2,142
- without redemption $ 276 $ 646 $1,039 $2,142
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- --------------------------------
Ticker JHTFX
CUSIP 41013Y302
Newspaper HiYTxFA
SEC number 811-5968
Class B
- --------------------------------
Ticker TSHTX
CUSIP 41013Y401
Newspaper HiYTxFB
SEC number 811-5968
Class C
- --------------------------------
Ticker --
CUSIP 41013Y500
Newspaper --
SEC number 811-5968
7
<PAGE>
Massachusetts Tax-Free Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income, consistent with
preservation of capital, that is exempt from federal and Massachusetts personal
income taxes.
In pursuing its goal, the fund normally invests at least 80% of assets in
securities of any maturity exempt from Massachusetts personal income taxes. Most
of these securities have credit ratings of A or higher when purchased, but the
fund may invest up to 33.3% of assets in securities rated as low as BB/Ba and
their unrated equivalents. Bonds that are in or below the BB/Ba category are
considered junk bonds.
In managing the portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the team uses a strategy designed to find
undervalued bonds, based on research into specific municipal issuers, their
creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The team also favors
bonds with limitations on whether they can be called, or redeemed, by the issuer
before maturity. This enables the team to minimize the effect of declining
interest rates on the fund's income. The fund is non-diversified and may invest
more than 5% of assets in securities of a single issuer.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these and other
cases, the fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- -------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began business career in 1986
Dianne Sales, CFA
- -------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began business career in 1984
Frank A. Lucibella, CFA
- -------------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began business career in 1982
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. The average annual figures reflect sales charges; the
year-by-year and index figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
4.39% 13.56% 9.50% 12.71% -5.51% 16.36% 4.27% 9.34% 7.06% -4.24%
2000 total return as of March 31: 2.83%
Best quarter: Q1 '95, 6.68% Worst quarter: Q1 '94, -6.07%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A -8.53% 5.37% 6.03% --
Class B - began 10/3/96 -9.46% -- -- 2.84%
Class C - began 4/1/99 -- -- -- --
Index -2.06% 6.91% 6.89% 4.88%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of municipal
bonds.
8
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk. There
is no limit on the fund's average maturity.
Because the fund invests primarily in Massachusetts issuers, its performance is
affected by local, state and regional factors. These may include economic or
policy changes, erosion of the tax base, state legislative changes (especially
those affecting taxes) and the possibility of credit problems.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments do not perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund invests in securities with additional risks, those
risks could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from their
underlying facilities decline, causing the fund to lose money.
o If the fund invests heavily in a single issuer, its performance could suffer
significantly from adverse events affecting that issuer.
o Junk bonds could make the fund more sensitive to market or economic shifts.
o Certain derivatives could produce disproportionate losses.
o In a down market, certain securities and derivatives could become harder to
value or to sell at a fair price.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by
shareholders indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none 1.00%
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.25% 0.25% 0.25%
Total fund operating expenses 1.05% 1.75% 1.75%
Expense reimbursement (at least
until 12/31/00) 0.25% 0.25% 0.25%
Actual operating expenses 0.80% 1.50% 1.50%
The hypothetical example below shows what your expenses would be after the
expense reimbursement (first year only) if you invested $10,000 over the time
frames indicated, assuming you reinvested all distributions and that the
average annual return was 5%. The example is for comparison only, and does not
represent the fund's actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $ 528 $ 745 $ 980 $1,653
Class B - with redemption $ 653 $ 827 $1,126 $1,857
- without redemption $ 153 $ 527 $ 926 $1,857
Class C - with redemption $ 350 $ 621 $1,016 $2,121
- without redemption $ 251 $ 621 $1,016 $2,121
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- -------------------------------
Ticker JHMAX
CUSIP 410229207
Newspaper MATxFA
SEC number 811-5079
Class B
- -------------------------------
Ticker JHMBX
CUSIP 410229405
Newspaper --
SEC number 811-5079
Class C
- -------------------------------
Ticker --
CUSIP 410229603
Newspaper --
SEC number 811-5079
9
<PAGE>
New York Tax-Free Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income consistent with
preservation of capital, that is exempt from federal, New York State and New
York City personal income taxes.
In pursuing its goal, the fund normally invests at least 80% of assets in
securities of any maturity exempt from New York personal income taxes. Most of
these securities have credit ratings of A or higher when purchased, but the fund
may invest up to 33.3% of assets in bonds rated as low as BB/Ba and their
unrated equivalents. Bonds that are in or below the BB/Ba category are
considered junk bonds.
In managing the portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the team uses a strategy designed to find
undervalued bonds, based on research into specific municipal issuers, their
creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The team also favors
bonds with limitations on whether they can be called, or redeemed, by the issuer
before maturity. This enables the team to minimize the effect of declining
interest rates on the fund's income. The fund is non-diversified and may invest
more than 5% of assets in securities of a single issuer.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these and other
cases, the fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- ------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began business career in 1986
Frank A. Lucibella, CFA
- ------------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began business career in 1982
Dianne Sales, CFA
- ------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began business career in 1984
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. The average annual figures reflect sales charges; the
year-to-year and index figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
4.77% 13.63% 9.45% 13.78% -6.48% 17.09% 3.65% 9.50% 6.28% -4.39%
2000 total return as of March 31: 3.37%
Best quarter: Q1 '95, 6.64% Worst quarter: Q1 '94, -5.54%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A -8.70% 5.23% 5.99% --
Class B - began 10/3/96 -9.59% -- -- 2.42%
Class C - began 4/1/99 -- -- -- --
Index -2.06% 6.91% 6.89% 4.88%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of municipal
bonds.
10
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk. There
is no limit on the fund's average maturity.
Because the fund invests primarily in New York issuers, its performance is
affected by local, state and regional factors. These may include economic or
policy changes, erosion of the tax base, state legislative changes (especially
those affecting taxes) and the legacy of past credit problems of New York City
and other issuers.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments do not perform as the fund expects, it could
under-perform its peers or lose money.
To the extent that the fund invests in securities with additional risks, those
risks could increase volatility or reduce performance:
o Revenue bonds could be downgraded or go into default if revenues from their
underlying facilities decline, causing the fund to lose money.
o Junk bonds could make the fund more sensitive to market or economic shifts.
o If the fund invests heavily in a single issuer, its performance could suffer
significantly from adverse events affecting that issuer.
o Certain derivatives could produce disproportionate losses.
o In a down market, certain securities and derivatives could become harder to
value or to sell at a fair price.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none 1.00%
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.28% 0.28% 0.28%
Total fund operating expenses 1.08% 1.78% 1.78%
Expense reimbursement (at least
until 12/31/00) 0.28% 0.28% 0.28%
Actual operating expenses 0.80% 1.50% 1.50%
The hypothetical example below shows what your expenses would be after the
expense reimbursement (first year only) if you invested $10,000 over the time
frames indicated, assuming you reinvested all distributions and that the
average annual return was 5%. The example is for comparison only, and does not
represent the fund's actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $ 528 $ 751 $ 993 $1,684
Class B - with redemption $ 653 $ 833 $1,138 $1,887
- without redemption $ 153 $ 533 $ 938 $1,887
Class C - with redemption $ 350 $ 628 $1,029 $2,151
- without redemption $ 251 $ 628 $1,029 $2,151
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- ---------------------------------
Ticker JHNYX
CUSIP 410229306
Newspaper NYTxFA
SEC number 811-5079
Class B
- ---------------------------------
Ticker JNTRX
CUSIP 410229504
Newspaper --
SEC number 811-5079
Class C
- ---------------------------------
Ticker --
CUSIP 410229702
Newspaper --
SEC number 811-5079
11
<PAGE>
Tax-Free Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks as high a level of interest income exempt from federal
income tax as is consistent with preservation of capital. In pursuing this goal,
the fund normally invests at least 80% of assets in tax-exempt municipal debt
obligations of any maturity. Most of these bonds are investment-grade when
purchased, but the fund may also invest up to 35% of assets in junk bonds rated
BB/Ba or B and their unrated equivalents.
In managing the portfolio, the management team uses top-down research to assess
general credit trends and identify promising market sectors. To select
securities for long-term investment, the management team uses a strategy
designed to find undervalued bonds, based on research into specific municipal
issuers, their creditworthiness and the structure of their bonds.
The management team commonly seeks out revenue bonds, which are repaid from
income tied to specific facilities such as power plants. The fund may invest up
to 25% of assets in private activity bonds.
The management team also favors bonds with limitations on whether they can be
called, or redeemed, by the issuer before maturity. This enables the team to
minimize the effect of declining interest rates on the fund's income.
The fund may make limited use of certain derivatives (investments whose value is
based on indices or other securities), especially in managing its exposure to
interest rate risk.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in taxable investment-grade short-term securities. In these and other
cases, the fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- -----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began business career in 1986
Dianne Sales, CFA
- -----------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1989
Began business career in 1984
Frank A. Lucibella, CFA
- -----------------------------------
Second vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began business career in 1982
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. The average annual figures reflect sales charges; the
year-to-year and index figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999
14.97% 10.95% 15.15% -9.26% 20.22% 4.15% 9.81% 5.50% -3.50%
2000 total return as of March 31: 2.41% Best quarter: Q1 '95, 8.82% Worst
quarter: Q1 '94, -7.06%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Life of Life of
1 year 5 year Class A Class B
Class A - began 1/5/90 -7.88% 5.99% 6.56% --
Class B - began 12/31/91 -8.80% 5.87% -- 5.45%
Class C - began 4/1/99 -- -- -- --
Index -2.06% 6.91% 6.89% 6.20%
Index: Lehman Brothers Municipal Bond Index, an unmanaged index of municipal
bonds.
12
<PAGE>
MAIN RISKS
[Clip Art] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk. There is no limit on the fund's average maturity.
Junk bonds may make the fund more sensitive to market or economic shifts. The
fund could lose money if any bonds it owns are downgraded in credit rating or go
into default. If certain sectors or investments do not perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund invests in other securities with additional risks,
those risks could increase volatility or reduce performance:
o If the fund invests heavily in securities from a given state or region, its
performance could be disproportionately affected by political or demographic
factors in that state or region.
o Revenue bonds could be downgraded or go into default if revenues from their
underlying facilities decline, causing the fund to lose money.
o Certain derivatives could produce disproportionate losses.
o In a down market, certain securities and derivatives could become harder to
value or to sell at a fair price.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 4.50% none 1.00%
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.53% 0.53% 0.53%
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
Other expenses 0.18% 0.18% 0.18%
Total fund operating expenses 0.96% 1.71% 1.71%
Distribution and service (12b-1) fee
reduction (until 12/31/00) 0.10% 0.10% --
Expense reimbursement (at least
until 12/31/00) 0.01% 0.01% 0.01%
Actual operating expenses 0.85% 1.60% 1.70%
The hypothetical example below shows what your expenses would be after the
expense reimbursement (first year only) if you invested $10,000 over the time
frames indicated, assuming you reinvested all distributions and that the average
annual return was 5%. The example is for comparison only, and does not represent
the fund's actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $ 533 $ 732 $ 947 $1,565
Class B - with redemption $ 663 $ 828 $1,118 $1,811
- without redemption $ 163 $ 528 $ 918 $1,811
Class C - with redemption $ 370 $ 632 $1,018 $2,098
- without redemption $ 271 $ 632 $1,018 $2,098
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
FUND CODES
Class A
- -----------------------------
Ticker TAMBX
CUSIP 41013Y104
Newspaper TFBdA
SEC number 811-5968
Class B
- -----------------------------
Ticker TSMBX
CUSIP 41013Y203
Newspaper TFBdB
SEC number 811-5968
Class C
- -----------------------------
Ticker --
CUSIP 41013Y609
Newspaper --
SEC number 811-5968
13
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each share class has its own cost structure, including a Rule 12b-1 plan that
allows it to pay fees for the sale, distribution and service of its shares. Your
financial representative can help you decide which share class is best for you.
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------
o A front-end sales charge, as described at right.
o Distribution and service (12b-1) fees of 0.15% for California Tax-Free
Income and Tax-Free Bond, 0.25% for High Yield Tax-Free and 0.30% for
Massachusetts Tax-Free Income and New York Tax-Free Income.
- --------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right away.
o Distribution and service (12b-1) fees of 1.00% (0.90% for California
Tax-Free Income and Tax-Free Bond).
o A deferred sales charge, as described at right.
o Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses.
- --------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------
o A front-end sales charge, as described at right.
o Distribution and service (12b-1) fees of 1.00%.
o A 1.00% contingent deferred sales charge on shares sold within one year of
purchase.
o No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
For actual past expenses of each share class, see the fund-by-fund information
earlier in this prospectus.
Because 12b-1 fees are paid on an ongoing basis, they may cost shareholders more
than other types of sales charges.
Investors purchasing $1 million or more of Class B or Class C shares may want to
consider the lower operating expenses of Class A shares.
Your broker receives a percentage of these sales charges and fees. In addition,
John Hancock Funds may pay significant compensation out of its own resources to
your broker.
Your broker or agent may charge you a fee to effect transactions in fund shares.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A and Class C Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges
- --------------------------------------------------------------------------------
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 next column
- --------------------------------------------------------------------------------
Class C sales charges
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $1,000,000 1.00% 1.01%
$1,000,000 and over none
Investments of $1 million or more Class A and Class C shares are available with
no front-end sales charge. However, there is a contingent deferred sales charge
(CDSC) on any Class A shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments
- --------------------------------------------------------------------------------
CDSC on shares
Your investment being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
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.
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.
Class B and Class C A CDSC may be charged if you sell Class B or Class C shares
within a certain time after you bought them, as described in the tables below.
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 CDSCs are as follows:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after CDSC on shares
purchase being sold
1st year 5.00%
2nd year 4.00%
3rd year 3.00%
4th year 3.00%
5th year 2.00%
6th year 1.00%
After 6th year none
- --------------------------------------------------------------------------------
Class C deferred charges
- --------------------------------------------------------------------------------
Years after purchase CDSC
1st year 1.00%
After 1st year none
For purposes of these CDSCs, all purchases made during a calendar month are
counted as having been made on the first day of that month.
14 YOUR ACCOUNT
<PAGE>
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.
- --------------------------------------------------------------------------------
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.
o 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. Retirement plans investing $1 million in Class
B shares may add that value to Class A purchases to calculate charges.
o 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.
o 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, or consult the SAI (see the
back cover of this prospectus).
Group Investment Program A group may be treated as a single purchaser under the
accumulation and combination privileges. Each investor has an individual
account, but the group's investments are lumped together for sales charge
purposes, making the investors potentially eligible for reduced sales charges.
There is no charge or obligation to invest (although initial investments must
total at least $250), and individual investors may close their accounts at any
time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify, or consult the SAI (see the back cover of this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for each share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o 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
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge, as long as Signature Services is
notified before you reinvest. 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:
o selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under signed agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds
o individuals transferring assets from an employee benefit plan into a John
Hancock fund
o certain John Hancock insurance contract holders (one-year CDSC usually
applies)
o participants in certain retirement plans with at least 100 eligible
employees (one-year CDSC applies)
Class C shares may be offered without front-end sales charges to various
individuals and institutions, including certain retirement plans.
To utilize: if you think you may be eligible for a sales charge waiver, contact
Signature Services or consult the SAI (see the back cover of this prospectus).
- --------------------------------------------------------------------------------
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:
o non-retirement account: $1,000
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest
at least $25 a month
o fee-based clients of selling brokers who have placed at least $2 billion
in John Hancock funds: $250
3 Complete the appropriate parts of the account application, carefully
following the instructions. You must submit additional documentation when
opening trust, corporate or power of attorney accounts. You must notify your
financial representative or Signature Services if this information changes.
For more details, please contact your financial representative or call
Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges 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 and your
financial representative can initiate any purchase, exchange or sale of
shares.
YOUR ACCOUNT 15
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clip Art] o Make out a check for the o Make out a check for the
investment amount, investment amount payable
payable to "John Hancock to "John Hancock
Signature Services, Inc." Signature Services, Inc."
o Deliver the check and o Fill out the detachable
your completed investment slip from an
application to your account statement. If no
financial representative, slip is available,
or mail them to Signature include a note specifying
Services (address below). the fund name, your share
class, your account
number and the name(s) in
which the account is
registered.
o Deliver the check and
your investment slip or
note to your financial
representative, or mail
them to Signature
Services (address below).
By exchange
[Clip Art] o Call your financial o Log on to www.jhfunds.com
representative or to process exchanges
Signature Services to between funds.
request an exchange.
o Call EASI-Line for
automated service 24
hours a day using your
touch tone phone at
1-800-338-8080.
o Call your financial
representative or
Signature Services to
request an exchange.
By wire
[Clip Art] o Deliver your completed o Instruct your bank to
application to your wire the amount of your
financial representative, investment to:
or mail it to Signature First Signature Bank
Services. & Trust
Account # 900000260
o Obtain your account Routing # 211475000
number by calling your
financial representative Specify the fund name, your
or Signature Services. share class, your account
number and the name(s) in
o Instruct your bank to which the account is
wire the amount of your registered. Your bank may
investment to: charge a fee to wire funds.
First Signature Bank
& Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the
new account number and the
name(s) in which the account
is registered. Your bank may
charge a fee to wire funds.
By Internet
[Clip Art] See "By exchange" and "By o Verify that your bank or
wire." credit union is a member
of the Automated Clearing
House (ACH) system.
o Complete the "Bank
Information" section on
your account application.
o Log on to www.jhfunds.com
to initiate purchases
using your authorized
bank account.
By phone
[Clip Art] See "By exchange" and "By o Verify that your bank or
wire." credit union is a member
of the Automated Clearing
House (ACH) system.
o Complete the "Bank
Information" section on
your account application.
o Call EASI-Line for
automated service 24
hours a day using your
touch tone phone at
1-800-338-8080.
o Call your financial
representative or
Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most
business days.
- ----------------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative for
instructions and assistance.
- ----------------------------------------------
To open or add to an account using the Monthly Automatic
Accumulation Program, see "Additional investor services."
16 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clip Art] o Accounts of any type. o Write a letter of
instruction or complete a
o Sales of any amount. stock power indicating
the fund name, your share
class, your account
number, the name(s) in
which the account is
registered and the dollar
value or number of shares
you wish to sell.
o Include all signatures
and any additional
documents that may be
required (see next page).
o Mail the materials to
Signature Services.
o 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 Internet
[Clip Art] o Most accounts. o Log on to www.jhfunds.com
to initiate redemptions
o Sales of up to $100,000. from your funds.
By phone
[Clip Art] o Most accounts. o Call EASI-Line for
automated service 24
o Sales of up to $100,000. hours a day using your
touch tone phone at
1-800-338-8080.
o Call your financial
representative or
Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most
business days.
By wire or electronic funds transfer (EFT)
[Clip Art] o Requests by letter to o To verify that the
sell any amount. Internet or telephone
redemption privilege is
o Requests by Internet or in place on an account,
phone to sell up to or to request the form to
$100,000. add it to an existing
account, call Signature
Services.
o Amounts of $1,000 or more
will be wired on the next
business day. A $4 fee
will be deducted from
your account.
o 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
[Clip Art] o Accounts of any type. o Obtain a current
prospectus for the fund
o Sales of any amount. into which you are
exchanging by Internet or
by calling your financial
representative or
Signature Services.
o Log on to www.jhfunds.com
to process exchanges
between your funds.
o Call EASI-Line for
automated service 24
hours a day using your
touch tone phone at
1-800-338-8080.
o Call your financial
representative or
Signature Services to
request an exchange.
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, unless they were previously provided to Signature Services and are
still accurate. These items are 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:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You will need to obtain your signature guarantee from a member of the Signature
Guarantee Medallion Program. Most brokers and securities dealers are members of
this program. A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
- --------------------------------------------------------------------------------
[Clip Art]
Owners of individual, joint or o Letter of instruction.
UGMA/UTMA accounts (custodial
accounts for minors). o On the letter, the signatures of
all persons authorized to sign
for the account, exactly as the
account is registered.
o Signature guarantee if
applicable (see above).
Owners of corporate, sole o Letter of instruction.
proprietorship, general partner or
association accounts. o Corporate business/organization
resolution, certified within the
past 12 months, or a John
Hancock Funds business/
organization certification form.
o On the letter and the
resolution, the signature of the
person(s) authorized to sign for
the account.
o Signature guarantee if
applicable (see above).
Owners or trustees of trust o Letter of instruction.
accounts.
o On the letter, the signature(s)
of the trustee(s).
o Copy of the trust document
certified within the past 12
months or a John Hancock Funds
trust certification form.
o Signature guarantee if
applicable (see above).
Joint tenancy shareholders with o Letter of instruction signed by
rights of survivorship whose surviving tenant.
co-tenants are deceased.
o Copy of death certificate.
o Signature guarantee if
applicable (see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing
executor, certified within the
past 12 months.
o Signature guarantee if
applicable (see above).
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or instructions.
account types not listed above.
----------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 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."
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). The funds use market prices in
valuing portfolio securities, but may use fair-value estimates if reliable
market prices are unavailable.
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 Signature Services receives your
request in good order.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line, accessing www.jhfunds.com, 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. Also for your protection, telephone
redemption 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.
The registration for both accounts involved must be identical. Class B and Class
C shares will continue to age from the original date and will retain the same
CDSC rate. However, if the new fund's CDSC rate is higher, then the rate will
increase. 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 also refuse any exchange order.
A fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
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 business 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:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o 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.
Capital gains, if any, are distributed annually, typically after the end of a
fund's fiscal year. Most of these funds' dividends are income dividends. Your
dividends begin accruing the day after payment is received by the fund and
continue through the day your shares are actually sold.
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.
YOUR ACCOUNT 19
<PAGE>
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.
Each 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-term capital gains are taxable as ordinary income.
Dividends from a fund's long-term capital gains are taxable at a lower rate.
Whether gains are short-term or long-term depends on the fund's holding period.
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 generally be exempt from state
and local personal income taxes in the applicable state. Dividends of the other
tax-free income funds are generally not exempt from state and local income
taxes.
The tax information 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:
o Complete the appropriate parts of your account application.
o 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 payments or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o 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).
o 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.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o 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 retirement plans,
including traditional, Roth and Education IRAs, SIMPLE plans, SEPs, 401(k) plans
and other pension and profit-sharing plans. Using these plans, you can invest in
any John Hancock fund with a low minimum investment of $250 or, for some group
plans, no minimum investment at all. Because of certain tax implications,
tax-free income funds are not appropriate investments for qualified retirement
plans.
20 YOUR ACCOUNT
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The diagram below shows the basic business structure used by the John Hancock
tax-free income funds. Each fund's board of trustees oversees the fund's
business activities and retains the services of the various firms that carry out
the fund's operations.
The trustees of the Massachusetts Tax-Free Income and New York Tax-Free Income
funds have the power to change these funds' respective investment goals without
shareholder approval.
Management fees The management fees paid to the investment adviser by the John
Hancock tax-free income funds last fiscal year are as follows:
- --------------------------------------------------------------------------------
Fund % of net assets
- --------------------------------------------------------------------------------
California Tax-Free Income Fund 0.49%
High Yield Tax-Free Fund 0.58%
Massachusetts Tax-Free Income Fund 0.19%
New York Tax-Free Income Fund 0.16%
Tax-Free Bond Fund 0.53%
[The following information was represented as a flow chart in the printed
material.]
-----------------
Shareholders
-----------------
Distribution and
shareholder services
-------------------------------------------------
Financial services firms and
their representatives
Advise current and prospective share-
holders on their fund investments, often
in the context of an overall financial plan.
-------------------------------------------------
-------------------------------------------------
Principal distributor
John Hancock Funds, Inc.
Markets the funds and distributes shares
through selling brokers, financial planners
and other financial representatives.
-------------------------------------------------
------------------------------------------------------
Transfer agent
John Hancock Signature Services, Inc.
Handles shareholder services, including record-
keeping and statements, distribution of dividends,
and processing of buy and sell requests.
------------------------------------------------------
Asset
management
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodian
Investors Bank & Trust Co.
Holds the funds' assets, settles all
portfolio trades and collects most of
the valuation data required for
calculating the fund's NAV.
------------------------------------
------------------------------------
Trustees
Oversee the funds' activities.
------------------------------------
FUND DETAILS 21
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
These tables detail the performance of each fund's share classes, including
total return information showing how much an investment in the fund has
increased or decreased each year.
California Tax-Free Income Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/94(1) 12/95 8/96(2) 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.85 $9.28 $10.69 $10.36 $10.77 $11.19
Net investment income (loss) 0.58 0.57(3) 0.39(3) 0.57(3) 0.56(3) 0.56(3)
Net realized and unrealized gain (loss) on
investments and financial futures contracts (1.57) 1.41 (0.33) 0.41 0.42 (0.54)
Total from investment operations (0.99) 1.98 0.06 0.98 0.98 0.02
Less distributions:
Dividends from net investment income (0.58) (0.57) (0.39) (0.57) (0.56) (0.56)
Net asset value, end of period $9.28 $10.69 $10.36 $10.77 $11.19 $10.65
Total investment return at net asset value(4) (%) (9.31) 21.88 0.61(5) 9.71 9.32 0.11
Total adjusted investment return at net asset
value(4,6) (%) (9.45) 21.73 0.55(5) 9.64 9.26 0.04
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 241,583 309,305 291,072 291,167 300,483 306,786
Ratio of expenses to average net assets (%) 0.75 0.75 0.76(7,8) 0.75 0.77(8) 0.76(8)
Ratio of adjusted expenses to average net
assets(9) (%) 0.89 0.90 0.84(7) 0.82 0.83 0.82
Ratio of net investment income (loss) to average net
assets (%) 5.85 5.76 5.57(7) 5.42 5.05 5.06
Ratio of adjusted net investment income (loss) to
average net assets(9) (%) 5.71 5.61 5.48(7) 5.35 4.99 4.99
Portfolio turnover rate (%) 62 37(10) 30 15 10 3
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01(3) 0.01(3) 0.01(3)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(1) 12/95 8/96(2) 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.85 $9.28 $10.68 $10.36 $10.77 $11.19
Net investment income (loss) 0.51 0.50(3) 0.33(3) 0.49(3) 0.47(3) 0.48(3)
Net realized and unrealized gain (loss) on
investments and financial futures contracts (1.57) 1.40 (0.31) 0.41 0.42 (0.54)
Total from investment operations (1.06) 1.90 0.02 0.90 0.89 (0.06)
Less distributions:
Dividends from net investment income (0.51) (0.50) (0.34) (0.49) (0.47) (0.48)
Net asset value, end of period $9.28 $10.68 $10.36 $10.77 $11.19 $10.65
Total investment return at net asset value(4) (%) (9.99) 20.87 0.20(5) 8.88 8.50 (0.63)
Total adjusted investment return at net asset
value(4,6) (%) (10.13) 20.72 0.14(5) 8.81 8.44 (0.80)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 77,365 84,673 83,253 89,493 98,572 98,530
Ratio of expenses to average net assets (%) 1.50 1.50 1.52(7,8) 1.50 1.52(8) 1.51(8)
Ratio of adjusted expenses to average net
assets(9) (%) 1.64 1.65 1.59(7) 1.57 1.58 1.67
Ratio of net investment income (loss) to average
net assets (%) 5.10 4.97 4.81(7) 4.66 4.29 4.31
Ratio of adjusted net investment income (loss) to
average net assets(9) (%) 4.96 4.82 4.72(7) 4.59 4.23 4.14
Portfolio turnover rate (%) 62 37(10) 30 15 10 3
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01(3) 0.01(3) 0.01(3)
</TABLE>
22 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Class C - period ended: 8/99(11)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $11.14
Net investment income (loss)(3) 0.18
Net realized and unrealized (loss) on investments and
financial futures contracts (0.49)
Total from investment operations (0.31)
Less distributions:
Dividends from net investment income (0.18)
Net asset value, end of period $10.65
Total investment return at net asset value(4) (%) (2.77)(5)
Total adjusted investment return at net asset value(4,6) (%) (2.80)(5)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 860
Ratio of expenses to average net assets (%) 1.61(7,8)
Ratio of adjusted expenses to average net assets(9) (%) 1.67(7)
Ratio of net investment income (loss) to average net assets (%) 4.20(7)
Ratio of adjusted net investment income (loss) to average net
assets(9) (%) 4.13(7)
Portfolio turnover rate (%) 3
Fee reduction per share(3) ($) 0.01
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Effective August 31, 1996, the fiscal period end 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 and the years ended August 31, 1998
and 1999, 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 have been 0.75% for
Class A, 1.50% for Class B and 1.60% for Class C, respectively.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover rate excludes merger activity.
(11) Class C shares began operations on April 1, 1999.
FUND DETAILS 23
<PAGE>
High Yield Tax-Free Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95(2) 8/96(3) 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.85 $8.82 $9.47 $9.16 $9.34 $9.65
Net investment income (loss) 0.48(4) 0.57 0.49(4) 0.56(4) 0.54(4) 0.53(4)
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.94) 0.70 (0.30) 0.18 0.31 (0.62)
Total from investment operations (0.46) 1.27 0.19 0.74 0.85 (0.09)
Less distributions:
Dividends from net investment income (0.48) (0.58) (0.50) (0.56) (0.54) (0.53)
Distributions in excess of net investment income (0.09) (0.04) -- -- -- --
Total distributions (0.57) (0.62) (0.50) (0.56) (0.54) (0.53)
Net asset value, end of period $8.82 $9.47 $9.16 $9.34 $9.65 $9.03
Total investment return at net asset value(5) (%) 4.96(6) 14.85 1.96(6) 8.29 9.34 (0.98)
Total adjusted investment return at net asset value(5,10) (%) -- -- -- -- -- (1.00)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 15,401 14,225 23,663 32,199 40,725 48,869
Ratio of expenses to average net assets (%) 1.15(7) 1.06 1.10(7) 1.06 1.00(8) 1.00(8)
Ratio of net investment income (loss) to average net assets (%) 6.08(7) 6.36 6.39(7) 6.00 5.66 5.65(9)
Portfolio turnover rate (%) 62 64 38 51 35 39
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/94 10/95(2) 8/96(3) 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.98 $8.82 $9.47 $9.16 $9.34 $9.65
Net investment income (loss) 0.48 0.51 0.44(4) 0.49(4) 0.47(4) 0.47(4)
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.90) 0.69 (0.31) 0.18 0.31 (0.62)
Total from investment operations (0.42) 1.20 0.13 0.67 0.78 (0.15)
Less distributions:
Dividends from net investment income (0.48) (0.51) (0.44) (0.49) (0.47) (0.47)
Distributions in excess of net investment income (0.07) (0.04) -- -- -- --
Distributions from net realized gain on investments sold (0.19) -- -- -- -- --
Total distributions (0.74) (0.55) (0.44) (0.49) (0.47) (0.47)
Net asset value, end of period $8.82 $9.47 $9.16 $9.34 $9.65 $9.03
Total investment return at net asset value(5) (%) (4.44) 13.99 1.36(6) 7.51 8.53 (1.69)
Total adjusted investment return at net asset value(5,10) (%) -- -- -- -- -- (1.71)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 151,069 155,234 147,669 139,385 131,497 112,873
Ratio of expenses to average net assets (%) 1.85 1.79 1.81(7) 1.81 1.75(8) 1.73(8)
Ratio of net investment income to average net assets (%) 5.36 5.61 5.65(7) 5.28 4.92 4.93(9)
Portfolio turnover rate (%) 62 64 38 51 35 39
</TABLE>
24 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Class C - period ended: 8/99(1)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $9.47
Net investment income (loss)(4) 0.18
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.44)
Total from investment operations (0.26)
Less distributions:
Dividends from net investment income (0.18)
Net asset value, end of period $9.03
Total investment return at net asset value(5) (%) (2.70)(6)
Total adjusted investment return at net asset value(5,10) (%) (2.71)(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 229
Ratio of expenses to average net assets (%) 1.76(7,8)
Ratio of net investment income to average net assets (%) 4.84(7,9)
Portfolio turnover rate (%) 39
(1) Class A and Class C shares began operations on December 31, 1993 and April
1, 1999, respectively.
(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) The ratio of expenses to average net assets for the years ended August 31,
1998 and 1999 excludes the effect of balance credits. If these expense
reductions had been included, the effect to the ratio of expenses to
average net assets would have been less than 0.01% for Class A and Class B
shares for the year ended August 31, 1998 and the ratio of expenses to
average net assets would have been 0.98%, 1.71% and 1.74% for Class A,
Class B and Class C shares, respectively, for the year ended August 31,
1999.
(9) The ratio of net investment includes the effect of balance credits. If the
expense reductions were excluded, the effect to the ratio of net
investment income to average net assets would have been less than 0.01%
for Class A and Class B shares for the year ended August 31, 1998 and the
ratio of net investment income to average net assets would have been
5.63%, 4.91% and 4.82% for Class A, Class B and Class C shares,
respectively, for the year ended August 31, 1999.
(10) An estimated return that does not take into consideration fee reductions
by the Adviser during the periods shown.
FUND DETAILS 25
<PAGE>
Massachusetts Tax-Free Income Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/95 8/96 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.56 $11.76 $11.66 $12.12 $12.60
Net investment income (loss) 0.65 0.65 0.66 0.66(1) 0.64(1)
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.20 (0.10) 0.46 0.48 (0.75)
Total from investment operations 0.85 0.55 1.12 1.14 (0.11)
Less distributions:
Dividends from net investment income (0.65) (0.65) (0.66) (0.66) (0.64)
Net asset value, end of period $11.76 $11.66 $12.12 $12.60 $11.85
Total investment return at net asset value(2) (%) 7.66 4.78 9.85 9.66 (0.96)
Total adjusted investment return at net asset
value(2,3) (%) 7.21 4.30 9.45 9.27 (1.31)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 54,416 55,169 54,253 58,137 58,177
Ratio of expenses to average net assets (%) 0.70 0.75(4) 0.71(4) 0.71(4) 0.74(4)
Ratio of adjusted expenses to average net assets(5) (%) 1.15 1.18 1.11 1.10 1.05
Ratio of net investment income (loss) to average
net assets (%) 5.67 5.53 5.59 5.28 5.16
Ratio of adjusted net investment income (loss)
to average net assets(5) (%) 5.22 5.05 5.19 4.89 4.81
Portfolio turnover rate (%) 24 36 12 6 6
Expense and fee reduction per share ($) 0.05 0.06 0.05 0.05(1) 0.04(1)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 8/97(6) 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.84 $12.12 $12.60
Net investment income (loss) 0.54 0.57(1) 0.55(1)
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.28 0.48 (0.75)
Total from investment operations 0.82 1.05 (0.20)
Less distributions:
Dividends from net investment income (0.54) (0.57) (0.55)
Net asset value, end of period $12.12 $12.60 $11.85
Total investment return at net asset value(2) (%) 7.08(7) 8.89 (1.66)
Total adjusted investment return at net asset
value(2,3) (%) 6.72(7) 8.50 (2.01)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,418 6,197 12,967
Ratio of expenses to average net assets (%) 1.41(4,8) 1.41(4) 1.44(4)
Ratio of adjusted expenses to average net assets(5) (%) 1.81(8) 1.80 1.75
Ratio of net investment income (loss) to average
net assets (%) 4.82(8) 4.58 4.46
Ratio of adjusted net investment income (loss) to
average net assets(5) (%) 4.42(8) 4.19 4.11
Portfolio turnover rate (%) 12 6 6
Expense and fee reduction per share ($) 0.04 0.05(1) 0.04(1)
</TABLE>
26 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Class C - period ended: 8/99(6)
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $12.46
Net investment income (loss)(1) 0.21
Net realized and unrealized gain (loss) on investments and financial futures contracts (0.61)
Total from investment operations (0.40)
Less distributions:
Dividends from net investment income (0.21)
Net asset value, end of period $11.85
Total investment return at net asset value(2) (%) (3.23)(7)
Total adjusted investment return at net asset value(2,3) (%) (3.38)(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 178
Ratio of expenses to average net assets (%) 1.44(4,8)
Ratio of adjusted expenses to average net assets(5) (%) 1.75(8)
Ratio of net investment income (loss) to average net assets (%) 4.30(8)
Ratio of adjusted net investment income (loss) to average net assets(5) (%) 3.95(8)
Portfolio turnover rate (%) 6
Expense and fee reduction per share(1) ($) 0.02
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(4) The ratio of expenses to average net assets for the periods ending on or
after August 31, 1996 excludes the effect of balance credits. If these
expense reductions were included, the ratio of expenses to average net
assets would have been 0.70% for Class A and 1.40% for Class B and Class
C.
(5) Unreimbursed, without fee reduction.
(6) Class B and Class C shares began operations on October 3, 1996 and April
1, 1999, respectively.
(7) Not annualized.
(8) Annualized.
FUND DETAILS 27
<PAGE>
New York Tax-Free Income Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/95 8/96 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.73 $11.88 $11.83 $12.25 $12.62
Net investment income (loss) 0.65 0.66 0.67 0.66(1) 0.63(1)
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.15 (0.05) 0.42 0.37 (0.75)
Total from investment operations 0.80 0.61 1.09 1.03 (0.12)
Less distributions:
Dividends from net investment income (0.65) (0.66) (0.67) (0.66) (0.63)
Distributions from net realized gain on investments sold -- -- -- -- (0.11)
Distributions in excess of net realized gain on
investments sold -- -- -- -- (0.00)(2)
Total distributions (0.65) (0.66) (0.67) (0.66) (0.74)
Net asset value, end of period $11.88 $11.83 $12.25 $12.62 $11.76
Total investment return at net asset value(3) (%) 7.19 5.21 9.48 8.64 (1.08)
Total adjusted investment return at net asset value(3,4) (%) 6.74 4.77 9.08 8.24 (1.46)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 55,753 56,229 54,086 52,373 48,198
Ratio of expenses to average net assets (%) 0.70 0.73(5) 0.71(5) 0.70 0.74(5)
Ratio of adjusted expenses to average net assets(6) (%) 1.15 1.14 1.11 1.10 1.08
Ratio of net investment income (loss) to average net assets (%) 5.67 5.51 5.61 5.26 5.06
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) 5.22 5.07 5.21 4.86 4.68
Portfolio turnover rate (%) 70 76 46 46 58
Expense and fee reduction per share ($) 0.05 0.05 0.05 0.05(1) 0.04(1)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 8/97(7) 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.99 $12.25 $12.62
Net investment income (loss) 0.54 0.57(1) 0.54(1)
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.26 0.37 (0.75)
Total from investment operations 0.80 0.94 (0.21)
Less distributions:
Dividends from net investment income (0.54) (0.57) (0.54)
Distributions from net realized gain on investments sold -- -- (0.11)
Distributions in excess of net realized gain on
investments sold -- -- (0.00)(2)
Total distributions (0.54) (0.57) (0.65)
Net asset value, end of period $12.25 $12.62 $11.76
Total investment return at net asset value(3) (%) 6.82(8) 7.88 (1.77)
Total adjusted investment return at net asset value(3,4) (%) 6.46(8) 7.48 (2.15)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,414 5,824 8,458
Ratio of expenses to average net assets (%) 1.41(5,9) 1.40 1.44(5)
Ratio of adjusted expenses to average net assets(6) (%) 1.81(9) 1.80 1.78
Ratio of net investment income (loss) to average net assets (%) 4.79(9) 4.56 4.36
Ratio of adjusted net investment income (loss) to average
net assets(6) (%) 4.39(9) 4.16 3.98
Portfolio turnover rate (%) 46 46 58
Expense and fee reduction per share ($) 0.04 0.05(1) 0.04(1)
</TABLE>
28 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Class C - period ended: 8/99(7)
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $12.39
Net investment income (loss) 0.22(1)
Net realized and unrealized gain (loss) on investments and financial futures contracts (0.63)
Total from investment operations (0.41)
Less distributions:
Dividends from net investment income (0.22)
Net asset value, end of period $11.76
Total investment return at net asset value(3) (%) (3.24)(8)
Total adjusted investment return at net asset value(3,4) (%) (3.40)(8)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 94
Ratio of expenses to average net assets (%) 1.44(5,9)
Ratio of adjusted expenses to average net assets(6) (%) 1.78(9)
Ratio of net investment income (loss) to average net assets (%) 4.23(9)
Ratio of adjusted net investment income (loss) to average net assets(6) (%) 3.85(9)
Portfolio turnover rate (%) 58
Expense and fee reduction per share(1) ($) 0.04
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Less than $0.01 per share.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(5) The ratio of expenses to average net assets for the periods ending on or
after August 31, 1996 excludes the effect of balance credits. If these
expense reductions were included, the ratio of expenses to average net
assets would have been 0.70% for Class A and 1.40% for Class B and Class
C.
(6) Unreimbursed, without fee reduction.
(7) Class B and Class C shares began operations on October 3, 1996 and April
1, 1999, respectively.
(8) Not annualized.
(9) Annualized.
FUND DETAILS 29
<PAGE>
Tax-Free Bond Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/94(1) 12/95 8/96(2) 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.96 $9.39 $10.67 $10.27 $10.63 $11.01
Net investment income (loss) 0.58 0.57(3) 0.40 0.59 0.56(3) 0.56(3)
Net realized and unrealized gain (loss) on investments (1.58) 1.28 (0.41) 0.36 0.38 (0.65)
Total from investment operations (1.00) 1.85 (0.01) 0.95 0.94 (0.09)
Less distributions:
Dividends from net investment income (0.57) (0.57) (0.39) (0.59) (0.56) (0.56)
Net asset value, end of period $9.39 $10.67 $10.27 $10.63 $11.01 $10.36
Total investment return at net asset value(4) (%) (9.28) 20.20 (0.01)(5) 9.44 9.08 (0.93)
Total adjusted investment return at net asset
value(4,6) (%) (9.39) 20.08 (0.09)(5) 9.38 9.06 (1.04)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 114,539 118,797 560,863 590,185 600,905 564,877
Ratio of expenses to average net assets (%) 0.85 0.85 0.85(7) 0.85 0.85 0.86(10)
Ratio of adjusted expenses to average net assets(8) (%) 0.96 0.97 0.98(7) 0.91 0.87 0.96
Ratio of net investment income (loss) to average net
assets (%) 5.72 5.67 5.75(7) 5.61 5.16 5.14
Ratio of adjusted net investment income (loss) to
average net assets(8) (%) 5.61 5.55 5.62(7) 5.55 5.14 5.03
Portfolio turnover rate (%) 107 113 116(9) 46(9) 24 13
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01 0.01(3) 0.00(11)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(1) 12/95 8/96(2) 8/97 8/98 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.96 $9.38 $10.67 $10.27 $10.63 $11.01
Net investment income 0.50 0.50(3) 0.34 0.51 0.48(3) 0.48(3)
Net realized and unrealized gain (loss) on investments (1.58) 1.28 (0.40) 0.36 0.38 (0.65)
Total from investment operations (1.08) 1.78 (0.06) 0.87 0.86 (0.17)
Less distributions:
Dividends from net investment income (0.50) (0.49) (0.34) (0.51) (0.48) (0.48)
Net asset value, end of period $9.38 $10.67 $10.27 $10.63 $11.01 $10.36
Total investment return at net asset value(4) (%) (10.05) 19.41 (0.51)(5) 8.63 8.27 (1.67)
Total adjusted investment return at net asset
value(4,6) (%) (10.16) 19.29 (0.59)(5) 8.57 8.25 (1.78)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 70,243 76,824 81,177 204,621 184,085 143,830
Ratio of expenses to average net assets (%) 1.60 1.60 1.60(7) 1.60 1.60 1.61(10)
Ratio of adjusted expenses to average net assets(8) (%) 1.71 1.72 1.73(7) 1.66 1.62 1.71
Ratio of net investment income (loss) to average net
assets (%) 4.97 4.90 4.91(7) 4.85 4.41 4.39
Ratio of adjusted net investment income (loss) to
average net assets(8) (%) 4.86 4.78 4.78(7) 4.79 4.39 4.28
Portfolio turnover rate (%) 107 113 116(9) 46(9) 24 13
Fee reduction per share ($) 0.01 0.01(3) 0.01(3) 0.01 0.01(3) 0.00(11)
</TABLE>
30 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Class C - period ended: 8/99(12)
- --------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $10.86
Net investment income (3) 0.19
Net realized and unrealized gain (loss) on investments (0.50)
Total from investment operations (0.31)
Less distributions:
Dividends from net investment income (0.19)
Net asset value, end of period $10.36
Total investment return at net asset value(4) (%) (2.86)(5)
Total adjusted investment return at net asset value(4,6) (%) (2.86)(5)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 354
Ratio of expenses to average net assets (%) 1.71(7,10)
Ratio of adjusted expenses to average net assets(8) (%) 1.71(7)
Ratio of net investment income (loss) to average net assets (%) 4.29(7)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 4.28(7)
Portfolio turnover rate (%) 13
Fee reduction per share ($) 0.00(11)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Effective August 31, 1996, the fiscal period end 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) Unreimbursed, without fee reduction.
(9) Portfolio turnover rate excludes merger activity.
(10) For the period ended August 31, 1999, the ratio of expenses to average net
assets for the Fund excludes the effect of expense reductions. If expense
reductions were included, the ratio of expenses to average net assets
would have been 0.85%, 1.60% and 1.70% for Class A, Class B and Class C,
respectively.
(11) Less than $0.01 per share.
(12) Class C shares began operations on April 1, 1999.
FUND DETAILS 31
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
tax-free income funds:
Annual/Semiannual Report to Shareholders
Includes financial statements, a discussion of the market conditions and
investment strategies that significantly affected performance, as well as the
auditors' report (in annual report only).
Statement of Additional Information (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into (is legally a part of) this prospectus.
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
By phone: 1-800-225-5291
By EASI-Line: 1-800-338-8080
By TDD: 1-800-544-6713
On the Internet: www.jhfunds.com
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public Reference Room in Washington, DC. For access to
the Reference Room call 1-202-942-8090
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-0102
(duplicating fee required)
By electronic request:
[email protected]
(duplicating fee required)
On the Internet: www.sec.gov
[LOGO] JOHN HANCOCK FUNDS John Hancock Funds, Inc.
A Global Investment Management Firm 101 Huntington Avenue
Boston MA 02199-7603
(C)2000 John Hancock Funds, Inc.
TXFPN 5/00
<PAGE>
JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
Class A, Class B and Class C Shares
Statement Of Additional Information
May 1, 2000
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' current 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.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund............................................ 2
Investment Objective and Policies................................... 2
Special Risks....................................................... 14
Investment Restrictions............................................. 19
Those Responsible for Management.................................... 21
Investment Advisory and Other Services.............................. 30
Distribution Contracts.............................................. 31
Sales Compensation.................................................. 33
Net Asset Value..................................................... 36
Initial Sales Charge on Class A and Class C Shares.................. 36
Deferred Sales Charge on Class B and Class C........................ 39
Special Redemptions................................................. 43
Additional Services and Programs.................................... 43
Purchases and Redemptions Through Third Parties..................... 45
Description of the Fund's Shares.................................... 45
Tax Status.......................................................... 46
State Income Tax Information........................................ 51
Calculation of Performance.......................................... 52
Brokerage Allocation................................................ 54
Transfer Agent Services............................................. 56
Custody of Portfolio................................................ 56
Independent Auditors................................................ 56
Appendix A-Description of Investment Risk........................... A-1
Appendix B-Description of Bond Ratings.............................. B-1
Appendix C-Description of Equivalent Yields......................... C-1
Financial Statements................................................ F-1
-1-
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a diversified open-end investment management company organized as a
Massachusetts business trust under the laws of The Commonwealth of
Massachusetts.
John Hancock Advisers, Inc. (the "Adviser"), is the Fund's investment adviser.
The Adviser is an indirect wholly-owned subsidiary of John Hancock Life
Insurance Company (formerly 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. The Life
Company is wholly owned by John Hancock Financial Services, Inc., a Delaware
Corporation organized in February, 2000.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. Appendix A contains further
information describing investment risks. The investment objective is fundamental
and may only be changed with shareholder approval. There is no assurance that
the Fund will achieve its 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.
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 (excluding
pre-refunded securities secured with high quality U.S.
government or similar securities.)
(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.
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.
-2-
<PAGE>
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.
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.
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
-3-
<PAGE>
attributable to such interest also constitute tax preference items. The Code
also imposes certain limitations and restrictions on the use of tax-exempt bond
financing for non-governmental business activities, such as industrial
development bonds.
Municipal Notes. Municipal notes are short-term obligations of municipalities,
generally with a maturity ranging from six months to three years. The principal
types of such notes include tax, bond and revenue anticipation notes and project
notes.
Municipal Commercial Paper. Municipal commercial paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued to meet seasonal working
capital needs of a municipality or interim construction financing. Municipal
commercial paper is backed in many cases by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks and other institutions.
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.
Ratings as Investment Criteria. In general, the ratings of Moody's Investors
Services, Inc. ("Moody's"), Fitch Investors Services, Inc. ("Fitch") and
Standard & Poor's Ratings Group ("S&P") represent the opinions of these agencies
as to the quality of the securities which they rate. It should be emphasized,
however, that such ratings are relative and subjective and are not absolute
standards of quality. These ratings will be used by the Fund as initial criteria
for the selection of portfolio securities. Among the factors which will be
considered are the long-term ability of the issuer to pay principal and interest
and general economic trends. Appendix B contains further information concerning
the ratings of Moody's, S&P and Fitch and their significance. Subsequent to its
purchase by the Fund, an issue of securities may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. Neither of
these events will require the sale of the securities by the Fund.
Lower Rated High Yield "High Risk" Debt Obligations. 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. 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. The Adviser will purchase bonds
rated BBB or BB or Baa or Ba where, based upon price, yield and its assessment
of quality, investment in these bonds is determined to be consistent with the
Fund's objective of preservation of capital. The Adviser will evaluate and
monitor the quality of all investments, including bonds rated BBB or BB or Baa
or Ba, and will dispose of these bonds as determined to be necessary to assure
that the Fund's overall portfolio is constituted in a manner consistent with the
goal of preservation of capital. To the extent that the Fund's investments in
bonds rated BBB or BB or Baa or Ba will emphasize obligations believed
-4-
<PAGE>
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.
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. The Fund will not invest more than 10% of its net
assets in illiquid investments. If the Trustees determine, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 10% limit
on illiquid securities. The Trustees have adopted guidelines and delegated 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.
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 illiquid for purposes of the Fund's 10%
investment restriction on investment in illiquid securities.
The Fund may also invest in Certificates of Participation (COP's) which provide
participation interests in lease revenues. Each COP represents a proportionate
interest in or right to the lease-purchase payment made under municipal lease
obligations or installment sales contracts. Typically, municipal lease
obligations are issued by a state or municipal financing authority to provide
funds for the construction of facilities (e.g., schools, dormitories, office
buildings or prisons) or the acquisition of equipment. In certain states, such
as California, COP's constitute a majority of new municipal financing issues.
The facilities are typically used by the state or municipality pursuant to a
lease with a financing authority. Certain municipal lease obligations may trade
infrequently. Participation interests in municipal lease obligations will not be
considered illiquid for purposes of the Fund's 10% limitation on illiquid
securities provided the Adviser determines that there is a readily available
market for such securities.
In reaching liquidity decisions, the Adviser will consider, among others, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer.) With respect to municipal
lease obligations, the Adviser also considers: (1) the willingness of the
municipality to continue, annually or biannually, to appropriate funds for
payment of the lease; (2) the general credit quality of the
-5-
<PAGE>
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.
Repurchase Agreements. The Fund may enter into repurchase agreements for the
purpose of realizing additional (taxable) income. In a repurchase agreement the
Fund buys a security for a relatively short period (usually 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 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 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.
-6-
<PAGE>
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 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 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
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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). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the 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
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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 and Other Strategies with Future Contracts. 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 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 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 decline
in market prices that would 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.
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
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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.
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 either for bona fide hedging purposes or to seek to increase total
return 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.
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 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 or 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. 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.
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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.
Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Indexed Securities. The Fund may invest in indexed securities, including
floating rate securities that are subject to a maximum interest rate ("capped
floaters") and leveraged inverse floating rate securities ("inverse floaters")
(up to 10% of the Fund's total assets). The interest rate or, in some cases, the
principal payable at the maturity of an indexed security may change positively
or inversely in a relation to one or more interest rates, financial indices, or
other financial indicators ("reference prices"). An indexed security may be
leveraged to the extent that the magnitude of any change in the interest rate or
principal payable on an indexed security is a multiple of the change in the
reference price. Thus, indexed securities may decline in value due to adverse
market charges in interest rates or other reference prices.
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
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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 IFRCs 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
illiquid securities.
Risk Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. The risk of early prepayments
is the primary risk associated with interest only debt securities ("IOs"), super
floaters and other leveraged floating rate instruments. In some instances, early
prepayments may result in a complete loss of investment in certain of these
securities. The primary risks associated with certain other derivative debt
securities are the potential extension of average life and/or depreciation due
to rising interest rates.
Derivative debt securities include floating rate securities based on the Cost of
Funds Index ("COFI floaters"), other "lagging rate" floating rate securities,
floating rate securities that are subject to a maximum interest rate ("capped
floaters"), leveraged inverse floating rate securities ("inverse floaters"),
principal only debt securities ("POs") and certain residual or support branches
of index amortizing notes. Index amortizing notes are subject to extension risk
resulting from the issuer's failure to exercise its option to call or redeem the
notes before their stated maturity date. Leveraged inverse IOs present an
especially intense combination of prepayment, extension and interest rate risks.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X- reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Forward Commitment and When-Issued 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 to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid 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
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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.
Swaps, Caps, Floors 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
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.
Lending of Securities. For purposes of realizing additional (taxable) income,
the Fund may lend portfolio securities to brokers, dealers, and financial
institutions 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.
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. The Fund may engage in short-term trading in response to changes
in interest rates or other economic trends and developments, or to take
advantage of yield disparities between various fixed income securities in order
to realize capital gains or improve income. Short term trading may have the
effect of increasing portfolio turnover rate. A high rate of portfolio turnover
(100% or greater) involves correspondingly greater brokerage expenses. The
Fund's portfolio turnover rate is set forth in the table under the caption
"Financial Highlights" in the Prospectus.
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SPECIAL RISKS
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. The State's financial condition improved markedly during the fiscal
years starting in 1995-967, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing occurred over the end of the last
four fiscal years. The last borrowing to spread out the repayment of a budget
deficit over the end of a fiscal year was $4.0 billion of revenue anticipation
warrants issued in July, 1994 and which matured in April, 1996.
The economy grew strongly during the fiscal year beginning in 1995-96, and as a
result the General Fund took in substantially greater tax revenues (around $2.2
billion in 95-96, $1.6 billion in 96-97 and $2.4 billion in 97-98 and $1.0
billion in 98-99) than were initially planned when the budgets were enacted. The
accumulated budget deficit from the recession years was finally eliminated in
April 1996. Additional funds were largely direct to school spending as mandated
by Proposition 98, to make up shortfalls from reduced federal health and welfare
aid in 95-96 and 96-97 and particularly in 98-99 to fund new program incentives.
In FY1998, the economic recovery in California broadened and continued to pick
up momentum, again outpacing the nation and exceeding the growth recorded during
the previous four years. Overall, the California economy has created 1.6 million
new jobs since the recession in 1993. Nationally, the state retained its first
place ranking in employment creation by adding over 400,000 new jobs; reflecting
a growth of 3.5% and exceeding the national average by 0.9%. New growth sectors
include computer software, wireless communication, biotechnology, construction
and multimedia enterprises. The unemployment rate closed 1998 at 5.9%, a full
0.4% improvement over 1997. Compared with the nation as a whole, the rate still
trails by over 1 point. Per Capita Personal income expanded by 3.4% year over
year, with the state continuing to exceed the national median. Reflecting the
improving economy, nonresidential permits for new commercial and industrial
projects exceeded the value of alteration and rehabilitation projects for the
first time in five years and residential permits exceeded 125,700, the second
year running that expansion levels exceed those of 1990. While growth is
expected to remain strong through 1999, the State budget estimates anticipate a
slow down in 2000. For 1999, projections call for non-farm employment to
continue expansion at 3.3%, slowing to 2.5% in 2000. Personal income is
estimated to grow 6.6% in 1999, slowing to 5.4% in 2000. Both forecasts place
growth in California ahead of the national economy through 2000. Any setbacks to
continuation of economic growth or breakdowns in fiscal discipline could produce
budgetary pressures on State programs and local governments.
Recovery from the prolonged recession of the early 1990's has produced a steady
increase in California tax and fee revenues. Coupled with disciplined spending
programs, revenue growth has outpaced the need for additional state expenditures
driven by the State's growing population. Over the last three years, the largest
General Fund program K-12 schools and community colleges has been increasing by
twice as fast revenues. For FY1998 and FY1999, these programs will comprise over
50% of all General Fund expenditures. Efficiencies gained from revamping key
state services particularly in programs related to health and welfare have
allowed the state to maintain structural balance over this period. Going
forward, the increasing demands of a growing
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population including needed infrastructure improvements may begin to produce
structural imbalances should the state's fiscal discipline or the pace of the
recovery begin to falter.
The principal sources of the State's General Fund revenues are the California
personal income tax (50% of total revenues) sales and use tax (32%) and bank and
corporation taxes (11%). 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. The SFEU carried an estimated
positive balance of $1.932 billion at June 30, 1999, and for June 30, 2000 the
balance is estimated to be $880 million. The 1999 Budget Act includes a set
aside of $300 million for employee compensation and litigation.
After filing for protection under Chapter 9 of the Federal Bankruptcy Code in
December 1994, Orange County, California emerged from under court supervision in
June 1996. The intervening period has seen the lingering effects of this fiscal
crisis which has required the County to continue to explore opportunities to
reduce spending and expand its revenue base to balance meeting debt service, now
comprising 20% of all the County Funds and delivering essential services. The
aftermath still continues in FY1998-99 with the County continuing a strategy to
reduce the debt load incurred as part of the 1996 Recovery Plan financing,
upgrade the County credit standing and meet essential capital improvements.
Under the new plan, the County would attempt to annually set aside funds to
retire early $140 million of the outstanding $800 million in recovery notes. The
current challenge facing the County centers on funding critical needs for
emergency shelters, corrections facilities and a courthouse without the benefit
of a solid investment grade rating and voter approvals for increasing taxes and
continuing to set aside funds to reduce the current debt burden.
FY1998 provided evidence of an on-going economic and fiscal recovery in the
County of Los Angeles. Aided by the rebound of its diverse economy and the
effective implementation of health care restructuring and welfare reform, the
County has proposed a budget of $13.2 billion, an increase of about 5.3% over
the fiscal year 1998. Achievement of budget balance will require the County to
continue to reengineer Health Services delivery prior to expiration of Federal
waiver provisions in 2001, rationalize infrastructure investments, effectively
manage welfare reform, and continue to reduce overall staffing levels. After
several years of closing prospective gaps through deficit financing, the use of
non-recurring revenues, and the diversion of agency revenues, significant
concern exists over the continuing ability of the County to continue to meet
this challenge without receiving continual funding for State and Federal
mandates and maintenance of effort requirements without the establishment of an
additional permanent funding source.
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 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. However, the rebounding economy and sound fiscal restraints
resulted in the General Fund posting an operating surplus of $700 million on
total revenues of over $42.7 billion.
Because of the accumulated budget deficit over the past several years depleted
the State's cash resources. The lack of liquidity resulted in a series of
external borrowings to pay its normal
-15-
<PAGE>
expenses, including borrowings which were carried over into succeeding fiscal
years. 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. The $4.0 billion of this borrowing maturing in
April 1996 was retired from the General Fund.
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 projected General Fund revenues of $44.1 billion and expenditures of
$43.4 billion. This Budget eliminated the outstanding deficit including all
short-term borrowings and generated a significant surplus of $1.3 billion by
year end. On October 16, 1995, the State Controller again indicated that the
cash position of the General Fund exceeded the Trigger Law requirements and no
budget cuts were required. The major tax sources (Income, Sales and Corporation
Taxes) of the state grew by over $3.7 billion in FY 1995-96. The tax revenue
growth provided strong evidence of the breadth of California's economic rebound
and offsets some reductions in Federal aid.
The FY 1996-97 budget was signed on July 15, 1996, and called for General Fund
expenditures of $47.25 billion against expected revenues of $47.64 billion, a
general increase of 4% over FY 1995-96. 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 non-citizens and changes in the Food
Stamp program, including lower benefits and a work requirement. The Law required
states to implement the program not later than 7/1/97, and provided California
with approximately $3.7 billion in block grant funds for FY 96-97. The General
Fund results showed that final expenditures to total over $48 billion with an
operating surplus of approximately $860 million
The FY 1997-98 budget enacted on August 18, 1997 provided for General Fund
expenditures of $52.8 billion against revenues of $52.5 billion. Significant
features include: additional investments in K-12 education, public safety and
corrections, increased support of higher education, reform of public welfare
(CalWORKS), no change in taxes and a $1.235 billion full payment of deferred
contributions to the Public Employment Retirement System. During FY1997-98,
additional legislation was passed increasing educational expenditures and cuts
in welfare spending. The year also saw tax revenues exceed budgeted levels for
the second consecutive year. These changes produced an unexpected operating
surplus in the General Fund from final expenditures of $53.3 billion and
revenues of $55.5 billion. At year end, the Special Fund for Economic
Uncertainties to over $1.7 billion.
Enacted on August 21, 1998, the FY 1998-99 Budget spent an estimated $57.93
billion in General Fund expenditures, a 5.2% increase over FY 1997-98, The
budget projects a final balance equal to 3.3% of General Fund expenditures in
the Special Fund for Economic Uncertainties, the highest level since 1986.
Significant programs included: tax reductions featuring a 25% cut in vehicle
licensing fees, increases in dependent exemptions, and credits for renters and
businesses, increased education spending for K-12 programs, additional Higher
Education spending and increased funding for social service agencies and the
trial court system..
1999-2000 Fiscal Year Budget was signed in July 1999, and called for General
Fund revenues and Transfers of $63 billion against expenditures totaling $63.7
billion, (after the Governor used his line-item veto to reduce $581 million in
expenditures). The administration estimated that the SFEU would have a balance
at FY 2000 of $880 million. Not included in these amount is an additional $300
million set aside to provide funds for employee salary increases and litigation
reserves. Principal features include: Prop 98 funding for K-12 schools increased
by $1.6 billion, $108.6 million higher than the minimum Prop 98 guarantee.
Higher Ed funding increased by
-16-
<PAGE>
7.3%for University of CA system and 5.9% for CA State University and 6.6% for
Community Colleges, and increased funding of @$600 million for Health and Human
Services.Targeted tax cuts including a one year additional reduction of 10% of
the VLF for calendar year 2000. In addition, cities and counties will benefit
from a onetime appropriation of $150 million to be split to offset property tax
shifts during the early 1990's.
Rating Agencies. The state currently maintains an AA- rating from S&P, Aa3 from
Moody's and AA- from Fitch.
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. In November 1996, the voters also approved Proposition 218
which further defines and extends situations limiting the ability of localities
to impose taxes or change tax rates without voter approval. The full impact of
Prop 218 on outstanding and proposed taxes will require further clarification
through court rulings on specific legal tests and challenges.
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 that include tax
revenues and certain other funds. Excluded from the Appropriation Limits are
prior (pre 1979) debt service and subsequent debt incurred as the result of
voter authorizations, court mandates, qualified capital outlay projects and
certain increases in gasoline taxes and motor vehicle weight fees. Certain civil
disturbance emergencies declared by the Governor and appropriations approved by
a two-thirds vote of the legislature are excluded from 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 FY1986-1987 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.
-17-
<PAGE>
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
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
-18-
<PAGE>
original principal amount of the mortgage loan. This limitation could affect the
flow of revenues available to the issuer for debt service on these outstanding
debt obligations.
Substantially all of California is located within an active geologic region
subject to major seismic activity. Any California municipal obligation in the
Fund could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (1) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (2) an issuer to perform on its contract
of insurance in the event of widespread losses; or (3) the Federal or State
government to appropriate sufficient funds within their respective budget
limitations.
The January 1994 major earthquake in greater Los Angeles (Northridge) was
estimated to have resulted in up to $20 billion in property damage. Significant
damage was incurred by public and private facilities in four counties. Los
Angeles, Ventura, Orange and San Bernadino Counties were declared State and
Federal disasters. The Federal government approved a total of $9.5 billion in
earthquake relief funds for assistance to homeowners and small businesses, as
well as repair of damaged public facilities.
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.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information, means the approval by the lesser of (1) the holders of
67% or more of the Fund's shares represented at a meeting if more than 50% of
the Fund's outstanding shares are present in person or by proxy at that meeting
or (2) more than 50% of the Fund's outstanding shares.
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
-19-
<PAGE>
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 33 1/3% of its total assets.
5. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 or securities which are not readily
marketable if such purchase would cause the Fund to have more than
10% of its net assets invested in such types of securities.
6. Purchase or retain the securities of any issuer, if those officers
and Trustees of the Fund or the 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
-20-
<PAGE>
unless all securities issued or guaranteed by the government or
other entity owned by the Fund do not exceed 10% of the Fund's total
assets.
10. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, except commodities
and commodities contracts which are necessary to enable the Fund to
engage in permitted futures and options transactions necessary to
implement hedging strategies, or oil and gas interests. This
limitation shall not prevent the Fund from investing in municipal
securities secured by real estate or interests in real estate or
holding real estate acquired as a result of owning such municipal
securities.
11. Invest in common stock or in securities of other investment
companies, except that securities of investment companies may be
acquired as part of a merger, consolidation or acquisition of assets
and units of registered unit investment trusts whose assets consist
substantially of tax-exempt securities may be acquired to the extent
permitted by Section 12 of the Act or applicable rules.
12. Invest more than 5% of the value of its total assets in securities
of issuers having a record, including predecessors, of fewer than
three years of continuous operation, except obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities, unless the securities are rated by a nationally
recognized rating service.
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.
Non-fundamental Investment Restrictions. The following investment restriction is
designated as non-fundamental and may be changed by the Trustees without
shareholder approval:
1. 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.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of the Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees of the Trust 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/or Directors of the Fund's principal distributor, John Hancock
Funds, Inc. ("John Hancock Funds").
-21-
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Stephen L. Brown* Trustee and Chairman Chairman and Chief
John Hancock Place Executive Officer, John
P.O. Box 111 Hancock Life Insurance
Boston, MA 02117 Company; Chairman and
July 1937 Director, John Hancock
Advisers, Inc. (The
Adviser), John Hancock
Funds, Inc. (John Hancock
Funds), The Berkeley
Financial Group, Inc.
(The Berkeley Group);
Director, John Hancock
Subsidiaries, Inc.; John
Hancock Insurance Agency,
Inc.; (Insurance Agency),
(until June 1999);
Federal Reserve Bank of
Boston (until March
1999); John Hancock
Signature Services, Inc.
(Signature Services)
(until January 1997);
Trustee, John Hancock
Asset Management (until
March 1997).
Maureen R. Ford * Trustee, Vice Chairman President, Broker/Dealer
101 Huntington Avenue and Chief Executive Distributor, John Hancock
Boston, MA 02199 Officer Life Insurance Company;
April 1955 Vice Chairman, Director
and Chief Executive
Officer, the Adviser, The
Berkeley Group, John
Hancock Funds; Chairman,
Director and President,
Insurance Agency, Inc.;
Chairman, Director and
Chief Executive Officer,
Sovereign Asset
Management Corporation
(SAMCorp.); Senior Vice
President, MassMutual
Insurance Co. (until
1999); Senior Vice
President, Connecticut
Mutual Insurance Co.
(until 1996).
</TABLE>
- -------------------
* 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.
-22-
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James F. Carlin Trustee Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments);
April 1940 Director, Arbella Mutual
(insurance), Health Plan
Services, Inc.,
Massachusetts Health and
Education Tax Exempt
Trust, Flagship
Healthcare, Inc., Carlin
Insurance Agency, Inc.,
West Insurance Agency,
Inc. (until May 1995),
Uno Restaurant Corp.;
Chairman, Massachusetts
Board of Higher
Education (until July
1999).
William H. Cunningham Trustee Chancellor, University
601 Colorado Street of Texas System and
O'Henry Hall former President of the
Austin, TX 78701 University of Texas,
January 1944 Austin, Texas; Lee Hage
and Joseph D. Jamail
Regents Chair of Free
Enterprise; Director,
LaQuinta Motor Inns, Inc.
(hotel management
company) (1985-1998);
Jefferson-Pilot
Corporation (diversified
life insurance company)
and LBJ Foundation Board
(education foundation);
Advisory Director, Chase
Bank (formerly Texas
Commerce Bank - Austin).
</TABLE>
- -------------------
* 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.
-23-
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Ronald R. Dion Trustee President and Chief
250 Boylston Street Executive Officer, R.M.
Boston, MA 02116 Bradley & Co., Inc.;
March 1946 Director, The New
England Council and
Massachusetts
Roundtable; Trustee,
North Shore Medical
Center; Director, BJ's
Wholesale Club, Inc. and
a corporator of the
Eastern Bank; Trustee,
Emmanuel College.
Charles L. Ladner Trustee Senior Vice President
UGI Corporation and Chief Financial
P.O. Box 858 Officer, UGI Corporation
Valley Forge, PA 19482 (Public Utility Holding
February 1938 Company) (retired 1998);
Vice President and
Director for AmeriGas,
Inc. (retired 1998);
Vice President of
AmeriGas Partners, L.P.
(until 1997); Director,
EnergyNorth, Inc. (until
1995).
</TABLE>
- -------------------
* 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.
-24-
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Steven R. Pruchansky Trustee (1) Director and President,
4327 Enterprise Avenue Mast Holdings, Inc.
Naples, FL 34104 (since 1991); Director,
August 1944 First Signature Bank &
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
John Hancock Place Hancock Life Insurance
P.O. Box 111 Company; Director, the
Boston, MA 02117 Adviser, John Hancock
August 1937 Funds, Signator
Investors, Inc., John
Hancock Subsidiaries,
Inc., SAMCorp., NM
Capital, The Berkeley
Group, JH Networking
Insurance Agency, Inc.;
Insurance Agency, Inc.
(until June 1999),
Signature Services
(until January 1997).
Norman H. Smith Trustee Lieutenant General,
243 Mt. Oriole Lane United States Marine
Linden, VA 22642 Corps; Deputy Chief of
March 1933 Staff for Manpower and
Reserve Affairs,
Headquarters Marine
Corps; Commanding General
III Marine Expeditionary
Force/3rd Marine Division
(retired 1991).
</TABLE>
- -------------------
* 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.
-25-
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John P. Toolan Trustee Director, The Smith
13 Chadwell Place Barney Muni Bond Funds,
Morristown, NJ 07960 The Smith Barney Tax-Free
September 1930 Money Funds, Inc.,
Vantage Money Market
Funds (mutual funds), The
Inefficient-Market Fund,
Inc. (closed-end
investment company) and
Smith Barney Trust
Company of Florida;
Chairman, Smith Barney
Trust Company (retired
December, 1991);
Director, Smith Barney,
Inc., Mutual Management
Company and Smith Barney
Advisers, Inc.
(investment advisers)
(retired 1991); Senior
Executive Vice President,
Director and member of
the Executive Committee,
Smith Barney, Harris
Upham & Co., Incorporated
(investment bankers)
(until 1991).
Osbert M. Hood Executive Vice President Executive Vice President
101 Huntington Avenue and Chief Financial and Chief Financial
Boston, MA 02199 Officer Officer, each of the John
August 1952 Hancock Funds; Executive
Vice President, Treasurer
and Chief Financial
Officer of the Adviser,
the Berkeley Group, John
Hancock Funds, SAMCorp.
and NM Capital; Senior
Vice President, Chief
Financial Officer and
Treasurer, Signature
Services; Director IndoCam
Japan Limited; Vice
President and Chief
Financial Officer, John
Hancock Life Insurance
Company, Retail Sector
(until 1997).
</TABLE>
- -------------------
* 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.
-26-
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Susan S. Newton Vice President, Secretary Vice President,
101 Huntington Avenue and Chief Legal Officer Secretary and Chief
Boston, MA 02199 Legal Officer the
March 1950 Adviser; John Hancock
Funds, Signature
Services, The Berkeley
Group, NM Capital and
SAMCorp.
James J. Stokowski Vice President, Treasurer Vice President, the
101 Huntington Avenue and Chief Accounting Adviser.
Boston, MA 02199 Officer
November 1946
Thomas H. Connors Vice President and Vice President and
101 Huntington Avenue Compliance Officer Compliance Officer, the
Boston, MA 02199 Adviser; Vice President,
September 1959 John Hancock Funds, Inc.
</TABLE>
- ---------------
* 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.
-27-
<PAGE>
The following tables provide information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Messrs. Brown and Scipione and Ms.
Ford, each a non-Independent Trustee, and each of the officers of the Fund are
interested persons of the Adviser, are compensated by the Adviser and received
no compensation from the Fund for their services.
Total
Compensation
from all Funds
Aggregate in John Hancock
Compensation Funds Complex
Trustees from the Fund(1) to Trustees(2)
- -------- ---------------- --------------
James F. Carlin $ 2,555 $ 74,000
William H. Cunningham* 2,555 74,000
Ronald R. Dion 2,945 18,500
Charles F. Fretz* 144 57,121
Harold R. Hiser, Jr.* ** 2,420 70,000
Charles L. Ladner 2,664 77,100
Leo E. Linbeck, Jr.** 2,420 74,000
Patricia P. McCarter* 0 43,696
Steven R. Pruchansky* 2,661 77,100
Norman H. Smith* 2,767 79,350
John P. Toolan* 2,661 77,100
----------- ---------
Total $ 23,792 $ 721,967
(1) Compensation is for the fiscal year ended August 31, 1999.
(2) The total compensation paid by the John Hancock Funds Complex to the
Independent Trustees is as of the calendar year ended December 31, 1998 As
of this date, there were sixty-five funds in the John Hancock Funds
Complex with each of these Independent Trustees serving thirty-four funds.
*As of December 31, 1998, the value of the aggregate accrued deferred
compensation from all funds in the John Hancock Funds Complex for Mr. Cunningham
was $320,943, for Mr. Hiser was $115,084, for Ms. McCarter was $183,645, for Mr.
Pruchansky was for $75,016, for Mr. Smith was $109,807 and for Mr. Toolan was
$403,714 under the John Hancock Group of Funds Deferred Compensation Plan for
Independent Trustees. Mr. Fretz and Ms. McCarter resigned effective October 1,
1998.
** As of December 31, 1999, Mr. Hiser and Mr. Linbeck resigned as Trustees of
the Complex.
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
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<PAGE>
As of December 1, 1999, the officers and Trustees of the Fund as a group owned
beneficially less than 1% of these outstanding shares. As of that date, the
following shareholders owned beneficially 5% of or more of the outstanding
shares of the Fund:
Percentage of Total
Outstanding Shares of
Name and Address of Shareholder Class of Shares the Class of the Fund
- ------------------------------- --------------- ---------------------
MLPF&S For The 5.25%
Sole Benefit of Its Customers A
Attn: Fund Administration 976U2
4800 Deerlake Drive East 2nd
Floor
Jacksonville FL 32246
MLPF&S For The 16.41%
Sole Benefit of Its Customers B
Attn: Fund Administration 979E8
4800 Deerlake Drive East 2nd
Floor
Jacksonville FL 32246
MLPF&S For The C 63.65%
Sole Benefit of Its Customers
Attn: Fund Administration
4800 Deerlake Drive East 2nd
Floor
Jacksonville FL 32246-6484
NFSC FEBO # STL-065056 C 7.29%
T & R Investments
A Partnership
Julie T. Rice
3637 W 118th Pl
Torrance CA 90505-2601
NFSC FEBO # 0JR-655171 C 6.40%
FBO Ferris Family Trust
John Ferris
U/A 06/20/1989
24742 Mendocino Ct
Languna Hills CA 92653-5652
Prudential Securities Inc FBO C 5.35%
Mr. John O. Monroe
Mrs. Irene B. Monroe Co-TTEES
John & Irene Monroe Trust
UA DTD 05/29/91
Solana Beach CA 92075
-29-
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Fund and other funds in the John
Hancock group of funds as well as institutional accounts. 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 more
than $100 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries a high rating from Standard & Poor's
and A.M. Best. Founded in 1862, the Life Company has been serving clients for
over 130 years.
The Fund has entered into an investment management contract (the "Advisory
Agreement"), with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those that are delegated to a custodian, transfer agent
or other agent.
The Fund bears all costs of its organization and operation, including but not
limited to 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,
maintaining a committed line of credit, 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 extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage, equal on an annual basis to
0.55%, of the average daily net assets of the Fund.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of its average daily net
assets. The Adviser retains the right to reimpose a 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.
For the years ended August 31, 1997, 1998 and 1999, the advisory fees payable by
the Fund to the Adviser amounted to $2,090,799, $2,139,998 and $2,262,938,
respectively. However, a portion of such fees were not imposed pursuant to the
voluntary fee and expense limitation arrangements then in effect.
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,
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<PAGE>
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 Advisory Agreement, the Adviser is not liable 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 Advisory Agreement 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 Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement 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 continuation of the Advisory Agreement and Distribution Agreement (discussed
below) was approved by all Trustees. The Advisory Agreement and the Distribution
Agreement, will continue in effect from year to year, provided that its
continuance is approved annually both (i) by the holders of a majority of the
outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both Agreements may be terminated on 60 days
written notice by any party or by vote of a majority to the outstanding voting
securities of the Fund and will terminate automatically if assigned.
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 years ended August 31, 1997, 1998 and 1999,
the Fund paid Adviser $70,577, $66,577 and $64,108, respectively, for services
under this Agreement.
Personnel of the Adviser and its affiliates may trade securities for their
personal accounts. The Fund also may hold, or may be buying or selling, the same
securities. To prevent the Fund from being disadvantaged, the Adviser and its
affiliates and the Fund have adopted a code of ethics which restricts the
trading activity of those personnel.
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class on behalf 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. These Selling Brokers are authorized
to designate other intermediaries to receive purchase and redemption orders on
behalf of the Fund. John Hancock Funds accepts orders for the purchase of the
shares of the Fund that are continually offered at net asset value next
determined, plus an applicable sales charge, if any. In connection with the sale
of Fund shares, John Hancock Funds and Selling Brokers
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<PAGE>
receive compensation from a sales charge imposed, in the case of Class A shares,
at the time of sale. In the case of Class B or Class C shares, the broker
receives compensation immediately but John Hancock Funds is compensated on a
deferred basis.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended August 31, 1997, 1998 and 1999 were $646,473, $561,946 and
$515,724, respectively, and $83,720, $75,119 and $31,258, respectively, were
retained by John Hancock Funds in 1997, 1998 and 1999, respectively. The
remainder of the underwriting commissions were reallowed to dealers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (the "Plans"), pursuant to Rule 12b-1 under the Investment Company Act of
1940 (the "Investment Company Act"). Under the Plans, the Fund will pay
distribution and service fees at an aggregate annual rate of up to 0.15% for
Class A shares and 1.00% for Class B and Class C shares, of the Fund's average
daily net assets attributable to shares of that class. However, the service fee
will not exceed 0.25% of the Fund's average daily net assets attributable to
each class of shares. 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. The distribution fee will be used to reimburse John
Hancock Funds for its distribution expenses, including but not limited to: (i)
initial and ongoing sales compensation to Selling Brokers and others (including
affiliates of John Hancock Funds) engaged in the sale of Fund shares; (ii)
marketing, promotional and overhead expenses incurred in connection with the
distribution of Fund shares; and (iii) with respect to Class B and Class C
shares only, interest expenses on unreimbursed distribution expenses. The
service fees will be used to compensate Selling Brokers and others for providing
personal and account maintenance services to shareholders. In the event the John
Hancock Funds is not fully reimbursed for payments or expenses 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 and Class C Plans 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 and
Class C Plans as a liability of the Fund because the Trustees may terminate
Class B and/or Class C Plans expenses at any time with no additional liability
for these expenses to the shareholders and the Fund. For the fiscal year ended
August 31, 1999, an aggregate of $5,021,863 of distribution expenses or 4.82% 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. For the period from April 1, 1999 to August
31, 1999, an aggregate of $0 distribution expenses or 0% of the average net
assets of the Class C shares of the Fund was not reimbursed or recovered by John
Hancock Funds through receipt of deferred sales charges or 12b-1 fees.
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 provides 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
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<PAGE>
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 be effective unless
it is approved by a majority vote of the Trustees and the Independent Trustees
of the Fund. The holders of Class A, Class B and Class C 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.
During the fiscal year ended August 31, 1999, the Fund paid John Hancock Funds
the following amounts of expenses in connection with their services.
Expense Items
-------------
Printing and Interest,
Mailing of Expenses of Carrying
Prospectus Compensation John or Other
to New to Selling Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
Class A $ 70,536 $ 5,565 $241,515 $128,474 $14,537
Class B $160,243 $20,068 $475,051 $293,964 $34,652
Class C $ 468 $ 13 $ 0 $ 866 $ 77
*Commenced Operations April 1, 1999.
SALES COMPENSATION
As part of their business strategies, the Fund, along with John Hancock Funds,
pays compensation to financial services firms that sell the Fund's shares. These
firms typically pass along a portion of this compensation to your financial
representative.
The two primary sources of compensation payments are (1) the 12b-1 fees that are
paid out of the Fund's assets and sales charges paid by investors. The sales
charges and 12b-1 fees are detailed in the prospectus and under "Distribution
Contracts" in this Statement of Additional Information. The portions of these
expenses that are reallowed to financial services firms are shown on the next
page.
Whenever you make an investment in the Fund, the financial services firm
receives a reallowance, as described below. The firm also receives the first
year's service fee at this time. Beginning with the second year after an
investment is made, the financial services firm receives
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<PAGE>
an annual service fee of 0.25% of its total eligible fund net assets. This fee
is paid quarterly in arrears by the Fund.
In addition, from time to time, John Hancock Funds, at its expense, may provide
significant additional compensation to financial services firms which sell or
arrange for the sale of shares of the Fund. Such compensation provided by John
Hancock Funds may include, for example, financial assistance to financial
services firms in connection with their conferences or seminars, sales or
training programs for invited registered representatives and other employees,
payment for travel expenses, including lodging, incurred by registered
representatives and other employees for such seminars or training programs,
seminars for the public, advertising and sales campaigns regarding one or more
Funds, and/or other financial services firms-sponsored events or activities.
From time to time, John Hancock Funds may make expense reimbursements for
special training of a financial services firm's registered representatives and
other employees in group meetings or to help pay the expenses of sales contests.
Other compensation, such as asset retention fees, finder's fees and
reimbursement for wire transfer fees, may be offered to the extent not
prohibited by law or any self-regulatory agency, such as the NASD.
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<PAGE>
<TABLE>
<CAPTION>
Sales charge Maximum First year
paid by investors reallowance Service fee Maximum
(% of offering (% of offering (% of net total compensation (1)
Class A investments price) price) 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% (2)
Next $1 and more above -- 0.00% 0.25% 0.25% (2)
that
<CAPTION>
Maximum First year
reallowance Service fee Maximum
(% of offering (% of net total compensation
Class B investments price) investment) (% of offering price)
------ ----------- ---------------------
<S> <C> <C> <C>
All amounts 3.75% 0.25% 4.00%
<CAPTION>
Maximum First year
reallowance service fee Maximum
Class C investments (% of offering (% of net total compensation
price) investment) (% of offering price)
------ ----------- ---------------------
<S> <C> <C> <C> <C>
Amounts purchased at NAV -- 0.75% 0.25% 1.00%
All other amounts 1.00% 1.75% 0.25% 2.00%
</TABLE>
(1) Reallowance percentages and service fee percentages are calculated from
different amounts, and therefore may not equal total compensation
percentages if combined using simple addition.
(2) For Group Investment Program sales, the maximum total compensation for
investments of $1 million or more is 1.00% of the offering price (one year
CDSC of 1.00% applies for each sale).
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
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<PAGE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-Term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
The 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.
INITIAL SALES CHARGE ON CLASS A AND CLASS C SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then they
will only be issued for full shares. The Trustees reserve the right to change or
waive the Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A and Class C 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 accumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund, owned by
the investor, 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.
Without Sales Charge. Class A shares may be offered without a front-end sales
charge or contingent deferred sales charge ("CDSC") to various individuals and
institutions as follows:
o A Trustee or officer of the Trust; a 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, daughter-in-law, son-in-law, niece,
nephew, grandparents and same sex domestic partner) 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 a signed agreement with John Hancock Funds
providing specifically for the
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<PAGE>
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 a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing programs, if
the Plan has more than $3 million in assets or 500 eligible employees at
the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement. See your Merrill Lynch financial consultant for further
information.
o Retirement plans investing through the PruArray Program sponsored by
Prudential Securities.
o Pension plans transferring assets from a John Hancock variable annuity
contract to the Fund pursuant to an exemptive application approved by the
Securities Exchange and Commission.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed
retirement plans with at least 100 eligible employees at the inception of
the Fund account. Each of these investors 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 $4,999,000 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class C shares may be offered without a front-end sales charge to:
o Retirement plans for which John Hancock Signature Services performs
employer sponsored plan recordkeeping services. (These types of plans
include 401(k), money purchase pension, profit sharing and SIMPLE 401k.)
o An investor who buys through a Merrill Lynch omnibus account. However,
a CDSC may apply if the shares are sold within 12 months of purchase.
Class A and Class C shares may also be purchased without an initial sales charge
in connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below).
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<PAGE>
A company's (not an individual's) qualified and non-qualified retirement plan
investments can be combined to take advantage of this privilege. Further
information about combined purchases, including certain restrictions on combined
group purchases, is available from Signature Services or a Selling Broker's
representative.
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 being invested but also
the investor's purchase price or current value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize. A company's (not an individual's)
qualified and non-qualified retirement plan investments can be combined to take
advantage of this privilege.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments
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 retirement plan,
however, may opt to make the necessary investments called for by the LOI over a
forty-eight (48) month period. These retirement plans include traditional, Roth
and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs) SIMPLE, SIMPLE
IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and Section 457
plans. An individual's non-qualified and qualified retirement plan investments
cannot be combined to satisfy an LOI of 48 months. Such an investment (including
accumulations and combinations but not including reinvestment dividends) must
aggregate $100,000 or more 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 (either 13 or 48 months), the sales
charge applicable will not be higher than that which would have been applied
(including accumulations and combinations) had the LOI been for the amount
actually invested.
The LOI authorizes 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 escrowed Class A 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 Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a
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<PAGE>
binding commitment by an investor to purchase, or by the Fund to sell, any
additional Class A shares and may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of an initial sales charge so that the Fund will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively, will be subject to a
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 or Class C shares being redeemed. No CDSC will be imposed on increases
in account value above the initial purchase price or on shares derived from
reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service retirement 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 both Class B and Class C
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 for Class B or one year CDSC
redemption period for Class C 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 Class B. For this purpose, the amount of any increase in a
share's value above its initial purchase price is not subject to a 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.
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 Class B shares at $10 per share. The second year after
your purchase, your investment's net asset value per share has increased by $2
to $12, and you have gained 10 additional shares through dividend reinvestment.
If you redeem 50 shares at this time your CDSC will be calculated as follows:
<TABLE>
<S> <C>
o Proceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o *Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to CDSC (dividend reinvestment) (120.00)
-------
o Amount subject to CDSC $280.00
</TABLE>
*The appreciation is based on all 100 shares in the account not just the shares
being redeemed.
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<PAGE>
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 and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C shares and of Class A shares that are subject
to a CDSC, unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to Trust accounts
unless Trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B (but not Class C) shares made under a periodic
withdrawal plan, or redemptions for fees charged by planners or advisors
for advisory services, 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 or Class C shares that are
subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has less than $3 million in assets or 500 eligible
employees at the date the Plan Sponsor signs the Merrill Lynch
Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
* Redemption of Class A shares by retirement plans that invested through the
PruArray Program sponsored by Prudential Securities.
* Redemption of Class A shares made after one year from the inception date
of a retirement plan at John Hancock for which John Hancock is
recordkeeper.
For Retirement Accounts (such as traditional, Roth and Education IRAs, SIMPLE
IRAs, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan and Profit-Sharing Plan and other plans as described in the
Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
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<PAGE>
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under sections 401(a) (such as
Money Purchase Pension Plans and Profit-Sharing/401(k) Plans), 457 and 408
(SEPs and SIMPLE IRAs) of the Internal Revenue Code.
* 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.
Please see matrix for some examples.
-41-
<PAGE>
- --------------------------------------------------------------------------------
Type of 401 (a) 403 (b) 457 IRA, IRA Non-retirement
Distribution Plan (401 Rollover
(k), MPP,
PSP) 457 &
408 (SEPs &
Simple IRAs)
- --------------------------------------------------------------------------------
Death or Waived Waived Waived Waived Waived
Disability
- --------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distribution value
or 12% of annually
account in
value periodic
annually payments
in
periodic
payments.
- --------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually
in periodic
payments.
- --------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
(Class B only) annuity annuity annuity annuity account
payments payments payments payments value
(72t) or (72t) or (72t) or (72t) or annually
12% of 12% of 12% of 12% of in
account account account account periodic
value value value value payments
annually in annually annually annually
periodic in in in
payments periodic periodic periodic
payments. payments. 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
- --------------------------------------------------------------------------------
Qualified Waived Waived Waived N/A N/A
Domestic
Relations
Orders
- --------------------------------------------------------------------------------
Termination of Waived Waived Waived N/A N/A
Employment
Before Normal
Retirement Age
- --------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- --------------------------------------------------------------------------------
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.
-42-
<PAGE>
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transactions charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock 500 Index Fund and John Hancock
Intermediate Government Fund will retain the exchanged fund's CDSC schedule).
For purposes of computing the CDSC payable upon redemption of shares acquired in
an exchange, the holding period of the original shares is added to the holding
period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994 for
Class B shares of any other John Hancock fund, the acquired shares will continue
to be subject to the CDSC schedule that was in effect when the exchanged shares
were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares, which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional 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 and Class C shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase 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
-43-
<PAGE>
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 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 MAAP 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 order date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, 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 fund, subject to the minimum investment limit of 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 any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this 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.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege 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. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies 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 "TAX
STATUS."
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
-44-
<PAGE>
PURCHASES AND REDEMPTIONS THROUGH THIRD PARTIES
Shares of the Fund may be purchased or redeemed through certain broker-dealers.
Brokers may charge for their services or place limitations on the extent to
which you may use the services of the Fund. The Fund will be deemed to have
received a purchase or redemption order when an authorized broker, or if
applicable, a broker's authorized designee, receives the order. If a broker is
an agent or designee of the Fund, orders are processed at the NAV next
calculated after the broker receives the order. The broker must segregate any
orders it receives after the close of regular trading on the New York Stock
Exchange and transmit those orders to the Fund for execution at NAV next
determined. Some brokers that maintain nominee accounts with the Fund for their
clients charge an annual fee on the average net assets held in such accounts for
accounting, servicing, and distribution services they provide with respect to
the underlying Fund shares. The Adviser, the Fund, and John Hancock Funds, Inc.
(the Fund's principal distributor), share in the expense of these fees.
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund, without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series, and
classes 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. Additional series may be added in the future. The
Trustees have also authorized the issuance of three classes of shares of the
Fund, designated as Class A , Class B and Class C.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of the Fund. Holders of
each class of 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 each class of shares will be borne
exclusively by that class (ii) Class B and Class C shares will pay higher
distribution and service fees than Class A shares and (iii) each class of shares
will bear any class expenses properly allocable to that class of shares, subject
to the conditions the Internal Revenue Service imposes with respect to
multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
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 Investment Company 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
-45-
<PAGE>
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 therefore limited to circumstances in which the Fund itself
would be unable to meet its obligations, and the possibility of this occurrence
is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter, credit card or third party checks. All
checks returned by the post office as undeliverable will be reinvested at net
asset value in the fund or funds from which a redemption was made or dividend
paid. Information provided on the account application may be used by the Fund to
verify the accuracy of the information or for background or financial history
purposes. A joint account will be administered as a joint tenancy with right of
survivorship, unless the joint owners notify Signature Services of a different
intent. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts. For telephone transactions, the transfer agent 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 taken, the transfer agent is not responsible for any
losses that may occur to any account due to an authorized 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.
Selling activities for the Fund may not take place outside the U.S. except with
U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on
Non-U.S. investors' accounts with foreign mailing addresses are required to
certify that all sales activities have occurred, and in the future will occur,
only in the U.S. A foreign corporation may purchase shares of the Fund only if
it has a U.S. mailing address.
TAX STATUS
Federal Income Taxation
The Fund is treated as a separate entity for accounting and tax purposes, has
qualified and elected to be treated as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to continue to so qualify for each taxable year. 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 its tax-exempt
interest and taxable income (including net realized capital gains, if any) which
is distributed to shareholders in accordance with the timing requirements of the
Code.
-46-
<PAGE>
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 and, if available, the
exemption of such interest from California personal income taxation. 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
obligation 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.
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" or a "related person" thereof under Section
147(a) with respect to any 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.
-47-
<PAGE>
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 or constructive 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 may be paid in
January but may be taxable to shareholders as if they had been received on
December 31 of the previous year. The tax treatment described above will apply
without regard to whether distributions are received in cash or reinvested in
additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Amounts that are not allowable as a deduction in computing
taxable income, including expenses associated with earning tax-exempt interest
income, do not reduce the Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of the Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders who have chosen automatic reinvestment of their distributions will
have a federal tax basis in each share received pursuant to such a reinvestment
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received in the
reinvestment.
After the close of each calendar year, the Fund will inform shareholders of the
federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative 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 a pro rata share 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 realized 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.
-48-
<PAGE>
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, 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. A sales charge paid in purchasing
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. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Any loss realized upon the redemption of shares with a tax holding period of six
months or less will be disallowed to the extent of all exempt-interest dividends
paid with respect to such shares and, to the 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. Shareholders should consult their own tax advisers regarding their
particular circumstances to determine whether a disposition of Fund shares is
properly treated as a sale for tax purposes, as is assumed in the foregoing
discussion.
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 to
shareholders. The Fund has $8,347,379 of capital loss carryforwards, of which
$111,795 expires August 31, 2002, $5,169,717 expires August 31, 2003, $2,378,578
expires August 31, 2004, $7,774 expires August 31, 2005 and $679,515 expires
August 31, 2006.
Dividends and capital gain distributions from the Fund will not qualify for the
dividends-received deduction for corporate shareholders.
The Fund may invest in debt obligations that are in the lower rating categories
or are unrated. Investments in debt obligations that are at risk of default
present special tax issues for the Fund.
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Tax rules are not entirely clear about issues such as when the Fund may cease to
accrue interest, original issue discount, or market discount, when and to what
extent deductions may be taken for bad debts or worthless securities, how
payments received on obligations in default should be allocated between
principal and income, and whether exchanges of debt obligations in a workout
context are taxable. If the Fund invests in these debt obligations, it will
address these issues in order to seek to ensure that it distributes sufficient
income to preserve its status as a regulated investment company and seek to
avoid Federal income or excise tax.
The Fund is required to accrue original issue discount ("OID") on certain debt
securities (including zero coupon or deferred payment obligations) that have OID
prior to the receipt of the corresponding cash payments. The mark to market or
constructive sale rules applicable to certain options and futures contracts or
other transactions may also require the Fund to recognize income or 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 borrow the cash, to satisfy these distribution
requirements.
The Federal income tax rules applicable to certain structured or indexed
securities, interest rate swaps, caps, floors and collars, dollar rolls and
possibly other investments or transactions are unclear in certain respects, and
the Fund will account for these investments or transactions in a manner intended
to preserve its qualification as a regulated investment company and avoid
material tax liability.
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.
Additionally, the Fund may be required to recognize gain (subject to tax
distribution requirements) if an option, future, notional principal contract or
a
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combination thereof is treated as a constructive sale of an appreciated
financial position in the Fund's portfolio. 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 taxable income or 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 transactions 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 types of
investors, such as insurance companies and financial institutions. Dividends
(including exempt-interest dividends), capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of Fund shares
may also be subject to state and local taxes, except as described below under
"State Taxation." Shareholders should consult their own tax advisers as to the
Federal, state or local tax consequences of ownership of shares of, and receipt
of distributions from, the Fund in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8, Form W-8BEN or
other authorized withholding certificate 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 INCOME TAX INFORMATION
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, 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.
California Taxes
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
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personal income taxation. The Fund's long-term capital gains for Federal income
tax purposes that are distributed to the shareholders will be taxed as long-term
capital gains to individual shareholders of the Fund for purposes of California
personal income taxation. Gain or loss, if any, resulting from a sale or
redemption of shares will be recognized in the year of the sale or redemption.
Present California law taxes both long-term and short-term capital gains at the
rates applicable to ordinary income. Interest on indebtedness incurred or
continued by a shareholder in connection with the purchase of shares of the Fund
will not be deductible for California personal income tax purposes.
Generally, corporate shareholders of the Fund subject to the California
franchise tax will be required to include any gain on a sale or redemption of
shares and all distributions of exempt interest, capital gains and other taxable
income, if any, as income subject to such tax.
The Fund will not be subject to California franchise or corporate income tax on
interest income or net capital gain distributed to the shareholders.
Shares of the Fund will be exempt from local property taxes in California.
Shares of the Fund will not be excludable from the taxable estates of deceased
California resident shareholders for purposes of the California estate and
generation skipping taxes. California estate and generation skipping taxes are
creditable against the corresponding Federal taxes.
The foregoing is a general, abbreviated summary of certain of the provisions of
California law presently in effect as it directly governs the taxation of the
shareholders of the Fund. These provisions are subject to change by legislative
or administrative action, and any such change may be retroactive with respect to
the Fund's transactions. Shareholders are advised to consult with their own tax
advisers for more detailed information concerning California tax matters.
CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1999, the annualized yields of the Fund's
Class A, Class B and Class C shares were 4.34%, 3.79% and 3.66%, respectively.
As of August 31, 1999, 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 -4.41%, 5.78% and 6.77 %, respectively. As of August 31, 1999, the
average annual returns for the Fund's Class B shares for the one and five year
periods and since inception on December 31, 1991 were -5.39 %, 5.63% and 6.00%,
respectively. For the period from April 1, 1999 to August 31, 1999, the average
total return for the Fund's Class C shares was -8.71%. Without taking into
account the expense limitation arrangements, the foregoing total return
performance would have been lower.
The Fund may advertise 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, where
applicable) on the last day of the period, according to the following standard
formula:
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Yield = 2 ([( a-b/cd)+1]^6 - 1)
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the period
that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the period (NAV
where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by dividing
that portion of the yield of the Fund which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield of
the Fund that is not tax-exempt. The tax equivalent yields for the Fund's Class
A and Class B shares at the 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, 1999 were 7.92% and 6.92%,
respectively. The tax equivalent yields for the Fund's Class C shares at the
combined maximum federal and California tax rates, which assume the full
deductibility of state income taxes on the federal income tax return, for the
period ended August 31, 1999 was 6.68%.
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:
T = ((ERV/P)^(1/n)) - 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 each class, this calculation assumes
the maximum sales charge is included in the initial investment or the CDSC
applied at the end of the period. This calculation 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.
Excluding the Fund's sales charge from the distribution rate produces a higher
rate.
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
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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 sales charge on Class A shares or the CDSC on Class B or Class
C shares into account. Excluding the Fund's sales charge on Class A shares and
the CDSC on Class B or Class C 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.
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, and excerpts from,
national financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK,
THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S,
etc. may 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 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." 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
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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.
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 Adviser's officers will be primarily responsible for
the allocation of the Fund's brokerage business, their policies and practices in
this regard must be consistent with the foregoing and will at all times be
subject to review by the Trustees. For the fiscal years ended August 31, 1999,
1998 and 1997, the Fund paid negotiated brokerage commissions of $3,588, $8,178
and $29,397, respectively.
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 fiscal year ended August 31, 1999, 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 Signator Investors, Inc., a broker-dealer (until January 1, 1999,
John Hancock Distributors, Inc.) ("Signator" 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 the Affiliated Broker. For the periods ended August 31, 1997, 1998 and
1999, the Fund did not execute any portfolio transactions with the Affiliated
Broker.
Signator 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 Investment Company 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 Investment Company
Act) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser,
which is affiliated with the Affiliated Broker, has, as an investment adviser to
the Fund, the obligation to provide investment
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management services, which includes elements of research and related investment
skills, such research and related skills will not be used by the Affiliated
Broker 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 as 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. Because of
this, client accounts in a particular style may sometimes not sell or acquire
securities as quickly or at the same prices as they might if each were managed
and traded individually.
For purchases of equity securities, when a complete order is not filled, a
partial allocation will be made to each account pro rata based on the order
size. For high demand issues (for example, initial public offerings), shares
will be allocated pro rata by account size as well as on the basis of account
objective, account size ( a small account's allocation may be increased to
provide it with a meaningful position), and the account's other holdings. In
addition, an account's allocation may be increased if that account's portfolio
manager was responsible for generating the investment idea or the portfolio
manager intends to buy more shares in the secondary market. For fixed income
accounts, generally securities will be allocated when appropriate among accounts
based on account size, except if the accounts have different objectives or if an
account is too small to get a meaningful allocation. For new issues, when a
complete order is not filled, a partial allocation will be made to each account
pro rata based on the order size. However, if a partial allocation is too small
to be meaningful, it may be reallocated based on such factors as account
objectives, duration benchmarks and credit and sector exposure. 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 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., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent of the Fund. The Fund pays Signature Services
an annual fee of $20.00 for each Class A shareholder account, $22.50 for each
Class B shareholder account and $21.50 for each Class C shareholder account. The
Fund also pays certain out-of-pocket expenses and these expenses are aggregated
and charged to the Fund on the basis of their relative 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, 200 Clarendon Street,
Boston, Massachusetts 02116. 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 and
financial highlights 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, appearing elsewhere herein, and are included in
reliance on their report given on their authority as experts in accounting and
auditing.
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APPENDIX A
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 the fund's
risk profile in the prospectus.
A fund is 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 the Fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them with examples of related securities and
investment practices included in brackets. See the "Investment Objectives and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The Fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the 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. (e.g., futures and related options; securities and index
options, swaps, caps, floors, collars).
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.(e.g. borrowing; reverse repurchase
agreements, repurchase agreements, financial futures and options; securities and
index options, securities lending, non-investment grade debt securities, private
activity bonds, participation interests and structured securities, swaps, caps,
floors, collars).
Information risk The risk that key information about a security or market is
inaccurate or unavailable. Common to all municipal securities. (e.g.
non-investment grade debt securities, private activity bonds and participation
interests).
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. (e.g.
financial futures and options; securities and index options, non-investment
grade debt securities, private activity bonds, participation interests,
structured securities and swaps, caps, floors and collars).
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
borrowing; reverse repurchase agreements, when-issued securities and forward
commitments).
o 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.
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o 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.
o 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. (e.g. financial futures and options; securities
and index options, non-investment-grade debt securities, restricted and
illiquid securities, participation interests, swaps, caps, floors, collars ,
structured securities).
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. (e.g. financial futures and options;
securities and index options, short-term trading, when-issued securities and
forward commitments, non-investment-grade debt securities, restricted and
illiquid securities, structured securities).
Natural event risk The risk of losses attributable to natural disasters, such as
earthquakes and similar events. (e.g. private activity bonds).
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. (e.g. financial futures and options; securities and index options,
when-issued securities and forward commitments).
Political risk The risk of losses attributable to government or political
actions of any sort. (e.g. private activity bonds).
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.(e.g. non-investment-grade debt
securities, Restricted and illiquid securities, participation interests,
structured securities, swaps, caps, floors, collars).
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APPENDIX B
TAX EXEMPT BOND RATINGS
Below is a description of the five ratings that may apply to the Fund's
investments in Tax-Exempt Bonds.
Tax-Exempt Bond Ratings
Moody's describes its five highest ratings for Tax-Exempt Bonds as
follows:
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as 'gilt
edge'. Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
The five highest ratings of Standard & Poor's for Tax-Exempt Bonds are AAA
(Prime), AA (High Grade), A (Good Grade), BBB (Medium Grade) and BB:
AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay
principal and interest.
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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,
B-2
<PAGE>
business and financial alternatives can be identified that could
assist the obligor in satisfying its debt service requirements.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short-term run. Symbols
used will be as follows:
MIG 1 Loans bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market
for refinancing, or both.
MIG 2 Loans bearing this designation are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3 Loans bearing this designation are of favorable quality, with all
securities elements accounted for but lacking the undeniable
strength of the preceding grades. Market access for refinancing, in
particular, is likely to be less well established.
Standard & Poor's ratings for state and municipal notes and other
short-term loans are designated Standard & Poor's Grade (SP).
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
Fitch Ratings for short-term debt obligations that are payable on demand
or have original maturities of up to three years including commercial paper,
certificates of deposits, medium term notes and municipal and investment notes
are designated by the following ratings:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
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.
B-3
<PAGE>
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.
B-4
<PAGE>
APPENDIX C
EQUIVALENT YIELDS:
Tax Exempt Versus Taxable Income for 1999
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:
---------------------------------------------------------
1999 Marginal
Combined
Single Return Joint Return California
- ------------- ------------ And Federal
(Taxable Income) Income Tax 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
Bracket*
- -------------------------------------------------------------------------------------------------------------
IS EQUIVALENT TO A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-5,264 $ 0-10,528 15.85% 4.75% 5.94% 7.13% 8.32% 9.51% 10.70% 11.88%
$ 5,265- $ 10,559-
12,477 24,954 16.70% 4.80% 6.00% 7.20% 8.40% 9.60% 10.80% 12.00%
$ 12,478- $ 24,955-
19,692 39,384 18.40% 4.90% 6.13% 7.35% 8.58% 9.80% 11.03% 12.25%
$ 19,693- $ 39,385-
25,750 43,050 20.10% 5.01% 6.26% 7.51% 8.76% 10.01% 11.26% 12.52%
$ 25,751- $ 43,051-
27,337 54,674 32.32% 5.91% 7.39% 8.87% 10.34% 11.82% 13.30% 14.78%
$ 27,338- $ 54,675-
34,548 69,096 33.76% 6.04% 7.55% 9.06% 10.57% 12.08% 13.59% 15.10%
$ 34,549- $ 69,097-
62,450 104,050 34.70% 6.13% 7.66% 9.19% 10.72% 12.25% 13.78% 15.31%
$ 62,451- $ 104,051-
130,250 158,550 37.42% 6.39% 7.99% 9.59% 11.19% 12.78% 14.38% 15.98%
$ 130,251- $ 158,551-
283,150 283,150 41.95% 6.89% 8.61% 10.34% 12.06% 13.78% 15.50% 17.23%
$ 283,151- $ 283,151-
OVER OVER 45.22% 7.30% 9.13% 10.95% 12.78% 14.60% 16.43% 18.25%
</TABLE>
- ----------
* The marginal combined bracket includes the effect of deducting state taxes on
your federal tax return.
C-1
<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 2000.
This may result in higher or lower actual rates. The above chart is intended for
estimation only.
C-2
<PAGE>
FINANCIAL STATEMENTS
F-1
