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JOHN HANCOCK
TAX-FREE
BOND FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1995
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TABLE OF CONTENTS
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Page
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Expense Information................................................................... 2
The Fund's Financial Highlights....................................................... 3
Investment Objective and Policies..................................................... 4
Organization and Management of the Fund............................................... 7
Alternative Purchase Arrangements..................................................... 7
The Fund's Expenses................................................................... 9
Dividends and Taxes................................................................... 10
Performance........................................................................... 11
How to Buy Shares..................................................................... 13
Share Price........................................................................... 14
How to Redeem Shares.................................................................. 20
Additional Services and Programs...................................................... 23
Investments, Techniques and Risk Factors.............................................. 26
Derivative Instruments................................................................ 28
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This Prospectus sets forth the information about John Hancock Tax-Free Bond
Fund (the "Fund"), a diversified fund, that you should know before investing.
Please read and retain it for future reference.
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the "SEC"). You can obtain a copy of the Fund's Statement
of Additional Information, dated May 1, 1995 and incorporated by reference into
this Prospectus, free of charge by writing or telephoning: John Hancock Investor
Services Corporation, P.O. Box 9116, Boston, Massachusetts 02205-9116,
1-800-225-5291 (1-800-554-6713 TDD).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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EXPENSE INFORMATION
The purpose of the following information is to help you to understand the
various fees and expenses you will bear, directly or indirectly, when you
purchase Fund shares. The operating expenses included in the table and
hypothetical example below are based on fees and expenses for the Fund's fiscal
year ended December 31, 1994 adjusted to reflect certain current expenses.
Actual fees and expenses in the future of Class A and Class B shares may be
greater or less than those indicated.
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CLASS A CLASS B
SHARES SHARES
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SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchase (as a percentage of offering price).................... 4.50% None
Maximum sales charge imposed on reinvested dividends............................................ None None
Maximum deferred sales charge................................................................... None* 5.00%
Redemption fee+................................................................................. None None
Exchange fee.................................................................................... None None
ANNUAL FUND OPERATING EXPENSES (As a percentage of average net assets)
Management fee.................................................................................. 0.55% 0.55%
12b-1 fee (net of limitation -- Class B shares)***.............................................. 0.15% 0.90%
Other expenses**................................................................................ 0.26% 0.26%
Less fee waiver and expense limitation by Adviser............................................... (0.11)% (0.11)%
Total Fund operating expenses (net of limitation)****........................................... 0.85% 1.60%
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* No sales charge is payable at the time of purchase on investments of $1
million or more, but for these investments a contingent deferred sales
charge may be imposed, as described below under the caption "Share Price,"
in the event of certain redemption transactions within one year of
purchase.
**Other Expenses include transfer agent, legal, audit, custody and other
expenses.
*** The amount of the 12b-1 fee for Class B Shares used to cover service
expenses will be up to 0.25% of the Fund's average net assets, and the
remaining portion will be used to cover distribution expenses.
****Total Fund operating expenses in the table reflect voluntary and temporary
limitations by the Fund's investment adviser and distributor. Without such
limitations these Total Fund Operating Expenses of Class A shares and Class
B shares would be 0.96% and 1.81%, respectively.
+ Redemption by wire fee (currently $4.00) not included.
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EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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You would pay the following expenses for the indicated period of years on a
hypothetical $1,000 investment, assuming 5% annual return:
Class A Shares............................................................... $ 53 $71 $ 90 $145
Class B Shares
-- Assuming complete redemption at end of period......................... $ 66 $80 $ 107 $170
-- Assuming no redemption................................................ $ 16 $50 $ 87 $170
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(This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown.)
The Fund's payment of a distribution fee may result in a long-term shareholder
indirectly paying more than the economic equivalent of the maximum front-end
sales charge permitted under the National Association of Securities Dealers,
Inc.'s Rules of Fair Practice.
The management and 12b-1 fees referred to above are more fully explained in
this Prospectus under the caption "The Fund's Expenses" and in the Statement of
Additional Information under the captions "Investment Advisory and Other
Services" and "Purchase of Shares."
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THE FUND'S FINANCIAL HIGHLIGHTS
The following table of financial highlights has been audited by Ernst & Young
LLP, the Fund's independent auditors, whose unqualified report is included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's Annual Report to Shareholders
which may be obtained free of charge by writing or telephoning John Hancock
Investor Services Corporation ("Investor Services"), at the address or telephone
number listed on the front page of this Prospectus.
Selected data for each class of shares outstanding throughout each period is
as follows:
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CLASS A SHARES CLASS B SHARES
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YEAR ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED DECEMBER 31,
---------------------------------------- DECEMBER 31, ------------------------------
1994(1) 1993 1992 1991 1990(2) 1994(1) 1993 1992(3)
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Per share income and capital changes
for a share outstanding during each
period:
Net asset value, beginning of
period............................. $10.96 $10.47 $10.24 $9.90 $10.00 $10.96 $10.47 $10.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income................ 0.58 0.62 0.67 0.69 0.71 0.50 0.54 0.59
Net realized and unrealized gain
(loss)
on investments..................... (1.58 ) 0.93 0.42 0.72 (0.13) (1.58 ) 0.93 0.42
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Total from Investment Operations..... (1.00 ) 1.55 1.09 1.41 0.58 (1.08 ) 1.47 1.01
LESS DISTRIBUTIONS
Dividends from net investment
income............................. (0.57 ) (0.62) (0.68) (0.68) (0.68) (0.50 ) (0.54) (0.60 )
Distributions from realized gains.... -- (0.44) (0.18) (0.39) -- -- (0.44) (0.18 )
------- ------ ------ ------ ------ ------- ------ -------
Total Distributions.................. (0.57 ) (1.06) (0.86) (1.07) (0.68) (0.50 ) (0.98) (0.78 )
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Net asset value, end of period....... $ 9.39 $10.96 $10.47 $10.24 $ 9.90 $ 9.38 $10.96 $10.47
======= ====== ====== ====== ============= ======= ====== =======
Total Return(4)...................... (9.28 )% 15.15% 10.97% 14.78% 6.04% (10.05 )% 14.30% 10.15%
======= ====== ====== ====== ============= ======= ====== =======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net
assets............................. 0.96% 0.95% 0.96% 0.98% 1.25% 1.71% 1.70% 1.73%
Ratio of expense reimbursement to
average
net assets......................... (0.11 )% (0.17)% (0.30)% (0.38)% (0.85)% (0.11 )% (0.17)% (0.30 )%
======= ====== ====== ====== ============= ======= ====== =======
Ratio of net expenses to average
net assets......................... 0.85% 0.78% 0.66% 0.60% 0.40% 1.60% 1.53% 1.43%
======= ====== ====== ====== ============= ======= ====== =======
Ratio of net investment income to
average net assets................. 5.72% 5.57% 6.46% 6.86% 7.09% 4.97% 4.66% 5.57%
Portfolio turnover................... 107% 116% 79% 123% 64% 107% 116% 79%
Net Assets, end of period (in
thousands)......................... $114,539 $136,521 $99,523 $73,393 $45,437 $70,243 $56,384 $18,272
</TABLE>
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(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser. Prior to this date, Transamerica Fund Management Company was the
investment adviser.
(2) Financial highlights, including total return, are for the period from
January 5, 1990 (date of Fund's initial offering of shares to the public) to
December 31, 1990 and have not been annualized.
(3) Per share information has been calculated using the average number of shares
outstanding.
(4) Total return does not include the effect of the initial sales charge for
Class A Shares nor the contingent deferred sales charge for Class B Shares.
Total return does include the benefit of a voluntary expense reimbursement
by the Investment Adviser. Without such benefit, the total return would be
lower.
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to obtain as high a level of interest income
exempt from federal income taxes as is consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in municipal
bonds, notes and commercial paper, the interest on which is exempt from federal
income taxes ("Municipal Obligations"). Municipal Obligations include debt
obligations issued by or on behalf of states, territories and possessions of the
United States; the District of Columbia; and the political subdivisions,
agencies or instrumentalities thereof.
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THE FUND SEEKS TO PROVIDE INCOME EXEMPT
FROM FEDERAL INCOME TAX.
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Under normal market conditions, at least 80% of the Fund's total assets will be
invested in Municipal Obligations. At least 65% of the Fund's assets will
normally be invested in municipal bonds. Pending the investment of Fund assets
in Municipal Obligations and to meet redemption requests, the Fund may invest up
to 20% of its total assets in private activity bonds (the interest on which may
be treated as a tax preference item under the Federal alternative minimum tax)
and in certain taxable money market securities, including: obligations issued or
guaranteed by the U.S. government, its agencies, instrumentalities or
authorities; corporate debt securities; commercial paper; certificates of
deposit of domestic banks with assets of $1 billion or more; and repurchase
agreements secured by U.S. Government securities.
When John Hancock Advisers, Inc. (the "Adviser") determines that unfavorable
investment conditions warrant a temporary defensive position, the Fund may
invest more than 20% of its assets in taxable money market securities rated in
the three highest ratings as determined by Moody's Investors Services, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service
("Fitch") or, if unrated, determined by the Adviser to be of comparable quality.
See the Statement of Additional Information for a description of those ratings.
Municipal bonds generally are classified as either general obligation bonds or
revenue bonds. General obligation bonds are backed by the credit of an issuer
having taxing power and are payable from the issuer's general unrestricted
revenues. Their payment may depend on an appropriation of the issuer's
legislative body. Revenue bonds, by contrast, are payable only from the revenues
derived from a particular project, facility or a specific revenue source. They
are not generally payable from the unrestricted revenues of the issuer.
Municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes and project notes. Municipal commercial paper obligations are
unsecured promissory notes issued by municipalities to meet short-term credit
needs.
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THE FUND'S INVESTMENT IN MUNICIPAL
OBLIGATIONS INCLUDES MUNICIPAL BONDS,
MUNICIPAL NOTES AND MUNICIPAL COMMERCIAL
PAPER.
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At the time of purchase, municipal bonds including private activity bonds must
be rated at least investment grade, i.e., Baa by Moody's, BBB by S&P or Fitch
or, if not rated, determined by the Adviser to be of comparable credit quality.
Municipal notes must be rated at least Aa by Moody's or AA by S&P or Fitch or,
if not rated, determined by the Adviser to be of comparable credit quality.
Municipal commercial paper must be rated at least Prime-2 by Moody's or A-1+ by
S&P. The Fund may retain Municipal Obligations whose ratings are downgraded
below permissible ratings until the Adviser determines that disposing of such
Obligations is in the best interest of the Fund. Municipal bonds rated BBB or
Baa are considered to have some speculative characteristics and can pose special
risks involving the ability of the issuer to make payment of principal and
interest to a greater extent than higher rated securities. See Appendix A to the
Statement of Additional Information for additional discussion of the ratings
assigned to Municipal Obligations.
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THE FUND INVESTS IN MUNICIPAL OBLIGATIONS.
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The Adviser will purchase municipal bonds rated BBB or Baa where, based upon
price, yield and its assessment of quality, investment in such 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 Baa, and will dispose of such bonds necessary to
assure that the Fund's overall portfolio is constituted in manner consistent
with the goal of preservation of capital. To the extent that the Fund's
investments in municipal bonds rated BBB or Baa includes obligations believed to
be consistent with the goal of preserving capital, such bonds may not provide
yields as high as those of other obligations having such ratings and the
differential in yields between such bonds and obligations with higher quality
ratings may not be as significant as might otherwise be generally available.
Because there is no restriction on the maturities of the Municipal Obligations
in which the Fund may invest, the Fund's average portfolio maturity is not
subject to any limit. Generally, the longer the average portfolio maturity, the
greater will be the impact of fluctuations in interest rates on the values of
the Fund's assets and on the net asset value per share.
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THERE IS NO RESTRICTION ON THE MATURITIES
OF THE FUND'S MUNICIPAL OBLIGATIONS.
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The Fund may write (sell) covered call and put options on debt securities in
which it may invest and on indices composed of debt securities in which it may
invest. The Fund may purchase call and put options on these securities and
indices. The Fund may also write straddles, which are combinations of put and
call options on the same security. The Fund may buy and sell interest rate and
municipal bond index futures contracts and options on such futures contracts to
hedge against changes in securities prices and interest rates.
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THE FUND MAY EMPLOY CERTAIN INVESTMENT
STRATEGIES TO HELP ACHIEVE ITS INVESTMENT
OBJECTIVE.
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The Fund may invest in variable rate and floating rate obligations, including
inverse floating rate obligations, on which the interest rate is adjusted at
predesignated periodic intervals or when there is a change in the market rate of
interest on which the interest rate payable on the obligation is met is based.
Options, futures contracts and variable and floating rate instruments are
generally considered to be "derivative" instruments because they derive their
value from the performance of an underlying asset, index or other economic
benchmark. See "Investments, Techniques and Risk Factors" for additional
discussion of derivative instruments.
The Fund will not concentrate in any one industry (governmental issuers are not
considered to be part of any "industry"). While the Fund may invest more than
25% of its total assets in industrial development or pollution control bonds, it
may
5
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not invest more than 25% of its assets in industrial development or pollution
control bonds which are dependent, directly or indirectly, on the revenues or
credit of private entities in any one industry.
The Fund may purchase tax exempt participation interests and municipal lease
obligations, may lend its portfolio securities, enter into repurchase
agreements, purchase restricted and illiquid securities and purchase securities
on a when-issued or forward commitment basis.
See "Investments, Techniques and Risk Factors" for more information about the
Fund's investments.
The Fund has adopted certain investment restrictions which are enumerated in
detail in the Statement of Additional Information where they are classified as
fundamental or nonfundamental. Those restrictions designated as fundamental may
not be changed without shareholder approval. The Fund's investment objective and
its policy to invest (under normal market conditions) 80% of its assets in
Municipal Obligations are fundamental and may not be changed without the
approval of the Fund's shareholders. The Fund's other investment policies and
its nonfundamental restrictions, however, may be changed by a vote of the
Trustees without shareholder approval. Notwithstanding the Fund's fundamental
investment restriction prohibiting investments in other investment companies,
the Fund may, pursuant to an order granted by the SEC, invest in other
investment companies in connection with a deferred compensation plan for the
non-interested trustees of the John Hancock Group of Funds. There can be no
assurance that the Fund will achieve its investment objective.
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THE FUND FOLLOWS CERTAIN POLICIES WHICH
MAY HELP TO REDUCE INVESTMENT RISK.
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RISK FACTORS. An investment in the Fund is intended for long-term investors who
can accept the risks associated with investing primarily in fixed-income
securities. The Fund's investments will be subject to market fluctuation and
other risks inherent in all securities. The yield, return and price volatility
of the Fund depend on the type and quality of its investments as well as market
and other factors. In addition, the Fund's potential investments and management
techniques may entail specific risks. For additional information about risks
associated with an investment in the Fund, see "Investments, Techniques and Risk
Factors."
The primary consideration in choosing brokerage firms to carry out the Fund's
transactions is execution at the most favorable prices, taking into account the
broker's professional ability and quality service. Consideration may also be
given to the broker's sales of Fund shares. Pursuant to procedures determined by
the Trustees, the Adviser may place securities transactions with brokers
affiliated with the Adviser. The brokers include Tucker Anthony Incorporated,
Sutro and Company, Inc. and John Hancock Distributors, Inc., which are
indirectly owned by the John Hancock Mutual Life Insurance Company (the "Life
Company"), which in turn indirectly owns the Adviser.
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BROKERS ARE CHOSEN ON BEST PRICE AND
EXECUTION.
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6
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ORGANIZATION AND MANAGEMENT OF THE FUND
The Fund is a diversified open-end management investment company organized as a
Massachusetts business trust in 1989. The Fund reserves the right to create and
issue a number of series of shares, or funds or classes thereof, which are
separately managed and have different investment objectives. The Fund is not
required to and does not intend to hold annual meetings of shareholders,
although special meetings may be held for such purposes as electing or removing
Trustees, changing fundamental policies or approving a management contract. The
Fund, under certain circumstances, will assist in shareholder communications
with other shareholders.
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THE TRUSTEES ELECT OFFICERS AND RETAIN THE
INVESTMENT ADVISER WHO IS RESPONSIBLE FOR
THE DAY-TO-DAY OPERATIONS OF THE FUND,
SUBJECT TO THE TRUSTEES' POLICIES AND
SUPERVISION.
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The Adviser was organized in 1968 and is a wholly-owned indirect subsidiary of
the Life Company, a financial services company. The Adviser provides the Fund,
and other investment companies in the John Hancock group of funds, with
investment research and portfolio management services. John Hancock Funds
distributes shares for all of the John Hancock mutual funds through Selling
Brokers. Certain Fund officers are also officers of the Adviser and John Hancock
Funds.
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JOHN HANCOCK ADVISERS, INC. ADVISES
INVESTMENT COMPANIES HAVING A TOTAL ASSET
VALUE OF MORE THAN $13 BILLION.
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All investment decisions are made by the Adviser's fixed-income portfolio
management team and no single person is primarily responsible for making
recommendations to the team.
In order to avoid any conflict with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
preclearance for all personal trades and a ban on the purchase of initial public
offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
ALTERNATIVE PURCHASE ARRANGEMENTS
You can purchase shares of the Fund at a price equal to their net asset value
per share plus a sales charge. At your election, this charge may be imposed
either at the time of the purchase (see "Initial Sales Charge Alternative,"
Class A shares) or on a contingent deferred basis (the "Contingent Deferred
Sales Charge Alternative," Class B shares). If you do not specify on your
account application the class of shares you are purchasing, it will be assumed
that you are investing in Class A shares.
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AN ALTERNATIVE PURCHASE PLAN ALLOWS YOU TO
CHOOSE THE METHOD OF PAYMENT THAT IS BEST
FOR YOU.
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CLASS A SHARES. If you elect to purchase Class A shares, you will incur an
initial sales charge unless the amount of your purchase is $1 million or more.
If you purchase $1 million or more of Class A shares, you will not be subject to
an initial sales charge, but you will incur a sales charge if you redeem your
shares within one year of purchase. Class A shares are subject to ongoing
distribution and service fees at a combined annual rate of up to 0.25% of the
Fund's average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Share Price -- Qualifying for a Reduced Sales Charge."
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INVESTMENTS IN CLASS A SHARES ARE SUBJECT
TO AN INITIAL SALES CHARGE.
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<PAGE> 8
CLASS B SHARES. You will not incur a sales charge when you purchase Class B
shares, but the shares are subject to a sales charge if you redeem them within
six years of purchase (the "contingent deferred sales charge" or the "CDSC").
Class B shares are subject to ongoing distribution and service fees at a
combined annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class B shares. Investing in Class B shares permits all of
your dollars to work from the time you make your investment, but the higher
ongoing distribution fee will cause these shares to have higher expenses than
those of Class A shares. To the extent that any dividends are paid by the Fund,
these higher expenses will also result in lower dividends than those paid on
Class A shares.
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INVESTMENTS IN CLASS B SHARES ARE SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE.
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Class B shares are not available for fullservice defined contribution plans
administered by Investor Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
FACTORS TO CONSIDER IN CHOOSING AN ALTERNATIVE. The alternative purchase
arrangement allows you to choose the most beneficial way to buy shares, given
the amount of your purchase, the length of time you expect to hold your shares
and other circumstances. You should consider whether, during the anticipated
life of your Fund investment, the CDSC and accumulated fees on Class B shares
would be less than the initial sales charge and accumulated fees on Class A
shares purchased at the same time, and to what extent this differential would be
offset by the Class A shares' lower expenses. To help you make this
determination, the table under the caption "Expense Information" on the inside
cover page of this Prospectus shows examples of the charges applicable to each
class of shares. Class A shares will normally be more beneficial if you qualify
for reduced sales charges. See "Share Price--Qualifying for a Reduced Sales
Charge."
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YOU SHOULD CONSIDER WHICH CLASS OF SHARES
WOULD BE MORE BENEFICIAL TO YOU.
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Class A shares are subject to lower distribution fees and, accordingly, pay
correspondingly higher dividends per share, to the extent any dividends are
paid. However, because initial sales charges are deducted at the time of
purchase, you would not have all of your funds invested initially and,
therefore, would initially own fewer shares. If you do not qualify for reduced
initial sales charges and expect to maintain your investment for an extended
period of time, you might consider purchasing Class A shares. This is because
the accumulated distribution and service charges on Class B shares may exceed
the initial sales charge and accumulated distribution and service charges on
Class A shares during the life of your investment.
Alternatively, you might determine that it is more advantageous to purchase
Class B shares to have all of your funds invested initially. However, you will
be subject to higher distribution and service fees and, for a six-year period, a
CDSC.
In the case of Class A shares, the distribution expenses that John Hancock
Funds, Inc. ("John Hancock Funds") incurs in connection with the sale of the
shares will be paid from the proceeds of the initial sales charge and ongoing
distribution and service fees. In the case of Class B shares, the expenses will
be paid from the
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<PAGE> 9
proceeds of the ongoing distribution and service fees, as well as from the CDSC
incurred upon redemption within six years of purchase. The purpose and function
of the Class B shares' CDSC and ongoing distribution and service fees are the
same as those of the Class A shares' initial sales charge and ongoing
distribution and service fees. Sales personnel distributing the Fund's shares
may receive different compensation for selling each class of shares.
Dividends, if any, on Class A and Class B shares will be calculated in the same
manner, at the same time and on the same day. They also will be in the same
amount, except for differences resulting from each class bearing only its own
distribution and service fees, shareholder meeting expenses and any incremental
transfer agency costs. See "Dividends and Taxes."
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a monthly fee to
the Adviser equal to 0.55% of the Fund's average daily net assets. During the
Fund's most recent fiscal year, the advisory fee was 0.44% of the Fund's average
daily net assets. The Adviser has voluntarily and temporarily agreed to continue
to limit the Fund's operating expenses and not to impose its management fee to
the extent necessary to limit the total of the Fund's management fees and
operating expenses (not including fees payable by the Fund under a Rule 12b-1
plan) to .70% of the average net assets attributable to Class A and Class B
shares.
The Class A and Class B shareholders have adopted distribution plans (each a
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"). Under these Plans, the Fund will pay distribution and service fees
at an aggregate annual rate of up to 0.15% of the Class A shares' average daily
net assets and an aggregate annual rate of 1.00% of the Class B shares' average
daily net assets. John Hancock Funds has temporarily agreed to limit the
distribution and services fees pursuant to the Class B Plan to 0.90% of average
daily net assets. Up to 0.25% for Class B shares and 0.15% for Class A shares is
for service expenses and the remaining amount is for distribution expenses. The
distribution fees will be used to reimburse John Hancock Funds for its
distribution expenses, including but not limited to: (i) initial and ongoing
sales compensation to Selling Brokers and others (including affiliates of John
Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional
and overhead expenses incurred in connection with the distribution of Fund
shares; (iii) unreimbursed distribution expenses under the Fund's prior
distribution plans; (iv) distribution expenses incurred by other investment
companies which sell all or substantially all of its assets to, merge or
otherwise engage in a reorganization transaction with the Fund; and (v) with
respect to Class B shares only, interest expenses on unreimbursed distribution
expenses. The service fees will be used to compensate Selling Brokers for
providing personal and account maintenance services to shareholders.
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THE FUND PAYS DISTRIBUTION AND SERVICE
FEES FOR MARKETING AND SALES-RELATED
SHAREHOLDER SERVICING.
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In the event John Hancock Funds is not fully reimbursed for payments it makes or
expenses it incurs under the Class A Plan, these expenses will not be carried
beyond one year from the date they were incurred. Unreimbursed expenses under
the Class B Plan will be carried forward together with interest on the balance
of
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<PAGE> 10
these unreimbursed expenses. For the fiscal year ended December 31, 1994, an
aggregate of $3,316,138 of distribution expenses or 4.72% of the average net
assets of the Fund's Class B shares was not reimbursed or recommended by John
Hancock Funds through receipt of deferred sales charges or Rule 12b-1 fees in
prior periods.
Information on the Fund's total expenses is in the Financial Highlights section
of this Prospectus.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund generally declares dividends daily and distributes
dividends monthly, representing all or substantially all of its net investment
income. The Fund will distribute net realized long-term and short-term capital
gains, if any, annually before the close of the fiscal year (December 31).
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YOU SHOULD KEEP YOUR ACCOUNT STATEMENTS
RECEIVED BY THE FUND FOR YOUR PERSONAL TAX
RECORDS.
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Dividends are reinvested in additional shares of your class unless you elect the
option to receive them in cash. If you elect the cash option and the U.S. Postal
Service cannot deliver your checks, your election will be converted to the
reinvestment option. Because of the higher expenses associated with Class B
shares, any dividends on these shares will be lower than those on the Class A
shares. See "Share Price."
TAXATION. The Fund intends to meet certain federal tax requirements so that its
distributions of the tax-exempt interest it earns may be treated as
"exempt-interest dividends," which you are entitled to treat as tax-exempt
interest. That portion of exempt-interest dividends, if any, attributable to
interest on certain tax-exempt obligations that are "private activity bonds" may
increase certain shareholders' alternative minimum tax.
Shareholders receiving social security benefits and certain railroad retirement
benefits may be subject to Federal income tax on up to 85 percent of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Fund. Shares
of the Fund may not be an appropriate investment for persons who are
"substantial users" of facilities financed by industrial development or private
activity bonds, or persons related to "substantial users." Consult your tax
adviser if you think this may apply to you.
Dividends from the Fund's net taxable income, if any, including any market
discount included in the Fund's income, and from the Fund's net short-term
capital gains are taxable to you as ordinary income. Dividends from the Fund's
net long-term capital gains are taxable as long-term capital gain. These
dividends are taxable, whether received in cash or reinvested in additional
shares. Certain dividends may be paid by the Fund in January of a given year but
may be treated as if you received them the previous December.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, the Fund will not be
subject to
10
<PAGE> 11
Federal income tax on any net investment income or net realized capital gains
distributed to its shareholders within the time period prescribed by the Code.
When you redeem (sell) or exchange shares, you may realize a taxable gain or
loss.
On the account application you must certify that your social security or other
tax payer identification number is correct and that you are not subject to
backup withholding of Federal income tax. If you do not provide this information
or are otherwise subject to this withholding, the Fund may be required to
withhold 31% of your taxable dividends, and 31% of the proceeds of redemptions
or exchanges.
In addition to Federal taxes, you may be subject to state and local taxes with
respect to your investment in and distributions from the Fund. A state income
(and possibly local income and/or intangible property) tax exemption is
generally available to the extent the Fund's distributions are derived from
interest on (or, in the case of intangibles taxes, the value of its assets is
attributable to) certain U.S. Government obligations and/or tax-exempt municipal
obligations issued by or on behalf of the particular state or a political
subdivision thereof, provided in some states that certain thresholds for
holdings of such obligations and/or reporting requirements are satisfied. You
will receive tax information each year showing the percentage of the Fund's
exempt-interest dividends attributable to each state. You should consult your
tax adviser for specific advice.
PERFORMANCE
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30 day period by the maximum
offering price per share on the last day of that period. Yield is also
calculated according to accounting methods that are standardized for all stock
and bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the fund's yield may not equal the income paid on
shares or the income reported in the Fund's financial statements. The Fund may
also utilize tax equivalent yields of its Class A and Class B shares computed in
the same manner, with adjustment for assumed Federal income tax rates. For a
comparison of yields on municipal securities and taxable securities, see the
Taxable Equivalent Yield Table in Appendix A.
- -------------------------------------------------------------------------------
THE FUND MAY ADVERTISE ITS YIELD AND TOTAL
RETURN.
- -------------------------------------------------------------------------------
The Fund's total return shows the overall dollar or percentage change in value
of a hypothetical investment in the Fund, assuming the reinvestment of all
dividends. Cumulative total return shows the Fund's performance over a period of
time. Average annual total return shows the cumulative return divided over the
number of years included in the period. Because average annual total return
tends to smooth out variations in the Fund's performance, you should recognize
that it is not the same as actual year-to-year results.
Both total return and yield calculations for Class A shares generally include
the effect of paying the maximum sales charge (except as shown in "The Fund's
Financial Highlights"). Investments at a lower sales charge would result in
higher performance figures. Total return and yield for Class B shares reflects
the
11
<PAGE> 12
deduction of the applicable CDSC imposed on a redemption of shares held for the
applicable period. All calculations assume that all dividends are reinvested at
net asset value on the reinvestment dates during the periods. Total return and
yield of Class A and Class B shares will be calculated separately and, because
each class is subject to different expenses, the total return may differ with
respect to that class for the same period. The relative performance of the Class
A and Class B shares will be affected by a variety of factors, including the
higher operating expenses attributable to the Class B shares, whether the Fund's
investment performance is better in the earlier or later portions of the period
measured and the level of net assets of the Classes during the period. The Fund
will include the total return of Class A and Class B shares in any advertisement
or promotional materials including Fund performance data. The value of Fund
shares, when redeemed, may be more or less than their original cost. Both yield
and total return are historical calculations, and are not an indication of
future performance. See "Factors to Consider in Choosing an Alternative."
12
<PAGE> 13
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The minimum initial investment in Class A and Class B shares is $1,000 ($250 for
group investments and retirement plans). Complete the Account Application attached
to this Prospectus. Indicate whether you are purchasing Class A or Class B shares.
If you do not specify which class of shares you are purchasing, Investor Services
will assume that you are investing in Class A shares.
</TABLE>
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
BY CHECK 1. Make your check payable to John Hancock Investor Services
Corporation ("Investor Services"), P.O. Box 9115, Boston, MA
02205-9115.
2. Deliver the completed application and check to your registered
representative, a broker with an agreement with John Hancock
Funds ("Selling Broker") or mail it directly to Investor
Services.
- ---------------------------------------------------------------------------------
BY WIRE 1. Obtain an account number by contacting your registered
representative or Selling Broker, or by calling 1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Tax-Free Bond Fund
Class A or Class B shares
Your Account Number
Name(s) under which account is registered
3. Deliver the completed application to your registered
representative, Selling Broker or mail it directly to Investor
Services.
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A AND CLASS B
SHARES
- ---------------------------------------------------------------------------------
MONTHLY 1. Complete the "Automatic Investing" and "Bank Information"
AUTOMATIC sections on the Account Privileges Application designating a
ACCUMULATION bank account from which funds may be drawn.
PROGRAM
(MAAP)
</TABLE>
[/R]
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
2. The amount you elect to invest will be automatically withdrawn
from your bank or credit union account.
- ---------------------------------------------------------------------------------
BY TELEPHONE 1. Complete the "Invest-By-Phone" and "Bank Information" sections
on the Account Privileges Application designating a bank
account from which your funds may be drawn. Note that in order
to invest by phone, your account must be in a bank or credit
union that is a member of the Automated Clearing House system
(ACH).
2. After your authorization form has been processed, you may
purchase additional Class A or Class B shares by calling
Investor Services toll-free 1-800-225-5291.
3. Give the Investor Services representative the name(s) in which
your account is registered, the Fund name, the class of shares
you own, your account number, and the amount you wish to
invest.
4. Your investment normally will be credited to your account the
business day following your phone request.
- ---------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
- -------------------------------------------------------------------------------
BUYING ADDITIONAL
CLASS A AND CLASS B
SHARES (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
BY CHECK 1. Either complete the detachable stub included on your account
statement or include a note with your investment listing the
name of the Fund, the class of shares you own, your account
number and the name(s) in which the account is registered.
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
2. Make your check payable to John Hancock Investor Services
Corporation.
3. Mail the account information and check to:
John Hancock Investor Services Corporation
P.O. Box 9115
Boston, MA 02205-9115
or deliver it to your registered representative or Selling
Broker.
- ---------------------------------------------------------------------------------
BY WIRE Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Tax Free-Bond Fund
Class A or Class B shares
Your Account Number
Name(s) under which account is registered
- ---------------------------------------------------------------------------------
Other Requirements: All purchases must be made in U.S. dollars. Checks written on
foreign banks will delay purchases until U.S. funds are received, and a collection
charge may be imposed. Shares of the Fund are priced at the offering price based
on the net asset value computed after Investor Services receives notification of
the dollar equivalent from the Fund's custodian bank. Wire purchases normally take
two or more hours to complete and, to be accepted the same day, must be received
by 4:00 P.M., New York time. Your bank may charge a fee to wire funds. Telephone
transactions are recorded to verify information. Certificates are not issued
unless a request is made in writing to Investor Services.
- ---------------------------------------------------------------------------------
</TABLE>
You will receive a statement of your account after any transaction that affects
your share balance or registration (statements related to reinvestment of
dividends and automatic investment/withdrawal plans will be sent to you
quarterly). A tax information statement will be mailed to you by January 31 of
each year.
- -------------------------------------------------------------------------------
YOU WILL RECEIVE ACCOUNT STATEMENTS THAT
YOU SHOULD KEEP TO HELP WITH YOUR PERSONAL
RECORDKEEPING.
- -------------------------------------------------------------------------------
SHARE PRICE
The net asset value per share ("NAV") is the value of one share. The NAV per
share is calculated by dividing the net assets of each class by the number of
outstanding shares of that class. The NAV of each class can differ in value.
Securities in the Fund's portfolio are valued on the basis of market quotations,
valuations provided by independent pricing services or, at fair value as
determined in good faith according to procedures approved by the Trustees.
Short-term debt investments maturing within 60 days are valued at amortized cost
which the Board has determined approximates market value. If quotations are not
readily available, assets are valued by a method that the Trustees believe
accurately reflects fair value.
- -------------------------------------------------------------------------------
THE OFFERING PRICE OF YOUR SHARES IS THEIR
NET ASSET VALUE PLUS A SALES CHARGE, IF
APPLICABLE, WHICH WILL VARY WITH THE
PURCHASE ALTERNATIVE YOU CHOOSE.
- -------------------------------------------------------------------------------
The NAV is calculated once daily as of the close of regular trading on the New
York Stock Exchange (the "Exchange") (generally at 4:00 P.M., New York time) on
each day that the Exchange is open.
Shares of the Fund are sold at the offering price based on the NAV computed
after your investment request is received in good order by John Hancock Funds.
If you
14
<PAGE> 15
buy shares of the Fund through a Selling Broker, the Selling Broker must receive
your investment before the close of regular trading on the Exchange and transmit
it to John Hancock Funds before its close of business to receive that day's
offering price.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The offering price you pay
for Class A shares of the Fund equals the NAV plus a sales charge as follows:
<TABLE>
<CAPTION>
COMBINED
SALES CHARGE AS REALLOWANCE REALLOWANCE TO
AMOUNT INVESTED SALES CHARGE AS A PERCENTAGE OF AND SERVICE FEE AS SELLING BROKERS AS
(INCLUDING SALES A PERCENTAGE OF THE AMOUNT A PERCENTAGE OF A PERCENTAGE OF
CHARGE) OFFERING PRICE INVESTED OFFERING PRICE(+) THE OFFERING PRICE(*)
- ------------------------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999 3.00% 3.09% 2.50% 2.26%
$500,000 to $999,999 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over 0.00%(**) 0.00%(**) (***) 0.00%(***)
</TABLE>
(*) Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales
charge. In addition to the reallowance allowed to all selling Brokers,
John Hancock Funds will pay the following: round trip airfare to a resort
will be offered to each registered representative of a Selling Broker (if
the Selling Broker has agreed to participate) who sells certain amounts of
shares of John Hancock funds. John Hancock Funds will make these incentive
payments out of its own resources. A Selling Broker to whom substantially
the entire sales charge is reallowed or who receives these incentives may
be deemed to be an underwriter under the Securities Act of 1933. Other
than distribution and service fees, the Fund does not bear distribution
expenses.
(**) No sales charge is payable at the time of purchase in Class A shares of $1
million or more, but a CDSC may be imposed in the event of certain
redemption transactions within one year of purchase.
(***) John Hancock Funds may pay a commission and the first year's service fee
(as described in (+) below) to Selling Brokers who initiate and are
responsible for purchases of $1 million or more in aggregate as follows: 1
% on sales to $4,999,999, 0.50% on the next $5 million and 0.25% on
amounts over $10 million.
(+) At the time of sale, John Hancock Funds pays to Selling Brokers the first
year's service fee in advance in an amount equal to 0.25% of the net
assets invested in the Fund at the time of the sale, and thereafter, it
pays the service fee periodically in arrears in an amount up to 0.25% of
the Fund's average annual net assets. Selling Brokers receive the fee as
compensation for providing personal and account maintenance services to
shareholders.
Sales charges ARE NOT APPLIED to any dividends that are reinvested in additional
Class A shares of the Fund.
15
<PAGE> 16
In addition, John Hancock Funds will pay certain affiliated Selling Brokers at
an annual rate of up to 0.05% of the daily net assets of accounts attributable
to these brokers.
Under certain circumstances described below, investors in Class A shares may be
entitled to pay reduced sales charges. See "Qualifying for a Reduced Sales
Charge."
CONTINGENT DEFERRED SALES CHARGE -- INVESTMENTS OF $1 MILLION OR MORE IN CLASS A
SHARES. Purchases of $1 million or more of Class A shares will be made at net
asset value with no initial sales charge, but if the shares are redeemed within
12 months after the end of the calendar month in which the purchase was made
(the CDSC period), a CDSC will be imposed. The rate of the CDSC will depend on
the amount invested as follows:
<TABLE>
<CAPTION>
AMOUNT INVESTED CDSC RATE
- ---------------------------------------------------------------------------------
<S> <C>
$1 million to $4,999,999................................................ 1.00%
Next $5 million to $9,999,999........................................... 0.50%
Amounts of $10 million and over......................................... 0.25%
</TABLE>
Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994 and participant directed defined
contribution plans with at least 100 eligible employees at the inception of the
Fund Account may purchase Class A shares with no initial sales charge. However,
if the shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the above rate.
The CDSC will be assessed on an amount equal to the lesser of the current market
value or the original purchase cost of the Class A shares that have been
redeemed. Accordingly, no CDSC will be imposed on increases in account value
above the initial purchase price, including any distributions which have been
reinvested in additional Class A shares.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
Therefore, it will be assumed that the redemption is first made from any shares
in your account that are not subject to the CDSC. The CDSC is waived on
redemptions in certain circumstances. See "Waiver of Contingent Deferred Sales
Charge" below.
- -------------------------------------------------------------------------------
YOU MAY QUALIFY FOR A
REDUCED SALES CHARGE ON
YOUR INVESTMENT IN
CLASS A SHARES.
- -------------------------------------------------------------------------------
QUALIFYING FOR A REDUCED SALES CHARGE. If you invest more than $100,000 in
Class A shares of the Fund or a combination of funds within the John Hancock
family of funds (except money market funds), you may qualify for a reduced sales
charge on your investments in Class A shares through a LETTER OF INTENTION. You
may also be able to use the ACCUMULATION PRIVILEGE and the COMBINATION PRIVILEGE
to take advantage of the value of your previous investments in Class A shares of
the John Hancock funds in meeting the breakpoints for a reduced sales charge.
For the ACCUMULATION PRIVILEGE and COMBINATION PRIVILEGE, the applicable sales
charge will be based on the total of:
1. Your current purchase of Class A shares of the Fund.
16
<PAGE> 17
2. The net asset value (at the close of business on the previous day) of (a)
all Class A shares of the Fund you hold, and (b) all Class A shares of any
other John Hancock funds you hold; and
3. The net asset value of all shares held by another shareholder eligible to
combine his or her holdings with you into a single "purchase."
EXAMPLE:
If you hold Class A shares of a John Hancock fund with a net asset value of
$80,000 and, subsequently, invest $20,000 in Class A shares of the Fund, the
sales charge on this subsequent investment would be 3.75% and not 4.50%. This
rate is the rate that would otherwise be applicable to investments of less than
$100,000. See "Initial Sales Charge alternative -- Class A Shares."
If you are in one of the following categories, you may purchase Class A shares
of the Fund without paying a sales charge:
- - A Trustee or officer of the Fund; a Director or officer of the Adviser and its
affiliates or Selling Brokers; employees or sales representatives of any of
the foregoing; retired officers, employees or Directors of any of the
foregoing; a member of the immediate family of any of the foregoing; or any
Fund, pension, profit sharing or other benefit plan for the individuals
described above.
- -------------------------------------------------------------------------------
CLASS A SHARES MAY BE AVAILABLE WITHOUT A
SALES CHARGE TO CERTAIN INDIVIDUALS AND
ORGANIZATIONS.
- -------------------------------------------------------------------------------
- - Any state, county, city or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any registered
investment management company.*
- - A bank, trust company, credit union, savings institution or other types of
depository institution, its trust departments or common trust funds if it is
purchasing $1 million or more for non-discretionary customers or accounts.*
- - A broker, dealer or registered investment adviser that has entered into an
agreement with John Hancock Funds providing specifically for the use of Fund
shares in fee-based investment products made available to their clients.
- - A former participant in an employee benefit plan with John Hancock funds, when
he/she withdraws from his/her plan and transfers any or all of his/her plan
distributions directly to the Fund.
- ------------------
*For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Class A shares of the Fund may be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES. Class B shares
are offered at net asset value per share without a sales charge so that your
entire initial investment will go to work at the time of purchase. However,
Class B shares redeemed within six years of purchase will be subject to a CDSC
at the
17
<PAGE> 18
rates set forth below. This charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the shares
being redeemed. Accordingly, you will not be assessed a CDSC on increases in
account value above the initial purchase price, including shares derived from
dividend reinvestment.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
reinvestment of dividends and next from the shares you have held the longest
during the six-year period. The CDSC is waived on redemptions in certain
circumstances. See the discussion "Waiver of Contingent Deferred Sales Charges"
below.
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time, your CDSC will be calculated as follows:
<TABLE>
<S> <C>
- - Proceeds of 50 shares redeemed at $12 per share $ 600
- - Minus proceeds of 10 shares not subject to CDSC because they were
acquired through dividend reinvestment (10 X $12) -120
- - Minus appreciation on remaining shares, also not subject to CDSC (40 X
$2) - 80
------
- - Amount subject to CDSC $ 400
</TABLE>
Proceeds from the CDSC are paid to John Hancock Funds. John Hancock Funds uses
part of them to defray its expenses related to providing the Fund with
distribution services connected to the sale of Class B shares, such as
compensating Selling Brokers for selling these shares. The combination of the
CDSC and the distribution and service fees makes it possible for the Fund to
sell Class B shares without deducting a sales charge at the time of the
purchase.
The amount of the CDSC, if any, will vary depending on the number of years from
the time you purchase your Class B shares until the time you redeem them. Solely
for the purposes of determining the holding period, any payments you make during
the month will be aggregated and deemed to have been made on the last day of the
month.
<TABLE>
<CAPTION>
YEAR IN WHICH
CLASS B SHARES CONTINGENT DEFERRED SALES
REDEEMED FOLLOWING CHARGE AS A PERCENTAGE OF
PURCHASE DOLLAR AMOUNT SUBJECT TO CDSC
- ------------------------------------------------------------------------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
18
<PAGE> 19
A commission equal to 3.75% of the amount invested and a first year's service
fee equal to 0.25% of the amount invested are paid to Selling Brokers. The
initial service fee is paid in advance at the time of sale for the provision of
personal and account maintenance services to shareholders during the twelve
months following the sale, and thereafter the service fee is paid in arrears.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in these circumstances:
- - Redemptions of Class B shares made under Systematic Withdrawal Plan (see "How
to Redeem Shares"), as long as your annual redemptions do not exceed 10% of
your account value at the time you establish your Systematic Withdrawal Plan
and 10% of the value of your subsequent investments (less redemptions) in that
account at the time you notify Investor Services. This waiver does not apply
to Systematic Withdrawal Plan redemptions of Class A shares that are subject
to a CDSC.
- -------------------------------------------------------------------------------
UNDER CERTAIN CIRCUMSTANCES, THE CDSC
ON CLASS B AND CERTAIN
CLASS A SHARE REDEMPTIONS WILL BE WAIVED.
- -------------------------------------------------------------------------------
- - Redemptions made to effect distributions from an Individual Retirement Account
either before or after age 59 1/2, as long as the distributions are based on
the life expectancy of the joint-and-last survivor life expectancy of you and
your beneficiary. These distributions must be free from penalty under the
Code.
- - Redemptions made to effect mandatory distributions under the Code after age
70 1/2 from a tax-deferred retirement plan.
- - Redemptions made to effect distributions to participants or beneficiaries from
certain employer-sponsored retirement plans including those qualified under
Section 401(a) of the Code, custodial accounts under Section 403(b)(7) of the
Code and deferred compensation plans under Section 457 of the Code. The waiver
also applies to certain returns of excess contributions made to these plans.
In all cases, the distributions must be free from penalty under the Code.
- - Redemptions due to death or disability.
- - Redemptions made under the Reinvestment Privilege, as described in "Additional
Services and Programs" of this Prospectus.
- - Redemptions made pursuant to the Fund's right to liquidate your account if you
have less than $100 invested in the Fund.
- -Redemptions made in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
- -Redemptions from certain IRA and retirement plans that purchased shares prior
to October 1, 1992.
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to the waiver.
19
<PAGE> 20
CONVERSION OF CLASS B SHARES. Your Class B shares and an appropriate portion of
reinvested dividends on those shares will be converted into Class A shares
automatically. This will occur no later than the month following eight years
after the shares were purchased, and will result in lower annual distribution
fees. If you exchanged Class B shares into the Fund from another John Hancock
fund, the calculation will be based on the time you purchased the shares in the
original fund. The Fund has been advised that the conversion of Class B shares
to Class A shares should not be taxable for Federal income tax purposes and
should not change a shareholder's tax basis or tax holding period for the
converted shares.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services, less any applicable CDSC. The Fund
may hold payment until it is reasonably satisfied that investments recently made
by check or Invest-by-Phone have been collected (which may take up to 10
calendar days).
- -------------------------------------------------------------------------------
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION
REQUEST, PLEASE FOLLOW THESE PROCEDURES.
- -------------------------------------------------------------------------------
Once your shares are redeemed, the Fund generally sends you payment on the next
business day. When you redeem your shares, you may realize a taxable gain or
loss depending usually on the difference between what you paid for them and what
you receive for them, subject to certain tax rules. Under unusual circumstances,
the Fund may suspend redemptions or postpone payment for up to seven days or
longer, as permitted by Federal securities laws.
20
<PAGE> 21
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
BY TELEPHONE All Fund shareholders are automatically eligible for the
telephone redemption privilege. Call 1-800-225-5291, from
8:00 A.M. to 4:00 P.M. (New York time), Monday through
Friday, excluding days on which the Exchange is closed.
Investor Services employs the following procedures to
confirm that instructions received by telephone are
genuine. Your name, the account number, taxpayer
identification number applicable to the account and other
relevant information may be requested. In addition,
telephone instructions are recorded.
You may redeem up to $100,000 by telephone, but the address
on the account must not have changed for the last thirty
days. A check will be mailed to the exact name(s) and
address shown on the account.
If reasonable procedures, such as those described above,
are not followed, the Fund may be liable for any loss due
to unauthorized or fraudulent telephone instructions. In
all other cases, neither the Fund nor Investor Services
will be liable for any loss or expense for acting upon
telephone instructions made in accordance with the
telephone transaction procedures mentioned above.
Telephone redemption is not available for IRAs or other
tax-qualified retirement plans or shares of the Fund that
are in certificated form.
During periods of extreme economic conditions or market
changes, telephone requests may be difficult to implement
due to a large volume of calls. During these times, you
should consider placing redemption requests in writing or
use EASI-Line. EASI-Line's telephone number is
1-800-338-8080.
- ---------------------------------------------------------------------------------
BY WIRE If you have a telephone redemption form on file with the
Fund, redemption proceeds of $1,000 or more can be wired on
the next business day to your designated bank account, and
a fee (currently $4.00) will be deducted. You may also use
electronic funds transfer to your assigned bank account,
and the funds are usually collectible after two business
days. Your bank may or may not charge a fee for this
service. Redemptions of less than $1,000 will be sent by
check or electronic funds transfer.
This feature may be elected by completing the "Telephone
Redemption" section on the Account Privileges Application
included with this Prospectus.
- ---------------------------------------------------------------------------------
IN WRITING Send a stock power or "letter of instruction" specifying
the name of the Fund, the dollar amount or the number of
shares to be redeemed, your name, class of shares, your
account number and the additional requirements listed below
that apply to your particular account.
- ---------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TYPE OF REGISTRATION REQUIREMENTS
--------------------------------- --------------------------------------------
<S> <C> <C>
Individual, Joint Tenants, Sole A letter of instruction signed (with titles
Proprietorship, Custodial where applicable) by all persons authorized
(Uniform Gifts or Transfer to to sign for the account, exactly as it is
Minors Act), General Partners registered with the signature(s) guaran-
teed.
Corporation, Association A letter of instruction and a corporate
resolution, signed by person(s) authorized
to act on the account with the signature(s)
guaranteed.
Trusts A letter of instruction signed by the
trustee(s) with the signature(s) guaranteed.
(If the Trustee's name is not registered on
your account, also provide a copy of the
trust document, certified within the last 60
days.
If you do not fall into any of these registration categories, please call
1-800-225-5291 for further instructions.
- ---------------------------------------------------------------------------------
WHO MAY GUARANTEE YOUR SIGNATURE.
- -------------------------------------------------------------------------------
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the signature on your request. It may not be provided by a notary
public. If the net asset value of the shares redeemed is $100,000 or less, John
Hancock Funds may guarantee the signature. The following institutions may
provide you with a signature guarantee, provided that the institution meets
credit standards established by Investor Services: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or meets certain net capital
requirements; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association; or (v) a
national securities exchange, a registered securities exchange or a clearing
agency.
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT REDEMPTIONS.
- -------------------------------------------------------------------------------
THROUGH YOUR BROKER. Your broker may be able to initiate the redemption.
Contact your broker for instructions.
</TABLE>
[/R]
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------
If you have certificates for your shares, you must submit them with your stock
power or a letter of instructions. Unless you specify to the contrary, any
outstanding Class A shares will be redeemed before Class B shares. You may not
redeem certificated shares by telephone.
Due to the proportionately high cost of maintaining small accounts, the Fund
reserves the right to redeem at net asset value all shares in an account which
holds less than $100 (except accounts under retirement plans) and to mail the
proceeds to the shareholder, or the transfer agent may impose an annual fee of
$10.00. No account will be involuntarily redeemed or additional fee imposed, if
the value of the account is in excess of the Fund's minimum initial investment
or if the value of the account falls below the required minimum as a result of
market action. No CDSC will be imposed on involuntary redemptions of shares.
Shareholders will be notified before these redemptions are to be made or this
fee is imposed, and will have 30 days to purchase additional shares to bring
their account balance up to the required minimum. Unless the number of shares
acquired by further purchases and dividend reinvestments, if any, exceeds the
number of shares redeemed, repeated redemptions from a smaller account may
eventually trigger this policy.
- ---------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
If your investment objective changes, or if you wish to achieve further
diversification, John Hancock offers other funds with a wide range of investment
goals. Contact your registered representative or Selling Broker and request a
prospectus for the John Hancock funds that interest you. Read the prospectus
carefully before exchanging your shares. You can exchange shares of each class
of the Fund only for shares of the same class of another John Hancock fund. For
this purpose, John Hancock funds with only one class of shares will be treated
as Class A, whether or not they have been so designated.
- -------------------------------------------------------------------------------
YOU MAY EXCHANGE SHARES OF THE FUND ONLY
FOR SHARES OF THE SAME CLASS OF ANOTHER
JOHN HANCOCK FUND.
- -------------------------------------------------------------------------------
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Class B shares of the Fund that are subject to a CDSC may be exchanged
into Class B shares of another John Hancock fund without incurring the CDSC;
however, these shares will be subject to the CDSC schedule of the shares
acquired (except that exchanges into John Hancock Short-Term Strategic Income
Fund, John Hancock Limited-Term Government Fund and John Hancock Adjustable U.S.
Government Trust will be subject to the initial fund's CDSC). For purposes of
computing the CDSC payable upon redemption of shares acquired in an exchange,
the holding period of the original shares is added to the holding period of the
shares acquired in an exchange. However, if you exchange Class B shares
purchased prior to January 1, 1994 for Class B shares of any other John Hancock
Fund, you will be subject to the CDSC schedule in effect on your initial
purchase date.
You may exchange Class B shares of the Fund into shares of a John Hancock money
market fund at net asset value; however, you will continue to be subject to the
same CDSC upon redemption.
The Fund reserves the right to require you to keep previously exchanged shares
(and reinvested dividends) in the Fund for 90 days before you are permitted to
execute a new exchange. The Fund may also terminate or alter the terms of the
exchange privilege, upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares in another for Federal income tax purposes. An exchange may
result in a taxable gain or loss.
When you make an exchange, your account registration in both the existing and
new account must be identical. The exchange privilege is available only in
states where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
23
<PAGE> 24
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
Because Fund performance and shareholders can be hurt by excessive trading, the
Fund reserves the right to terminate the exchange privilege for any person or
group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely. The
Fund may also temporarily or permanently terminate the exchange privilege for
any person who makes seven or more exchanges out of the Fund per calendar year.
Accounts under common control or ownership will be aggregated for this purpose.
Although the Fund will attempt to give you prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time.
BY TELEPHONE
1. When you complete the application for your initial purchase of Fund shares,
you automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to authorize telephone exchanges.
2. Call 1-800-225-5291. Have the account number of your current fund and the
exact name in which it is registered available to give to the telephone
representative.
3. Investor Services employs the following procedures to confirm that
instructions received by telephone are genuine. Your name, the account
number, taxpayer identification number applicable to the account and other
relevant information may be requested. In addition, telephone instructions
are recorded.
IN WRITING
1. In a letter, request an exchange and list the following:
-- the name and class of the Fund whose shares you currently own
-- your account number
-- the name(s) in which the account is registered
-- the name of the fund in which you wish your exchange to be invested
-- the number of shares, all shares or dollar amount you wish to exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
24
<PAGE> 25
REINVESTMENT PRIVILEGE
1. You will not be subject to a sales charge on Class A shares reinvested in
shares of any John Hancock fund that is otherwise subject to a sales charge
as long as you reinvest within 120 days from the redemption date. If you paid
a CDSC upon a redemption, you may reinvest at net asset value in the same
class of shares from which you redeemed within 120 days. Your account will be
credited with the amount of the CDSC previously charged, and the reinvested
shares will continue to be subject to a CDSC. For purposes of computing the
CDSC payable upon a subsequent redemption, the holding period of the shares
acquired through reinvestment will include the holding period of the redeemed
shares.
- -------------------------------------------------------------------------------
IF YOU REDEEM SHARES OF THE FUND, YOU MAY
BE ABLE TO REINVEST ALL OR PART OF THE
PROCEEDS IN SHARES OF THIS FUND OR ANOTHER
JOHN HANCOCK FUND WITHOUT PAYING AN
ADDITIONAL SALES CHARGE.
- -------------------------------------------------------------------------------
2. Any portion of your redemption may be reinvested in Fund shares or in shares
of any of the other John Hancock funds, subject to the minimum investment
limit of that fund.
3. To reinvest, you must notify Investor Services in writing. Include the Fund's
name, the account number and class from which your shares were originally
redeemed.
SYSTEMATIC WITHDRAWAL PLAN
1. You can elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
also obtain this application by calling your registered representative or by
calling 1-800-225-5291.
2. To be eligible, you must have at least $5,000 in your account.
- -------------------------------------------------------------------------------
YOU CAN PAY ROUTINE BILLS FROM YOUR
ACCOUNT, OR MAKE PERIODIC DISBURSEMENTS OF
FUNDS FROM YOUR RETIREMENT ACCOUNT TO
COMPLY WITH IRS REGULATIONS.
- -------------------------------------------------------------------------------
3. Payments from your account can be made monthly, quarterly, semi-annually or
annually or on a selected monthly basis to yourself or any other designated
payee.
4. There is no limit on the number of payees you may authorize, but all payments
must be made at the same time or intervals.
5. It is not advantageous to maintain a Systematic Withdrawal Plan concurrently
with purchases of additional Class A or Class B shares, because you may be
subject to initial sales charges on your purchases of Class A shares or to a
CDSC on your redemptions of Class B shares. In addition, your redemptions are
taxable events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks or if deposits to a bank account are returned for any reason.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP)
1. You can authorize an investment to be automatically withdrawn each month from
your bank, for investment in Fund shares under the "Automatic Investing" and
"Bank Information" sections of the Account Privileges Application.
- -------------------------------------------------------------------------------
YOU CAN MAKE AUTOMATIC INVESTMENTS AND
SIMPLIFY YOUR INVESTING.
- -------------------------------------------------------------------------------
25
<PAGE> 26
2. You can also authorize automatic investment through payroll deduction by
completing the "Direct Deposit Investing" section of the Account Privileges
Application.
3. You can terminate your Monthly Automatic Accumulation Program plan at any
time.
4. There is no charge to you for this program, and there is no cost to the Fund.
5. If you have payments being withdrawn from a bank account and we are notified
that the account has been closed, your withdrawals will be discontinued.
GROUP INVESTMENT PROGRAM
1. An individual account will be established for each participant, but the
initial sales charge for Class A shares will be based on the aggregate dollar
amount of all participants' investments. To determine how to qualify for this
program, contact your registered representative or call 1-800-225-5291.
- -------------------------------------------------------------------------------
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS
MAY ESTABLISH ACCOUNTS.
- -------------------------------------------------------------------------------
2. The initial aggregate investment of all participants in the group must be at
least $250.
3. There is no additional charge for this program. There is no obligation to
make investments beyond the minimum, and you may terminate the program at any
time.
INVESTMENTS, TECHNIQUES AND RISK FACTORS
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in illiquid investments, which include repurchase agreements maturing in
more than seven days, restricted securities and securities not readily
marketable. The Fund may also invest up to 10% of its assets in restricted
securities eligible for resale to certain institutional investors pursuant to
Rule 144A under the Securities Act of 1933. To the extent that the Fund's
holdings of participation interests, COPs and inverse floaters are determined to
be illiquid, such holdings will be subject to the 10% restriction on illiquid
investments.
LENDING OF SECURITIES AND REPURCHASE AGREEMENTS. For the purpose of realizing
additional (taxable) income, the Fund may lend to broker-dealers portfolio
securities amounting to not more than 33% of its total assets taken at current
value or may enter into repurchase agreements. In a repurchase agreement, the
Fund buys a security subject to the right and obligation to sell it back to the
issuer at the same price plus accrued interest. These transactions must be fully
collateralized at all times. The Fund may reinvest any cash collateral in
short-term highly liquid debt securities. However, they may involve some credit
risk to the Fund if the other party should default on its obligation and the
Fund is delayed in or prevented from recovering the collateral. Securities
loaned by the Fund will remain subject to fluctuations of market value.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Fund may purchase securities
on a forward or "when-issued" basis and may purchase or sell securities
26
<PAGE> 27
on a forward commitment basis to hedge against anticipated changes in interest
rates and prices. When the Fund engages in such transactions, it relies on the
seller or the buyer, as the case may be, to consummate the transaction. Failure
to consummate the transaction may result in the Fund's losing the opportunity to
obtain an advantageous price and yield. If the Fund chooses to dispose of the
right to acquire a when-issued security prior to its acquisition or dispose of
its right to deliver or receive against a forward commitment, it can incur a
taxable gain or a loss.
SHORT TERM TRADING AND PORTFOLIO TURNOVER. Short-term trading means the
purchase and subsequent sale of a security after it has been held for a
relatively brief period of time. Short term trading may have the effect of
increasing portfolio turnover and may increase net short-term capital gains,
distributions from which would be taxable to shareholders as ordinary income.
The Fund does not intend to invest for the purpose of seeking short-term
profits. The Fund's portfolio securities may be changed, however, without regard
to the holding period of these securities (subject to certain tax restrictions),
when the Adviser deems that this action will help achieve the Fund's objective
given a change in an issuer's operations or changes in general market
conditions. The Fund's portfolio turnover rate is set forth in the table under
the caption "Financial Highlights."
OPTIONS AND FUTURES TRANSACTIONS. The Fund may buy and sell options contracts
on securities and debt security indices, interest rate and municipal bond index
futures contracts and options on such futures contracts. Options and futures
contracts are bought and sold to manage the Fund's exposure to changing interest
rates and security prices. Some options and futures strategies, including
selling futures, buying puts and writing calls, tend to hedge a Fund's
investment against price fluctuations. Other strategies, including buying
futures, writing puts, and buying calls, tend to increase market exposure.
Options and futures may be combined with each other or with forward contracts in
order to adjust the risk and return characteristics of the overall strategy. The
Fund may invest in options and futures based on debt securities and municipal
bond indices (securities indices).
Options and futures can be volatile investments and involve certain risks. If
the Adviser applies a hedge at an inappropriate time or judges market conditions
incorrectly, options and futures strategies may lower the Fund's return. The
Fund could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. Options and
futures do not pay interest, but may produce taxable capital gains or losses.
The Fund will not engage in a transaction in futures or options on futures if,
immediately thereafter, the sum of initial margin deposits and premiums required
to establish positions in futures contracts and options on futures would exceed
5% of the Fund's net assets. The loss incurred by the Fund investing in futures
contracts and in writing options on futures is potentially unlimited and may
exceed the amount of any premium received. The Fund's transactions in options
and futures contracts may be limited by the requirements of the Code for
qualification as a regulated investment company. See the Statement of Additional
Information
27
<PAGE> 28
for further discussion of options and futures transactions, including tax
effects and investment risks.
MUNICIPAL LEASE OBLIGATIONS. The Fund may purchase participation interests
which give the Fund an undivided pro rata interest in the tax exempt security.
For certain participation interests, the Fund will have the right to demand
payment, on a specified number of days' notice for all or any part of the Fund's
participation interest in the tax exempt security plus accrued interest.
Participation interests, which are determined to be not readily marketable, will
be considered illiquid for purposes of the Fund's 10% restriction on investment
in securities.
The Fund may also invest in Certificates of Participation ("COP's") which
provide participation interests in lease revenues. Each COP represents a
proportionate interest in or right to the lease-purchase payment made under
municipal lease obligations or installment sales contracts. Municipal lease
obligations are issued by a state or municipal financing authority to provide
funds for the construction of facilities (e.g., schools, dormitories, office
buildings or prisons) or the acquisition of equipment. Certain municipal lease
obligations may trade infrequently. Accordingly, COPs will be purchased and
monitored pursuant to analysis by the Adviser and reviewed according to
procedures by the Board of Trustees which consider various factors in
determining the liquidity risk. COPs will not be considered illiquid for
purposes of the Fund's 10% limitation on illiquid securities provided the
Adviser determines that there is a readily available market for such securities.
An investment in COPs is subject to the risk that a municipality may not
appropriate sufficient funds to meet payments on the underlying lease
obligation. See the Statement of Additional Information for additional
discussion of participation interests and municipal lease obligations.
DERIVATIVE INSTRUMENTS. The Fund may purchase or enter into derivative
instruments to enhance return, to hedge against fluctuations in interest rates
or securities prices, to change the duration of the Fund's fixed income
portfolio or as a substitute for the purchase or sale of securities. The Fund's
investments in derivative securities may include certain floating rate and
indexed securities. The Fund's transactions in derivative contracts may include
the purchase or sale of futures contracts on securities or indices; options on
futures contracts; and options on securities or indices. All of the Funds'
transactions in derivative instruments involve a risk of loss or depreciation
due to unanticipated adverse changes in interest rates or securities prices. The
loss on derivative contracts may exceed the Fund's initial investment in these
contracts. In addition, the Fund may lose the entire premium paid for purchased
options that expire before they can be profitably exercised by the Fund. The
Fund may realize taxable income or gain from its transactions in derivative
contracts, distributions of which will be taxable to shareholders.
INDEXED SECURITIES. The Fund may invest in indexed securities, including
floating rate securities that are subject to a maximum interest rate ("capped
floaters") and leveraged inverse floating rate securities ("inverse floaters")
(up to 10% of the Fund's total assets). The interest rate or, in some cases, the
principal payable at the maturity of an indexed security may change positively
or inversely in relation to
28
<PAGE> 29
one or more interest rates, financial indices or other financial indicators
("reference prices"). An indexed security may be leveraged to the extent that
the magnitude of any change in the interest rate or principal payable on an
indexed security is a multiple of the change in the reference price. Thus,
indexed securities may decline in value due to adverse market changes in
interest rates or other reference prices.
RISKS ASSOCIATED WITH DERIVATIVE SECURITIES AND CONTRACTS. The risks associated
with the Fund's transactions in derivative securities and contracts may include
some or all of the following:
Market Risk. Investments in floating rate and indexed securities are subject to
the interest rate and other market risks described above. Entering into a
derivative contract involves a risk that the applicable market will move against
the Fund's position and that the Fund will incur a loss. For derivative
contracts other than purchased options, this loss may exceed the amount of the
initial investment made or the premium received by the Fund.
Leverage and Volatility Risk. Derivative instruments may sometimes increase or
leverage the Fund's exposure to a particular market risk. Leverage enhances the
price volatility of derivative instruments held by the Fund. The Fund may
partially offset the leverage inherent in derivative contracts by maintaining a
segregated account consisting of cash and liquid, high grade debt securities, by
holding offsetting portfolio securities or contracts or by covering written
options.
Correlation Risk. A Fund's success in using derivative instruments to hedge
portfolio assets depends on the degree of price correlation between the
derivative instrument and the hedged asset. Imperfect correlation may be caused
by several factors, including temporary price disparities among the trading
markets for the derivative instrument, the assets underlying the derivative
instrument and the Fund's portfolio assets.
Credit Risk. Derivative securities and over-the-counter derivative contracts
involve a risk that the issuer or counterparty will fail to perform its
contractual obligations.
Liquidity and Valuation Risk. Some derivative securities are not readily
marketable or may become illiquid under adverse market conditions. In addition,
during periods of extreme market volatility, a commodity or exchange may suspend
or limit trading in an exchange-traded derivative contract, which may make the
contract temporarily illiquid and difficult to price. The staff of the SEC takes
the position that certain over-the-counter options are subject to the Fund's 10%
limit on illiquid investments. The Fund's ability to terminate over-the-counter
derivative contracts may depend on the cooperation of the counterparties to such
contracts. For thinly traded derivative securities and contracts, the only
source of price quotations may be the selling dealer or counterparty.
29
<PAGE> 30
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1995)
The table below shows the approximate taxable bond yields which are equivalent
to tax-exempt bond yields from 4% to 10% under Federal income tax laws that
apply to 1995. Separate calculations, showing the applicable taxable income
brackets, are provided for investors who file joint returns and for those
investors who file single returns.
EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
(TAXABLE INCOME)* INCOME TAX-EXEMPT YIELD
- ------------------------------------
TAX ----------------------------------------------------------
SINGLE RETURN JOINT RETURN BRACKET 4% 5% 6% 7% 8% 9% 10%
- --------------------------------------------- ------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-23,350 $ 0-39,000 15.0% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
$ 23,351-56,550 $ 39,001-94,250 28.0% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
$ 56,551-117,950 $ 94,251-143,600 31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
$ 117,951-256,500 $ 143,601-256,500 36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
Over $256,500 Over $256,500 39.6% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
</TABLE>
* Net amount subject to Federal income tax after deductions and exemptions. It
is assumed that an investor filing a single return is not a "head of
household," a "married individual filing a separate return," or a "surviving
spouse." The table does not take into account the effects of reductions in the
deductibility of itemized deductions or the phaseout of personal exemptions
for taxpayers with adjusted gross incomes in excess of specified amounts.
Further, the table does not attempt to show any alternative minimum tax
consequences, which will depend on each shareholder's particular tax situation
and may vary according to what portion, if any, of the Fund's exempt-interest
dividends is attributable to interest on certain private activity bonds for
any particular taxable year. No assurance can be given that the Fund will
achieve any specific tax-exempt yield or that all of its income distributions
will be tax-exempt. Distributions attributable to any taxable income or
capital gains realized by the Fund will not be tax-exempt.
The information set forth above is as of the date of this Prospectus. Subsequent
tax law changes could result in prospective or retroactive changes in the tax
brackets, tax rates, and tax-equivalent yields set forth above.
30
<PAGE> 31
JOHN HANCOCK
JOHN HANCOCK
TAX-FREE BOND FUND
TAX-FREE BOND
FUND
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CLASS A AND CLASS B SHARES
PRINCIPAL DISTRIBUTOR
PROSPECTUS
John Hancock Funds, Inc.
MAY 1, 1995
101 Huntington Avenue
Boston, Massachusetts 02199-7603
A MUTUAL FUND SEEKING TO
OBTAIN AS
HIGH LEVEL OF INTEREST
INCOME
CUSTODIAN
EXEMPT FROM FEDERAL INCOME
TAXES AS
Investors Bank
IN CONSISTENT WITH
PRESERVATION OF
& Trust Company
CAPITAL.
24 Federal Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services
Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For Service Information
For Telephone Exchange call
1-800-225-5291
For Investment-by-Phone
For Telephone Redemption
For TDD call 1-800-554-6713
101 HUNTINGTON AVENUE
T240P 5/95
BOSTON, MASSACHUSETTS 02199-7603
TELEPHONE 1-800-225-5291
(LOGO) Printed on Recycled Paper
<PAGE> 32
JOHN HANCOCK TAX-FREE BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995
This Statement of Additional Information provides information about John
Hancock Tax-Free Bond (the "Fund") in addition to the information that is
contained in the Fund's Class A and Class B Prospectus (the "Prospectus"),
dated May 1, 1995.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus, a copy of which can be obtained
free of charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-5291
1-800-225-5291
TABLE OF CONTENTS
<TABLE>
<S> <C>
Organization of the Fund................................................... 2
Investment Objective and Policies.......................................... 2
Certain Investment Practices............................................... 5
Investment Restrictions.................................................... 10
Those Responsible for Management........................................... 12
Investment Advisory and Other Services..................................... 17
Distribution Contract...................................................... 19
Net Asset Value............................................................ 22
Initial Sales Charge On Class A Shares..................................... 22
Deferred Sales Charge on Class B Shares.................................... 23
Special Redemptions........................................................ 24
Additional Services and Programs........................................... 24
Description of the Fund's Shares........................................... 25
Tax Status................................................................. 27
Brokerage Allocation....................................................... 30
Transfer Agent Services.................................................... 31
Independent Auditors....................................................... 32
Custody of Portfolio....................................................... 32
Calculation of Performance................................................. 32
Appendix A................................................................. A-1
Financial Statements....................................................... F-1
</TABLE>
<PAGE> 33
ORGANIZATION OF THE FUND
The Fund is a diversified open-end management investment company organized
as a business trust under the laws of The Commonwealth of Massachusetts. Prior
to the approval of John Hancock Advisers, Inc. (the "Investment Adviser") as
the Fund's adviser, the Fund was known as Transamerica Tax-Exempt Bond Fund.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE. As discussed under "Investment Objective and
Policies" in the Prospectus, the investment objective of the Fund is to obtain
as high a level of income exempt from federal income taxes as is consistent
with preservation of capital. The Fund seeks to achieve its objective by
investing primarily in municipal bonds which are rated at the time of purchase
within the four highest ratings and municipal notes which are rated at the time
of purchase within the two highest ratings assigned by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P") or Fitch
Investors Service, Inc. ("Fitch"); municipal bonds and notes which, if unrated,
are determined to be of comparable quality by John Hancock Advisers, Inc. (the
"Investment Adviser"); and municipal commercial paper rated within the two
highest quality ratings (collectively, "Municipal Obligations"). Securities in
which the Fund may invest may not earn as high a level of current income as
lower quality securities which have greater market risk and more fluctuation in
market value.
DESCRIPTION OF MUNICIPAL OBLIGATIONS. In seeking to achieve its
investment objective, the Fund invests in a variety of Municipal Obligations
which consist of Municipal Bonds, Municipal Notes and Municipal Commercial
Paper, the interest on which in the opinion of the bond issuer's counsel (not
the Fund's counsel) is exempt from federal income tax.
Municipal Bonds. 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 exempt from federal income tax. 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. Such guarantees
and the creditworthiness of guarantors will be considered by the Investment
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 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
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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.
Federal tax legislation enacted in the 1980's placed substantial new
restrictions on the issuance of the bonds described above and in some cases
eliminated the ability of state or local governments to issue Municipal
Obligations for some of the above purposes. Such restrictions do not affect
the Federal income tax treatment of Municipal Obligations in which the Fund may
invest which were issued prior to the effective dates of the provisions
imposing such restrictions. The effect of these restrictions may be to reduce
the volume of newly issued Municipal Obligations.
Issuers of Municipal Obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Act, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that as a result of
litigation or other conditions the power or ability of any one or more issuers
to pay when due the principal of and interest on their Municipal Obligations
may be affected.
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. The ratings of S&P, Moody's and Fitch represent their respective
opinions of the quality of the Municipal Bonds they undertake to rate. It
should be emphasized, however, that ratings are general and not absolute
standards of quality. Consequently, Municipal Bonds with the same maturity,
coupon and rating may have different yields and Municipal Bonds of the same
maturity and coupon with different ratings may have the same yield. See
Appendix A for a description of ratings. 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.
VARIABLE OR FLOATING RATE OBLIGATIONS. As discussed under "Investment
Objective and Policies" in the Prospectus, certain of the obligations in which
the Fund may invest may be variable or floating rate obligations on which the
interest rate is adjusted at predesignated periodic intervals (variable rate)
or when there is a change in the market rate of interest on which the interest
rate payable on the obligation is met is based (floating rate). Variable or
floating rate obligations may include a demand feature which entitles the
purchaser to demand prepayment of the principal amount prior to stated
maturity. Also, the issuer may have a corresponding right to prepay the
principal amount prior to maturity. As with any other type of debt security,
the marketability of variable or floating rate instruments may vary depending
upon a number of factors, including the type of issuer and the terms of the
instruments. The Fund may also invest in more recently developed floating rate
instruments which are created by dividing a municipal security's interest rate
into two or more different components. Typically, one component ("floating
rate component" or "FRC") pays an interest rate that is reset periodically
through an auction process or by reference to an interest rate index. A second
component ("inverse floating rate component" or "IFRC") pays an interest rate
that varies inversely with changes to market rates of interest, because the
interest paid to the IFRC holders is generally determined by subtracting a
variable or floating rate from a predetermined amount (i.e., the difference
between the total interest paid by the municipal security and that paid by the
FRC). The Fund may
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purchase FRC's without limitation. Up to 10% of the Fund's total assets may be
invested in IFRC's in an attempt to protect against a reduction in the income
earned on the Fund's other investments due to a decline in interest rates. The
extent of increases and decreases in the value of an IFRC generally will be
greater than comparable changes in the value of an equal principal amount of a
fixed-rate municipal security having similar credit quality, redemption
provisions and maturity. To the extent that such instruments are not readily
marketable, as determined by the Investment Adviser pursuant to guidelines
adopted by the Board of Trustees, they will be considered illiquid for purposes
of the Fund's 10% investment restriction on investment in non-readily
marketable securities.
PARTICIPATION INTERESTS. The Fund may purchase from financial
institutions tax exempt participation interests in tax exempt securities. A
participation interest gives the Fund an undivided interest in the tax exempt
security in the proportion that the Fund's participation interest bears to the
total amount of the tax exempt security. For certain participation interests,
the Fund will have the right to demand payment, on a specified number of days'
notice, for all or any part of the Fund's participation interest in the tax
exempt security plus accrued interest. Participation interests, which are
determined to be not readily marketable, will be considered as such for
purposes of the Fund's 10% investment restriction on investment in non-readily
marketable illiquid securities. The Fund may also invest in Certificates of
Participation (COP's) which provide participation interests in lease revenues.
Each Certificate represents a proportionate interest in or right to the
lease-purchase payment made under municipal lease obligations or installment
sales contracts. Typically, municipal lease obligations are issued by a state
or municipal financing authority to provide funds for the construction of
facilities (e.g., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Participation interests in municipal
lease obligations will not be considered illiquid for purposes of the Fund's
10% limitation on illiquid securities provided the Investment Adviser
determines that there is a readily available market for such securities. In
reaching liquidity decisions, the Investment Adviser will consider, among
others, the following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer.) With respect
to municipal lease obligations, the Investment Adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease; (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease; (3) an analysis of factors similar to that performed by
nationally recognized statistical rating organizations in evaluating the credit
quality of a municipal lease obligation, including (i) whether the lease can be
cancelled; (ii) if applicable, what assurance there is that the assets
represented by the lease can be sold; (iii) the strength of the lessee's
general credit (e.g., its debt, administrative, economic and financial
characteristics); (iv) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an event of nonappropriation); and (v) the legal recourse in the event of
failure to appropriate; and (4) any other factors unique to municipal lease
obligations as determined by the Investment Adviser.
FUND CHARACTERISTICS AND OTHER POLICIES. The Fund may engage in
short-term trading consistent with its investment objective. Securities may be
sold in anticipation of a market decline (a rise in interest rates) or
purchased in anticipation of a market rise (a decline in interest rates). In
addition, a security may be sold and another security of comparable quality
purchased at approximately the same time to take advantage of what the
Investment Adviser believes to be a
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<PAGE> 36
temporary disparity in the normal yield relationship between the two
securities. These yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for, or supply of,
various types of tax-exempt securities.
In general, purchases and sales may also be made to restructure the
portfolio in terms of average maturity, quality, coupon yield or
diversification for any one or more of the following purposes: (a) to increase
income, (b) to improve portfolio quality, (c) to minimize capital depreciation,
(d) to realize gains or losses, or (e) for such other reasons as the Investment
Adviser deems relevant in light of economic market conditions.
The Fund is a "diversified" management investment company under the
Investment Company Act of 1940 (the "Act"). This means that with respect to
75% of its total assets: (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer other than U.S. government
securities and securities of other investment companies and (2) the Fund may
not own more than 10% of the outstanding voting securities of any one issuer.
In applying these limitations, a guarantee of a security will not be considered
a security of the guarantor, provided that the value of all securities issued
or guaranteed by that guarantor, and owned by the Fund, does not exceed 10% of
Fund's total assets. Since Municipal Obligations ordinarily purchased by the
Fund are not voting securities (notwithstanding the 75% limitation described
above), there is generally no limit on the percentage of a single issuer's
obligations which the Fund may own so long as it does not invest more than 5%
of its total assets in the securities of that issuer. Consequently, the Fund
may invest in a greater percentage of the outstanding securities of a single
issuer than would an investment company which invests in voting securities. In
determining the issuer of a security, each state and each political subdivision
agency, and instrumentality of each state and each multi-state agency of which
such state is a member is a separate issuer. Where securities are backed only
by assets and revenues of a particular instrumentality, facility or
subdivision, such entity is considered the issuer.
CERTAIN INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income,
the Fund may, from time to time, lend securities from its portfolios to
brokers, dealers and financial institutions such as banks and trust companies.
Such loans will be secured by collateral consisting of cash or U.S. Government
securities which will be maintained in an amount equal to at least 100% of the
current market value of the loaned securities. During the period of the loan,
the Fund will receive the income on both the loaned securities and the
collateral and thereby increase its return. Cash collateral will be invested
in short-term high quality debt securities, which will increase the current
income of the Fund. The loans will be terminable by the Fund at any time and
by the borrower on one day's notice. The Fund will have the right to regain
record ownership of loaned securities to exercise beneficial rights such as
rights to interest or other distributions or voting rights on important issues.
The Fund may pay reasonable fees to persons unaffiliated with the Fund for
services in arranging such loans. Lending of portfolio securities involves a
risk of failure by the borrower to return the loaned securities, in which event
the Fund may incur a loss.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers
to securities whose terms are available and for which a market exists, but
which have not been issued. The Fund will engage in when-issued transactions
with respect to securities purchased for its portfolio in order to obtain what
is considered to be an advantageous price and yield at the time of the
transaction. For when-issued transactions, no payment is made until delivery
is due, often a month or more after
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<PAGE> 37
the purchase. In a forward commitment transaction, the Fund contracts to
purchase securities for a fixed price at a future date beyond customary
settlement time.
When the Fund engages in forward commitment and when-issued transactions,
it relies on the seller to consummate the transaction. The failure of the
issuer or seller to consummate the transaction may result in the Fund losing
the opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash
or securities will be segregated in a separate account to the extent that the
total value of the assets in the account declines below the amount of the
when-issued commitments. Alternatively, the Fund may enter into offsetting
contracts for the forward sale of other securities that it owns.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. A
repurchase agreement is a contract under which the Fund would acquire a
security for a relatively short period (generally not more than 7 days) subject
to the obligation of the seller to repurchase and the Fund to resell such
security at a fixed time and price (representing the Fund's cost plus
interest). The Fund will enter into repurchase agreements only with member
banks of the Federal Reserve System and with securities dealers. The
Investment Adviser will continuously monitor the creditworthiness of the
parties with whom the Fund enters into repurchase agreements. The Fund has
established a procedure providing that the securities serving as collateral for
each repurchase agreement must be delivered to the Fund's custodian either
physically or in book-entry form and that the collateral must be marked to
market daily to ensure that each repurchase agreement is fully collateralized
at all times. In the event of bankruptcy or other default by a seller of a
repurchase agreement, the Fund could experience delays in liquidating the
underlying securities and could experience losses, including the possible
decline in the value of the underlying securities during the period which the
Fund seeks to enforce its rights thereto, possible subnormal levels of income
and lack of access to income during this period, and the expense of enforcing
its rights.
The Fund is permitted to engage in certain hedging techniques involving
options and futures transactions in order to reduce the effect of interest rate
movements affecting the market values of the investments held, or intended to
be purchased, by the Fund.
OPTIONS ON DEBT SECURITIES. The Fund may purchase and write put and call
options on debt securities which are traded on a national securities exchange
(an "Exchange") to protect its holdings in municipal bonds against a
substantial decline in market value. Securities are considered related if
their price movements generally correlate to one another. The purchase of put
options on debt securities which are related to securities held in its
portfolio will enable the Fund to protect, at least partially, unrealized gains
in an appreciated security in its portfolio without actually selling the
security. In addition, the Fund may continue to receive tax-exempt interest
income on the security. However, under certain circumstances the Fund may not
be treated as the tax owner of a security held subject to a put option, in
which case interest with respect to such security would not be tax-exempt for
the Fund. The purchase of call options on debt securities may help to protect
against substantial increases in prices of securities the Fund intends to
purchase pending its ability to invest in such securities in an orderly manner.
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The Fund may sell put and call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid in
connection with the option which is sold.
In order to protect partially against declines in the value of its
portfolio securities, the Fund may sell (write) call options on debt
securities. A call option gives the purchaser of such option in return for a
premium paid, the right to buy, and the seller has the obligation to sell, the
underlying security at the exercise price if the option is exercised during the
option period. The writer of the call option who receives the premium has the
obligation to sell the underlying security to the purchaser at the exercise
price during the option period if assigned an exercise notice. The Fund will
write call options only on a covered basis, which means that it will own the
underlying security subject to a call option at all times during the option
period. The exercise price of a call option may be below, equal to or above
the current market value of the underlying security at the time the option is
written.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the
option period or at such earlier point in time when the writer effects a
closing purchase transaction.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, in conjunction with the sale of the underlying security or to
enable the Fund to write another call option on the underlying security with a
different exercise price or different expiration date or both.
The Fund will write cash secured put options in order to facilitate its
ability to purchase a security at a price lower than the current market price
of such security. The Fund will write put options only on a "cash secured"
basis which means that if the Fund writes a "put" it will segregate cash
obligations in the event the "put" is exercised. "Puts" will only be written
in furtherance of the basic investment objectives of the Fund relating to the
acquisition of tax exempt securities and will not be written with the primary
intent of generating income from premiums paid to the Fund in connection with
the sale of the "put".
The purchase and writing of put and call options involves certain risks.
During the option period, the covered call writer has, in return for the
premium on the option, given up the opportunity to profit from a price increase
in the underlying securities above the exercise price, but, as long as its
obligation as a writer continues, has retained the risk of loss in the event
the price of the underlying security declines. A secured put writer assumes
the risk that the underlying security will fall below the exercise price in
which case the writer could be required to purchase the security at a higher
price than the then current market price of the security. In either instance,
the writer has no control over the time when it may be required to fulfill its
obligation as a writer of the option. Once an option writer has received an
exercise notice, it cannot effect a closing purchase transaction in order to
terminate its obligation under the option and must deliver the underlying
securities, in the case of a call, or acquire the contract securities, in the
case of a put, at the exercise price. If a put or call option purchased by the
Fund is not sold when it has remaining value, and if the market price of the
underlying security remains equal to or greater than the exercise price, in the
case of a put, or equal to or less than the exercise price, in the case of a
call, the Fund will lose its entire investment in the option. Also, where a
put or a call option on a particular security is purchased to hedge against
price movements in a related security, the price of the put or call option may
move more or less than the price of the related security.
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<PAGE> 39
The Fund will not invest in a put or a call option if as a result the
amount of premiums paid for such options then outstanding, when added to the
premiums paid for financial and index futures and put and call options on such
futures, would exceed 10% of the Fund's total assets.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may engage in the
purchase and sale of interest rate futures contracts ("financial futures") and
tax-exempt bond index futures contracts ("index futures") and the purchase and
writing of put and call options thereon, as well as put and call options on
tax-exempt bond indexes (if and when they are traded) only as a hedge against
changes in the general level of interest rates in accordance with strategies
more specifically described below.
The purchase of a financial futures contract obligates the buyer to accept
and pay for the specific type of debt security called for in the contract at a
specified future time and at a specified price. The Fund would purchase a
financial futures contract when it is not fully invested in long-term debt
securities but wishes to defer its purchases for a time until it can invest in
such securities in an orderly manner or because short-term yields are higher
than long-term yields. Such purchases would enable the Fund to earn the income
on a short-term security while at the same time minimizing the effect of all or
part of an increase in the market price of the long-term debt security which
the Fund intends to purchase in the future. A rise in the price of the
long-term debt security prior to its purchase either would generally be offset
by an increase in the value of the futures contract purchased by the Fund or
avoids by taking delivery of the debt securities under the futures contract.
The sale of a financial futures contract obligates the seller to deliver
the specific type of debt security called for in the contract at a specified
future time and at a specified price. The Fund would sell a financial futures
contract in order to continue to receive the income from a long-term debt
security, while endeavoring to avoid part or all of the decline in market value
of that security which would accompany an increase in interest rates. If
interest rates did rise, a decline in the value of the debt security held by
the Fund would be substantially offset by an increase in the value of the
futures contract sold by the Fund. While the Fund could sell a long-term debt
security and invest in a short-term security, ordinarily the Fund would give up
income on its investment, since long-term rates normally exceed short-term
rates.
In addition, the Fund may purchase and write put and call options on
financial futures contracts which are traded on an Exchange or a Board of Trade
and enter into closing transactions with respect to such options to terminate
an existing position. Options on financial futures contracts are similar to
options on securities except that a put option on a financial futures contract
gives the purchaser the right in return for the premium paid to assume a short
position in a financial futures contract and a call option on a financial
futures contract gives the purchaser the right in return for the premium paid
to assume a long position in a financial futures contract.
The Fund anticipates purchasing and selling tax-exempt bond index futures
as a hedge against changes in the market value of the tax exempt bonds which it
holds. A tax-exempt bond index fluctuates with changes in the market values of
the tax-exempt bonds included in the index. An index future has similar
characteristics to a financial future except that settlement is made through
delivery of cash rather than the underlying securities. The sale of an index
future obligates the seller to deliver at settlement an amount of cash equal to
a specified dollar amount multiplied by the difference between the value of the
index at the close of the last trading day of the contract and the price at
which the future was originally written.
The Fund may also purchase and write put and call options on tax-exempt
bond indexes (if and when such options are traded) and enter into closing
transactions with respect to such options.
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An option on an index future is similar to an option on a debt security except
that an option on an index future gives the holder the right to assume a
position in an index future. The Fund will use options on futures contracts
and options on tax-exempt bond indexes (if and when they are traded) in
connection with hedging strategies. Generally, these strategies would be
employed under the same market conditions in which the Fund would use put and
call options on debt securities.
The Fund may hedge up to the full value of its portfolio through the use
of options and futures. At the time the Fund purchases a futures contract, an
amount of cash or U.S. Government securities at least equal to the market value
of the futures contract will be deposited in a segregated account with the
Fund's Custodian to collateralize the position and thereby insure that such
futures contract is unleveraged. The Fund may not purchase or sell futures
contracts or purchase or write related put or call options if immediately
thereafter the sum of the amount of margin deposits on the Fund's existing
futures and related options positions and the amount of premiums paid for
related options (measured at the time of investment) would exceed 5% of the
Fund's total assets.
While the Fund's hedging transactions may protect the Fund against adverse
movements in the general level of interest rates, such transactions could also
preclude the opportunity to benefit from favorable movements in the level of
interest rates. Due to the imperfect correlation between movements in the
prices of futures contracts and movements in the prices of the related
securities being hedged, the price of a futures contract may move more than or
less than the price of the securities being hedged. There is an increased
likelihood that this will occur when a tax-exempt security is hedged by a
futures contract on a taxable security. Options on futures contracts are
generally subject to the same risks applicable to all option transactions. In
addition, the Fund's ability to use this technique will depend in part on the
development and maintenance of a liquid secondary market for such options. For
a discussion of the inherent risks involved with futures contracts and options
thereon, see "Risks Relating to Transactions in Futures Contracts and Related
Options" below.
The Fund's policies permitting the purchase and sale of futures contracts
and the purchase and writing of related put or call options for hedging
purposes only may not be changed without the approval of shareholders holding a
majority of the Fund's outstanding voting securities. The Board of Directors
may authorize procedures, including numerical limitations, with regard to such
transactions in furtherance of the Fund investment objectives. Such procedures
are not deemed to be fundamental and may be changed by the Board of Trustees
without the vote of the Fund's shareholders.
RISKS RELATING TO TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS.
Positions in futures contracts may be closed out only on an exchange or board
of trade which provides a market for such futures. Although the Fund intends
to purchase or sell futures contracts only on exchanges or boards of trade
where there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
or at any particular time. In the event a liquid market does not exist, it may
not be possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
of maintenance margin. In addition, limitations imposed by an exchange or
board of trade on which futures contracts are traded may compel or prevent the
Fund from closing out a contract which may result in reduced gain or increased
loss to the Fund. The absence of a liquid market in futures contracts might
cause the Fund to make or take delivery of the underlying securities at a time
when it may be disadvantageous to do so. The purchase of put options on
futures contracts involves less potential dollar risk to the Fund than an
investment of equal amount in futures contracts, since the premium is the
maximum amount of risk the
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purchaser of the option assumes. The entire amount of the premium paid for an
option can be lost by the purchaser, but no more than that amount.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions upon its
investments as set forth below which may not be changed without the approval of
the holders of a majority of the outstanding shares of the Fund. A majority
for this purpose means: (a) more than 50% of the outstanding shares of the Fund
or (b) 67% or more of the shares represented at a meeting where more than 50%
of the outstanding shares of the Fund are represented, whichever is less.
Under these restrictions, the Fund may not:
1. Borrow money except from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
that might otherwise require the untimely disposition of securities,
in an amount up to 15% of the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowings was
made. While borrowing exceed 5% of the value of the Fund's total
assets, the Fund will not purchase any additional securities.
Interest paid on borrowing 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 borrowing for temporary or emergency purposes or as
may be necessary in connection with maintaining collateral in
connection with writing put and call options or making initial margin
deposits in connection with the purchase or sale of financial
futures, index futures contracts and related options.
3. With respect to 75% of its total assets, purchase securities (other
than obligations issued or guaranteed by the United States
government, its agencies of instrumentalities and shares of other
investment companies) of any issuer if the purchase would cause
immediately thereafter more than 5% of the value of the Fund's total
assets invested in the securities of such issuer or the Fund would
own more than 10% of the outstanding voting securities of such
issuer.
4. Make loans to others, except through the purchase of obligations in
which the Fund is authorized to invest, entering in repurchase
agreements and lending portfolio securities in an amount not
exceeding one third of its total assets.
5. Purchase illiquid securities, including securities subject to
restrictions on disposition under the Securities Act of 1933,
repurchase agreements maturing in more than seven days, and
securities which do not have readily available market quotations, if
such purchase would cause the Fund to have more than 10% of its net
assets invested in such types of securities.
6. Purchase or retain the securities of any issuer, if those officers
and Trustees of the Fund or the Investment Adviser who own
beneficially more than of 1% of the securities of such issuer,
together own more than 5% of the securities of such issuer.
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<PAGE> 42
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. 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.
10. 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.
11. Invest more than 25% of its assets in the securities of "issuers" in
any single industry; provided that there shall be no limitation on
the purchase of obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities or by any state or
political subdivision thereof. For purposes of this limitation when
the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government
creating the issuing entity and a security is backed only by the
assets and revenues of the entity, the entity would be deemed to be
the sole issuer of the security. Similarly, in the case of an
industrial development or pollution control bond, if that bond is
backed only by the assets and revenues of the nongovernmental user,
then such nongovernmental user would be deemed to be the sole issuer.
If, however, in either case, the creating government or some other
entity guarantees a security, such a guarantee would be considered a
separate security and would be treated as an issue of such government
or other entity unless all securities issued or guaranteed by the
government or other entity owned by the Fund does not exceed 10% of
the Fund's total assets.
12. Invest more than 5% of its total assets in securities of any issuers
if the party responsible for payment, together with any predecessor,
has been in operation for less than three years (except U.S.
government and agency obligations and obligations backed by the
faith, credit and taxing power of any person authorized to issue tax
exempt securities).
-11-
<PAGE> 43
13. Issue any senior securities, except insofar as the Fund may be deemed
to have issued a senior security by: entering into a repurchase
agreement; purchasing securities in a when-issued or delayed delivery
basis; purchasing or selling any options or financial futures
contract; borrowing money or lending securities in accordance with
applicable investment restrictions.
In order to comply with certain state regulatory policies, the Fund has
adopted a non- fundamental policy prohibiting the purchase of warrants. The
Fund's Board of Trustees has approved the following non-fundamental investment
policy pursuant to an order of the SEC: Notwithstanding any investment
restriction to the contrary, the Fund may, in connection with the John Hancock
Group of Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John Hancock Group
of Funds provided that, as a result, (i) no more than 10% of the Fund's assets
would be invested in securities of all other investment companies, (ii) such
purchase would not result in more than 3% of the total outstanding voting
securities of any one such investment company being held by the Fund and (iii)
no more than 5% of the Fund's assets would be invested in any one such
investment company.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers who
are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of
the Fund are also officers and directors of the Investment Adviser or officers
and directors of the Fund's distributor John Hancock Funds, Inc. ("John
Hancock Funds" or the "Distributor").
Set forth below is information with respect to each of the Fund's officers
and Trustees. The officers and Trustees may be contacted at 101 Huntington
Avenue, Boston, MA 02199-7603. Their affiliations represent their principal
occupations during the past five years.
EDWARD J. BOUDREAU, JR.,* Trustee, Chairman and Chief Executive Officer.
Chairman and Chief Executive Officer, the Investment Adviser and The
Berkeley Financial Group ("The Berkeley Group"); Chairman, NM Capital
Management, Inc. ("NM Capital"); John Hancock Advisers International
Limited ("Advisers International"); John Hancock Funds, Inc; John Hancock
Investor Services Corporation ("Investor Services"); and Sovereign Asset
Management Corporation ("SAMCorp"); (hereinafter the Investment Adviser,
the Berkeley Group, NM Capital, Advisers International, John Hancock
Funds, Inc., Investor Services and SAMCorp are collectively referred to as
the "Affiliated Companies"); Chairman, First Signature Bank & Trust;
Director, John Hancock Freedom Securities Corporation, John Hancock
Capital Corporation, New England/Canada Business Council; Member,
Investment Company Institute Board of Governors; Trustee, Museum of
Science; President, the Investment Adviser (until July 1992); Trustee or
Director of other investment companies managed by the Investment Adviser;
and Chairman, John Hancock Distributors, Inc. (until April, 1994).
JAMES F. CARLIN, Trustee. Chairman and CEO, Carlin Consolidated, Inc.
(insurance); Director, Arbella Mutual Insurance Company (insurance),
Consolidated Group Trust (group health plan), Carlin Insurance Agency,
Inc. and West Insurance Agency, Inc.;
* An "interested person" of the Fund, as such a term is defined in the Act.
-12-
<PAGE> 44
Receiver, the City of Chelsea (until August 1992); and Trustee or Director
of other investment companies managed by the Investment Adviser.
WILLIAM H. CUNNINGHAM, Trustee. Chancellor, University of Texas System and
former President of the University of Texas, Austin, Texas; Regents Chair
in Higher Education Leadership; James L. Bayless Chair for Free
Enterprise; Professor of Marketing and Dean College of Business
Administration/Graduate School of Business (1983-1985); Centennial Chair
in Business Education Leadership, 1983-1985; Director, LaQuinta Motor
Inns, Inc. (hotel management company); Director, Jefferson-Pilot
Corporation (diversified life insurance company); Director,
Freeport-McMoran Inc. (oil and gas company); Director, Barton Creek
Properties, Inc. (1988-1990) (real estate development) and LBJ Foundation
Board (education foundation); Advisory Director, Texas Commerce Bank -
Austin; and Trustee or Director of other investment companies managed by
the Investment Adviser.
CHARLES L. LADNER, Trustee. Director, Energy North, Inc. (public utility
holding company); Senior Vice President, Finance Corp (public utility
holding company) (until 1992); and Trustee or Director of other
investment companies managed by the Investment Adviser.
LEO E. LINBECK, JR., Trustee. Chairman, President, Chief Executive Officer and
Director, Linbeck Corporation (a holding company engaged in various phases
of the construction industry and warehousing interests); Director and
Chairman, Federal Reserve Bank of Dallas; Chairman of the Board and Chief
Executive Officer, Linbeck Construction Corporation; Director, Panhandle
Eastern Corporation (a diversified energy company); Director, Daniel
Industries, Inc. (manufacturer of gas measuring products and energy
related equipment); Director, GeoQuest International, Inc. (a geophysical
consulting firm); Director, Greater Houston Partnership; and Trustee or
Director of other investment companies managed by the Investment Adviser.
PATRICIA P. MCCARTER, Trustee. Director and Secretary, the McCarter Corp.
(machine manufacturer); and Trustee or Director of other investment
companies managed by the Investment Adviser.
STEVEN R. PRUCHANSKY, Trustee. Director and Treasurer, Mast Holdings, Inc.;
Director, First Signature Bank & Trust Company (until August 1991);
General Partner, Mast Realty Trust; President, Maxwell Building Corp.
(until 1991); and Trustee or Director of other investment companies
managed by the Investment Adviser.
NORMAN H. SMITH, Trustee. Lieutenant General, USMC, Deputy Chief of Staff for
Manpower and Reserve Affairs, Headquarters Marine Corps; Commanding
General III Marine Expeditionary Force/3rd Marine Division (retired 1991);
and Trustee or Director of other investment companies managed by the
Investment Adviser.
JOHN P. TOOLAN, Trustee. Director, The Smith Barney Muni Bond Funds, The Smith
Barney Tax-Free Money Fund, Inc., Vantage Money Market Funds (mutual
funds), The Inefficient-Market Fund, Inc. (closed-end investment company)
and Smith Barney Trust Company of Florida; Chairman, Smith Barney Trust
Company (retired December, 1991); Director, Smith Barney, Inc., Mutual
Management Company and Smith, Barney Advisers, Inc. (investment advisers)
(retired 1991); and Senior Executive Vice President, Director and member
of the Executive Committee, Smith Barney, Harris Upham & Co, Incorporated
(investment bankers) (until 1991); and Trustee or Director of other
investment companies managed by the Investment Adviser.
-13-
<PAGE> 45
ROBERT G. FREEDMAN*, Vice Chairman and Chief Investment Officer. President and
Chief Investment Officer, the Investment Adviser.
ANNE C. HODSDON*, President. President and Chief Operations Officer, the
Investment Adviser; Executive Vice President, the Investment Adviser
(until December, 1994).
JAMES B. LITTLE*, Senior Vice President and Chief Financial Officer. Senior
Vice President, the Investment Adviser.
THOMAS H. DROHAN*, Senior Vice President and Secretary. Senior Vice President
and Secretary, the Investment Adviser.
MICHAEL P. DICARLO*, Senior Vice President. Senior Vice President, the
Investment Adviser.
EDGAR LARSEN*, Senior Vice President. Senior Vice President, the Investment
Adviser.
B.J. WILLINGHAM*, Senior Vice President. Senior Vice President, the Investment
Adviser. Formerly, Director and Chief Investment Officer of Transamerica
Fund Management Company.
JAMES J. STOKOWSKI*, Vice President and Treasurer. Vice President, the
Investment Adviser.
SUSAN S. NEWTON*, Vice President and Compliance Officer. Vice President and
Assistant Secretary, the Investment Adviser.
JOHN A. MORIN*, Vice President. Vice President, the Investment Adviser.
THOMAS J. PRESS*, Vice President and Assistant Secretary. Vice President and
Assistant Secretary, the Investment Adviser. Formerly, General Counsel
and Secretary, Transamerica Management Company; Secretary and Treasurer,
Transamerica Asset Management Group, Inc.; and Secretary, Transamerica
Funds Distributors, Inc.
All of the officers listed are officers or employees of the Investment
Adviser or affiliated companies. Some of the Trustees and officers may also be
officers and/or directors and/or trustees of one or more of the other funds for
which the Investment Adviser serves as investment adviser.
As of January 31, 1995, there were 19,454,101 shares of the Fund
outstanding and officers and trustees of the Fund as a group beneficially owned
less than 1% of these outstanding shares. At such date, no person owned of
record or was known by the Fund to own beneficially as much as 5% of the
outstanding shares of the Fund.
As of December 22, 1994, the Trustees have established an Advisory Board
which acts to facilitate a smooth transition of management over a two-year
period (between Transamerica Fund Management Company ("TFMC"), the prior
investment adviser, and the Investment Adviser). The members of the Advisory
Board are distinct from the Board of Trustees, do not serve the Fund in any
other capacity and are persons who have no power to determine what securities
are
* An "interested person" of the Fund, as such term is defined in the Act.
-14-
<PAGE> 46
purchased or sold and behalf of the Fund. Each member of the Advisory Board
may be contacted at 101 Huntington Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal occupations
during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management services);
former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from Texas;
co-founder, Houston Parents' League; former board member of various civic
and cultural organizations in Houston, including the Houston Symphony,
Museum of Fine Arts and YWCA. Mrs. Bentsen is presently active in various
civic and cultural activities in the Washington, D.C. area, including
membership on the Area Board for The March of Dimes and is a National
Trustee for the Botanic Gardens of Washington, D. C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief Executive
Officer, TFMC; Director, West Central Advisory Board, Texas Commerce Bank;
Trustee, Memorial Hospital System; Chairman of the Board of Regents of
Baylor University; Member, Board of Governors, National Association of
Securities Dealers, Inc.; Formerly, Chairman, Investment Company
Institute; formerly, President, Houston Chapter of Financial Executive
Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company; Director,
Houston Industries and Houston Lighting and Power Company; Director,
TransAmerican Companies (natural gas producer and transportation); Member,
Board of Managers, Harris County Hospital District; Advisory Director,
Commercial State Bank, El Campo; Advisory Director, First National Bank of
Bryan; Advisory Director, Sterling Bancshares; Former Director and Vice
Chairman, Texas Commerce Bancshares; and Vice Chairman, Texas Commerce
Bank.
COMPENSATION OF THE BOARD OF TRUSTEES AND ADVISORY BOARD. The following
table provides information regarding the compensation paid by the Fund and the
other investment companies in the John Hancock Fund Complex to the Independent
Trustees and the Advisory Board members for their services. Mr. Boudreau, a
non-Independent Trustee, and each of the officers of the Funds are interested
persons of the Investment Adviser, are compensated by the Investment Adviser
and received no compensation from the Funds for their services.
-15-
<PAGE> 47
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement from all Funds in
Aggregate Benefits Accrued John Hancock
Compensation as Part of the Fund Complex to
Trustees from the Fund Fund's Expenses Trustees**
- -------- ------------- ---------------- ------------------
<S> <C> <C> <C>
James F. Carlin $ 0 $0 $ 60,452
William H. Cunningham $ 4,495 * $0 $ 0
Charles L. Ladner $ 0 $0 $ 60,450
Leo E. Linbeck, Jr. $ 4,495 * $0 $ 0
Patricia P. McCarter $ 0 $0 $ 60,200
Steven R. Pruchansky $ 0 $0 $ 62,450
Norman H. Smith $ 0 $0 $ 62,450
John P. Toolan $ 0 $0 $ 62,450
Total $ 8,990 $0 $ 366,450
</TABLE>
* Compensation made pursuant to different compensation arrangements then in
effect.
** The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1994.
All Trustees/Directors except Messrs. Cunnignham and Linbeck are
Trustees/Direcotrs of 39 funds in the John Hancock Fund Complex. Messrs.
Cunningham and Linbeck are Trustees/Directors of 21 funds. (The Fund was
not part of the John Hancock Fund Complex until December 22, 1994 and
Messrs. Cunningham and Linbeck were not trustees or directors of any funds
in the John Hancock Fund Complex prior to December 22, 1994.)
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement from all Funds in
Aggregate Benefits Accrued John Hancock
Compensation as Part of the Fund Complex to
Advisory Board*** from the Fund Fund's Expenses Trustees***
- ----------------- ------------- ---------------- ------------------
<S> <C> <C> <C>
R. Trent Campbell $ 54,000 $0 $ 54,000
Mrs. Lloyd Bentsen $ 54,000 $0 $ 54,000
Thomas R. Powers $ 54,000 $0 $ 54,000
Thomas B. McDade $ 54,000 $0 $ 54,000
TOTAL $ 216,000 $0 $ 216,000
</TABLE>
*** Estimated for the Fund's current fiscal year ending December 31, 1995.
-16-
<PAGE> 48
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Fund receives its investment advice
from the Investment Adviser. Investors should refer to the Prospectus for a
description of certain information concerning the investment management
contract. Each of the Trustees and principal officers of the Fund who is also
an affiliated person of the Investment Adviser is named above, together with the
capacity in which such person is affiliated with the Fund and the Investment
Adviser.
The Investment Adviser, located at 101 Huntington Avenue, Boston,
Massachusetts 02199-7603, was organized in 1968 and has more than $13 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,060,000 shareholders.
The Investment Adviser is a wholly-owned subsidiary of The Berkeley Financial
Group, which is in turn a wholly-owned subsidiary of John Hancock Subsidiaries,
Inc., which is in turn a wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), one of the nation's oldest and largest
financial services companies. With total assets under management of over $80
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries Standard & Poor's and A.M. Best's highest
ratings. Founded in 1862, the Life Company has been serving clients for over
130 years.
As described in the Prospectus under the caption, "Organization and
Management of the Fund," the Fund has entered into an investment management
contract with the Investment Adviser. Under the investment management contract,
the Investment Adviser provides the Fund with (i) a continuous investment
program, consistent with the Fund's stated investment objective and policies,
(ii) supervision of all aspects of the Fund's operations except those that are
delegated to a custodian, transfer agent or other agent and (iii) such
executive, administrative and clerical personnel, officers and equipment as are
necessary for the conduct of its business. The Investment Advisor is
responsible for the management of the Fund's portfolio assets.
No person other than the Investment Adviser, its directors and employees
regularly furnishes advice to the Fund with respect to the desirability of the
Fund investing in, purchasing or selling securities. The Investment Adviser may
from time to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life Company
and its affiliates.
Under the terms of the investment management contract with the Fund, the
Investment Adviser provides the Fund with office space, equipment and supplies
and other facilities and personnel required for the business of the Fund. The
Investment Adviser pays the compensation of all officers and employees of the
Fund and Trustees of the Fund affiliated with the Investment Adviser, the office
expenses of the Fund, including those of the Fund's Treasurer and Secretary, and
other expenses incurred by the Investment Adviser in connection with the
performance of its duties. All expenses which are not specifically paid by the
Investment Adviser and which are incurred in the operation of the Fund
including, but not limited to, (i) the fees of the Trustees of the Fund who are
not "interested persons," as such term is defined in the 1940 Act (the
"Independent Trustees"), (ii) the fees of the members of the Fund's Advisory
Board (described above) and (iii) the continuous public offering of the shares
of the Fund are borne by the Fund.
As provided by the investment management contract, the Fund pays the
Investment Adviser an investment management fee, which is accrued daily and paid
monthly in arrears, equal on an annual basis to a 0.55% of the Fund's average
daily net asset value.
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<PAGE> 49
The Investment Adviser may voluntarily and temporarily reduce its advisory
fee or make other arrangements to limit the Fund's expenses to a specified
percentage of average daily net assets. The Investment Adviser retains the
right to re-impose the advisory fee and recover any other payments to the extent
that, at the end of any fiscal year, the Fund's annual expenses fall below this
limit.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of any state limit where the
Fund is registered to sell shares of beneficial interest, the fee payable to the
Investment Adviser will be reduced to the extent required by law. At this time,
the most restrictive limit on expenses imposed by a state requires that expenses
charged to the Fund in any fiscal year not exceed 2.5% of the first $30,000,000
of the Fund's average daily net asset value, 2% of the next $70,000,000 and 1.5%
of the remaining average daily net asset value. When calculating the limit
above, the Fund may exclude interest, brokerage commissions and extraordinary
expenses.
Pursuant to the investment management contract, the Investment Adviser is
not liable to the Fund or its shareholders for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the matters to
which its contract relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Investment Adviser in the
performance of its duties or from its reckless disregard of the obligations and
duties under the contract.
The investment management contract initially expires on December
22, 1996, and will continue in effect from year to year thereafter if
approved annually by a vote of a majority of the Trustees of the Fund
who are not interested persons of one or more of the parties to the
contract, cast in person at a meeting called for the purpose of voting
on such approval, and by either a majority of the Trustees or the
holders of a majority of the Fund's outstanding voting securities.
The management contract may, on 60 days' written notice, be terminated
at any time without the payment of any penalty by the Fund by vote of
a majority of the outstanding voting securities of the Fund, by the
Trustees or by the Investment Adviser. The management contract
terminates automatically in the event of its assignment.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Investment Adviser or its
affiliates provide investment advice. Because of different investment
objectives or other factors, a particular security may be bought for
one or more funds or clients when one or more are selling the same
security. If opportunities for purchase or sale of securities by the
Investment Adviser or for other funds or clients for which the
Investment Adviser renders investment advice arise for consideration
at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds or clients in a
manner deemed equitable to all of them. To the extent that
transactions on behalf of more than one client of the Investment
Adviser or its respective affiliates may increase the demand for
securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
Under the investment management contract, the Fund may use the
name "John Hancock" or any name derived from or similar to it only for
so long as the investment management contract or any extension,
renewal or amendment thereof remains in effect. If the Fund's
investment management contract is no longer in effect, the Fund (to
the extent that it lawfully can) will cease to use such name or any
other name indicating that it is advised by or otherwise connected
with the Investment Adviser. In addition, the Investment Adviser or
the Life Company may grant the non-exclusive right to use the name
"John Hancock" or any similar name to any other corporation or entity,
including but not limited to any investment company of which the Life
Company or any
-18-
<PAGE> 50
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
For the fiscal years ended December 31, 1992, 1993 and 1994 advisory fees
payable by the Fund to TFMC, the Fund's former investment adviser, amounted to
$515,297, $888,791 and $1,136,532, respectively; however, a portion of such fees
were not imposed pursuant to the voluntary fee and expense assumption and fee
waiver then in effect (see "The Fund's Expenses" in the Prospectus). For the
period from December 22, 1994 to December 31, 1994, advisory fees payable by the
Fund were paid to the Investment Adviser.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund was a party to an administrative
services agreement with TFMC (the "Services Agreement"), pursuant to which TFMC
performed bookkeeping and accounting services and functions, including preparing
and maintaining various accounting books, records and other documents and
keeping such general ledgers and portfolio accounts as are reasonably necessary
for the operation of the Fund. Other administrative services included
communications in response to shareholder inquiries and certain printing
expenses of various financial reports. In addition, such staff and office space,
facilities and equipment was provided as necessary to provide administrative
services to the Fund. The Services Agreement was amended in connection with the
appointment of the Investment Adviser as adviser to the Fund to permit services
under the Agreement to be provided to the Fund by the Investment Adviser and its
affiliates. The Services Agreement was terminated during the current fiscal
year.
For the fiscal years ended December 31, 1992, 1993 and 1994, the Fund paid
to TFMC (pursuant to the Services Agreement) $68,225, $94,272 and $116,742,
respectively, of which $43,681, $62,855 and $81,515, respectively, was paid to
TFMC and $24,544, $31,417 and $35,227, respectively, were paid for certain data
processing and pricing information services.
DISTRIBUTION CONTRACT
As discussed in the Prospectus, the Fund's shares are sold on a continuous
basis at the public offering price. The Distributor, a wholly-owned subsidiary
of the Investment Adviser, has the exclusive right, pursuant to the Distribution
Agreement dated December 22, 1994 (the "Distribution Agreement"), to purchase
shares from the Fund at net asset value for resale to the public or to
broker-dealers at the public offering price. Upon notice to all broker-dealers
("Selling Brokers") with whom it has sales agreements, the Distributor may allow
such Selling Brokers up to the full applicable sales charge during periods
specified in such notice. During these periods, such Selling Brokers may be
deemed to be underwriters as that term is defined in the Securities Act of 1933.
The Distribution Agreement was initially adopted by the affirmative vote of
the Fund's Board of Trustees including the vote a majority of Trustees who are
not parties to the agreement or interested persons of any such party, cast in
person at a meeting called for such purpose. The Distribution Agreement shall
continue in effect until December 22, 1994 and from year to year if approved by
either the vote of the Fund's shareholders or the Board of Trustees including
the vote of a majority of Trustees who are not parties to the agreement or
interest persons of any such
-19-
<PAGE> 51
party, cast in person at a meeting called for such purpose. The Distribution
Agreement may be terminated at any time, without penalty, by either party upon
sixty (60) days' written notice or by a vote of a majority of the outstanding
voting securities of the Fund and terminates automatically in the case of an
assignment by the Distributor.
Total underwriting commissions for sales of the Fund's Class A Shares for
the fiscal years ended December 31, 1992, 1993 and 1994, respectively, were
$1,430,272, $1,224,810 and $149,847, respectively. Of such amounts $121,373,
$108,653 and $47,967, respectively, were retained by the Fund's former
distributor, Transamerica Fund Distributors, Inc. and the remainder was
reallowed to dealers. For the period from December 22, 1994 to December 31,
1994, underwriting commissions were paid to the Distributor.
DISTRIBUTION PLAN. The Board of Trustees, including the Independent Trustees
of the Fund, approved new distribution plans pursuant to Rule 12b-1 under the
1940 Act for Class A Shares ("Class A Plan") and Class B Shares ("Class B
Plan"). Such Plans were approved by a majority of the outstanding shares of each
respective class on December 16, 1994 and became effective on December 22, 1994.
Under the Class A Plan, the distribution or services fee will not exceed an
annual rate of 0.15% of the average daily net asset value of the Class A Shares
of the Fund (determined in accordance with such Fund's Prospectus as from time
to time in effect). Any expenses under the Class A Plan not reimbursed within 12
months of being presented to the Fund for repayment are forfeited and not
carried over to future years. Under the Class B Plan, the distribution or
services fee to be paid by the Fund will not exceed an annual rate of 1.00% of
the average daily net assets of the Class B Shares of the Fund (determined in
accordance with such Fund's prospectus as from time to time in effect); provided
that the portion of such fee used to cover Service Expenses (described below)
shall not exceed an annual rate of 0.25% of the average daily net asset value of
the Class B Shares of the Fund. The Distributor has agreed to limit the payment
of expenses pursuant to the Class B Plan to 0.90% of the average daily net
assets of the Class B Shares of the Fund. Under the Class B Plan, the fee covers
the Distribution and Service Expenses (described below) and interest expenses on
unreimbursed distribution expenses. In accordance with generally accepted
accounting principles, the Fund does not treat distribution fees in excess of
0.75% of the Fund's net assets attributable to Class B shares as a liability of
the Fund and does not reduce the current net assets of Class B by such amount
although the amount may be payable in the future.
Under the Plans, expenditures shall be calculated and accrued daily and paid
monthly or at such other intervals as the Trustees shall determine. The fee may
be spent by the Distributor on Distribution Expenses or Service Expenses.
"Distribution Expenses" include any activities or expenses primarily intended to
result in the sale of shares of the relevant class of the Fund, including, but
not limited to: (i) initial and ongoing sales compensation payable out of such
fee as such compensation is received by the Distributor or by Selling Brokers,
(ii) direct out-of-pocket expenses incurred in connection with the distribution
of shares, including expenses related to printing of prospectuses and reports;
(iii) preparation, printing and distribution of sales literature and advertising
material; (iv) an allocation of overhead and other branch office expenses of the
Distributor related to the distribution of Fund Shares (v) distribution expenses
that were incurred by the Fund's former distributor and not recovered through
payments under the Class A or Class B former plans or through receipt of
contingent deferred sales charges; and (vi) in the event that any other
investment company (the "Acquired Fund") sells all or substantially all of its
assets, merges or otherwise engages in a combination with the Fund, distribution
expenses originally incurred in connection with the distribution of the Acquired
Fund's shares. Service Expenses under the Plans include payments made to, or on
account of, account executives of selected
-20-
<PAGE> 52
broker-dealers (including affiliates of the Distributor) and others who furnish
personal and shareholder account maintenance services to shareholders of the
relevant class of the Fund.
During the fiscal year ended December 31, 1994, total payments made by the
Fund under the former Class A Rule 12b-1 plan to the former distributor amounted
to $200,118, and of such amount $417, $2,068, $555, $26,800 and $170,278
represented payments for (1) the cost of printing and distribution prospectuses
and financial reports to investors, (2) various sales literature, (3)
advertising expenses, (4) distribution and/or administrative services and (5)
service fees, respectively. During the period from December 22, 1994 to December
31, 1994, payment under the Class A Plan was made to the Distributor.
During the fiscal year ended December 31, 1994, total payments made by the
Fund under the former Class B Rule 12b-1 plan to the former distributor amounted
to $658,933 of which:
** (1) $109,829 represented service fees which were comprised of
$29,408 for distribution and/or administrative services
provided by the Fund's former distributor and $80,421 for
service fees paid to broker/dealers.
(2) $549,104 represented as the total of distribution fees paid
to the former distributor which are comprised of:
a) $232,594 for dealer commission payments;
b) $58,148 for underwriting fees; and
c) $258,362 for interest or the carrying charges.
For the fiscal year ended December 31, 1994, the former distributor received
$209,200 in contingent deferred sales charges from redemption of the Fund's
Class B shares. For the period from December 22, 1994 to December 31, 1994, the
Distributor received fees under the Class B Plan and contingent deferred sales
charges from redemptions of Class B shares.
Each of the Plans provides that it will continue in effect only so long as
its continuance is approved at least annually by a majority of both the Trustees
and the Independent Trustees. Each of the Plans provides that it may be
terminated (a) at any time by vote of a majority of the Trustees, a majority of
the Independent Trustees, or a majority of the respective Class' outstanding
voting securities or (b) by the Distributor on 60 days' notice in writing to the
Fund. Each of the Plans further provides that it may not be amended to increase
the maximum amount of the fees for the services described therein without the
approval of a majority of the outstanding shares of the class of the Fund which
has voting rights with respect to the Plan. Each of the Plans provides that no
material amendment to the Plan will, in any event, be effective unless it is
approved by a majority vote of the Trustees and the Independent Trustees of the
Fund. The holders of Class A Shares and Class B Shares have exclusive voting
rights with respect to the Plan applicable to their respective class of shares.
The Board of Trustees, including the Trustees who are not interested in the Fund
and have no direct or indirect interest in the Plans, has determined that, in
their judgment, there is a reasonable likelihood that the Plans will benefit the
holders of the applicable class of shares of the Fund.
Information regarding the services rendered under the Plans and the
Distribution Agreement and the amounts paid therefore by the respective Class of
the Fund are provided to, and reviewed by, the Board of Trustees on a quarterly
basis. In its quarterly review, the Board of Trustees considers the continued
appropriateness of the Plans and the Distribution Agreement and the level of
compensation provided therein.
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NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's shares,
the following procedures are utilized wherever applicable. Debt investment
securities are valued on the basis of valuations furnished by a principal market
maker or a pricing service, both of which generally utilize electronic data
processing techniques to determine valuations for normal institutional size
trading units of debt securities without exclusive reliance upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or
less are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the
Investment Adviser any quotation or price is not representative of true market
value, the fair value of the security may be determined in good faith in
accordance with procedures approved by the Trustees. The Fund will not price its
securities on the following national holidays: New Year's Day; President's Day;
Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and
Christmas Day.
INITIAL SALES CHARGE ON CLASS A 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 only will be issued for full shares. The Board of Trustees reserves the
right to change or waive the minimum investment requirements and to reject any
order to purchase shares (including purchase by exchange) when in the judgment
of the Investment Adviser such rejection is in the Fund's best interest.
INITIAL SALES CHARGE ON CLASS A SHARES. The sales charges applicable to
purchases of Class A Shares of the Fund are described in the Fund's Class A and
Class B Prospectus. Methods of obtaining reduced sales charges referred to
generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A Shares, the investor is
entitled to cumulate current purchases with the greater of the current value (at
offering price) of the Class A Shares of the Fund, or if Investor Services is
notified by the investor's dealer or the investor at the time of the purchase,
the cost of the Class A Shares owned.
COMBINED PURCHASES. In calculating the sales charge applicable to purchases
of Class A Shares made at one time, the purchases will be combined if made by
(a) an individual, his or her spouse and their children under the age of 21
purchasing securities for his or her own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
WITHOUT SALES CHARGE. As described in the Class A and Class B Prospectus,
Class A shares of the Fund may be sold without a sales charge to certain persons
described in the prospectus.
ACCUMULATION PRIVILEGE. Investors (including investors combining purchases)
who are already Class A Shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or value of the Class A Shares already held by such
person.
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<PAGE> 54
COMBINATION PRIVILEGE. Reduced sales charges (according to the schedule set
forth in the Class A and Class B Prospectus) also are available to an investor
based on the aggregate amount of his concurrent and prior investments in Class A
Shares of the Fund and shares of all other John Hancock funds which carry a
sales charge.
LETTER OF INTENTION. The reduced sales loads are also applicable to
investments made over a specified period pursuant to a Letter of Intention
(LOI), which should be read carefully prior to its execution by an investor. The
Fund offers two options regarding the specified period for making investments
under the LOI. All investors have the option of making their investments over a
period of thirteen (13) months. Investors who are using the Fund as a funding
medium for a qualified retirement plan, however, may not opt to make the
necessary investments called for by the LOI over a forty-eight (48) month
period. These qualified retirement plans include IRA'S, SEP, SARSEP, TSA, 401
(k) plans, TSA plans and 457 plans. Such an investment (including accumulations
and combinations) must aggregate $50,000 or more invested during the specified
period from the date of the LOI or from a date within ninety (90) days prior
thereto, upon written request to Investor Services. The sales charge applicable
to all amounts invested under the LOI is computed as if the aggregate amount
intended to be invested had been invested immediately. If such aggregate amount
is not actually invested, the difference in the sales charge actually paid and
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made with the specified period
(either 13 or 48 months), the sales charge applicable will not be higher than
that which would have been applied (including accumulations and combinations)
had the LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class A
shares (approximately 5%) of the aggregate to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charges as may be due. By signing
the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrowed shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by the Fund to sell, any additional shares and may be terminated at
any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
CONTINGENT DEFERRED SALES CHARGE. Investments in Class B shares are
purchased at net asset value per share without the imposition of a sales charge
so that the Fund will receive the full amount of the purchase payment. Class B
Shares which are redeemed within six years of purchase will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the Class A
and Class B Prospectus as a percentage of the dollar amount subject to the CDSC.
The charge will be assessed on an amount equal to the lesser of the current
market value or the original purchase cost of the Class B Shares being redeemed.
Accordingly, no CDSC will be imposed on increases in account value above the
initial purchase prices, including Class B Shares derived from reinvestment of
dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B Shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
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<PAGE> 55
Proceeds from the CDSC are paid to the Distributor and are used in whole or
in part by the Distributor to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B Shares, such as the payment of compensation to select Selling Brokers
for selling Class B Shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B Shares
without a sales charge being deducted at the time of the purchase. See the Class
A and Class B Prospectus for additional information regarding the CDSC.
SPECIAL REDEMPTIONS
Although it is the Fund's present policy to make payment of redemption
proceeds in cash, if the Board of Trustees determines that a material adverse
effect would otherwise be experienced by remaining investors, redemption
proceeds may be paid in whole or in part by a distribution in kind of securities
from the Fund in conformity with rules of the Securities and Exchange
Commission, valuing such securities in the same manner they are valued in
determining NAV, and selecting the securities in such manner as the Board may
deem fair and equitable. If such a distribution occurs, investors receiving
securities and selling them before their maturity could receive less than the
redemption value of such securities and, in addition, could incur certain
transaction costs. Such a redemption is not as liquid as a redemption paid in
cash or federal funds. The Fund has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which the Fund is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90 day period for any one account.
ADDITIONAL SERVICES AND PROGRAM
EXCHANGE PRIVILEGE. As described more fully in the Class A and Class B
Prospectus, the Fund permits exchanges of shares of any class of the Fund for
shares of the same class in any other John Hancock fund offering that class.
SYSTEMATIC WITHDRAWAL PLAN. As described briefly in the Class A and Class B
Prospectus, the Fund permits the establishment of a Systematic Withdrawal Plan.
Payments under this plan represent proceeds arising from the redemption of Fund
shares. Since the redemption price of Fund shares may be more or less than the
shareholder's cost, depending upon the market value of the securities owned by
the Fund at the time of redemption, the distribution of cash pursuant to this
plan may result in realization of gain or loss for purposes of Federal, state
and local income taxes. The maintenance of a Systematic Withdrawal Plan
concurrently with purchases of additional Class A or Class B Shares of the Fund
could be disadvantageous to a shareholder because of the initial sales charge
payable on such purchases of Class A Shares and the CDSC imposed on redemptions
of Class B Shares and because redemptions are taxable events. Therefore, a
shareholder should not purchase Fund shares at the same time as a Systematic
Withdrawal Plan is in effect. The Fund reserves the right to modify or
discontinue the Systematic Withdrawal Plan of any shareholder on 30 days' prior
written notice to such shareholder, or to discontinue the availability of such
plan in the future. The shareholder may terminate the plan at any time by giving
proper notice to Fund Services.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM ("MAAP"). This program is explained
fully in the Fund's Class A and Class B Prospectus and the Account Privileges
Application. The program, as it relates to automatic investment checks, is
subject to the following conditions;
The investments will be drawn on or about the day of the month indicated.
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<PAGE> 56
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non-payment of any check.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the due date of any investment.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Fund shares may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
the Fund or another John Hancock mutual fund, subject to the minimum investment
limit in that fund. The proceeds from the redemption of Class A Shares may be
reinvested at net asset value without paying a sales charge in Class A Shares of
the Fund or in Class A Shares of another John Hancock mutual fund. If a CDSC was
paid upon a redemption, a shareholder may reinvest the proceeds from that
redemption at net asset value in additional shares of the class from which the
redemption was made. The shareholder's account will be credited with the amount
of any CDSC charged upon the prior redemption and the new shares will continue
to be subject to the CDSC. The holding period of the shares acquired through
reinvestment will, for purposes of computing the CDSC payable upon a subsequent
redemption, include the holding period of the redeemed shares. The Fund may
modify or terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes. Even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "Tax
Status."
DESCRIPTION OF THE FUND'S SHARES
SHARES OF THE FUND. Ownership of the Fund is represented by transferable
shares of beneficial interest. The Declaration of Trust permits the Trustees to
create an unlimited number of series and classes of shares of the Fund and, with
respect to each series and class, to issue an unlimited number of full or
fractional shares and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
of the Fund.
Each share of each series or class of the Fund represents an equal
proportionate interest with each other in that series or class, none having
priority or preference over other shares of the same series or class. The
interest of investors in the various series or classes of the Fund is separate
and distinct. All consideration received for the sales of shares of a particular
series or class of the Fund, all assets in which such consideration is invested
and all income, earnings and profits derived from such investments will be
allocated to and belong to that series or class. As such, each such share is
entitled to dividends and distributions out of the net income belonging to that
series or class as declared by the Board of Trustees. Shares of the Fund have a
par value of $0.01 per share. The assets of each series are segregated on the
Fund's books and are charged with the liabilities of that series and with a
share of the Fund's general liabilities. The Board of Trustees determines those
assets and liabilities deemed to be general assets or liabilities of the Fund,
and these items are allocated among each series in proportion to the relative
total net assets of each series. In the unlikely event that the liabilities
allocable to a series exceed the assets of that series, all or a portion of such
liabilities may have to be borne by the other series.
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Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional classes within any
series (which would be used to distinguish among the rights of different
categories of shareholders, as might be required by future regulations or other
unforeseen circumstances). As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Fund designated as Class A and Class B. Class A and Class B Shares of the
Fund represent an equal proportionate interest in the aggregate net asset values
attributable to that class of the Fund. Holders of Class A Shares and Class B
Shares each have certain exclusive voting rights on matters relating to the
Class A Plan and the Class B Plan, respectively. The different classes of the
Fund may bear different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares
will be calculated in the same manner, at the same time and on the same day and
will be in the same amount, except for differences caused by the fact that (i)
Class B Shares will pay higher distribution and service fees than Class A Shares
and (ii) each of Class A Shares and Class B Shares will bear any class expenses
properly allocable to such class of shares, subject to the conditions set forth
in a private letter ruling that the Fund has received from the Internal Revenue
Service relating to its multiple- class structure. Similarly, the net asset
value per share may vary depending whether Class A Shares or Class B Shares are
purchased.
VOTING RIGHTS. Shareholders are entitled to a full vote for each full share
held. The Trustees themselves have the power to alter the number and the terms
of office of Trustees, and they may at any time lengthen their own terms or make
their terms of unlimited duration (subject to certain removal procedures) and
appoint their own successors, provided that at all times at least a majority of
the Trustees have been elected by shareholders. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees. Although
the Fund need not hold annual meetings of shareholders, the trustees may call
special meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust. Also, a shareholder's
meeting must be called if so requested in writing by the holders of record of
10% or more of the outstanding shares of the Fund. In addition, the Trustees may
be removed by the action of the holders of record of two-thirds or more of the
outstanding shares.
SHAREHOLDER LIABILITY. The Declaration of Trust provides that no Trustee,
officer, employee or agent of the Fund is liable to the Fund or to a
shareholder, nor is any Trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the Fund, except as such liability may
arise from his or its own bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties. It also provides that all third persons shall
look solely to the Fund's property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.
As a Massachusetts business trust, the Fund is not required to issue share
certificates. The Fund shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders.
REPORTS TO SHAREHOLDERS. Shareholders of the Fund will receive annual and
semi-annual reports showing diversification of investments, securities owned and
other information regarding
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the Fund's activities. The financial statements of the Fund are audited at least
once a year by the Fund's independent auditors.
REGISTRATION STATEMENT. This Statement of Additional Information and the
Prospectus do not contain all of the information set forth in the Fund's
Registration Statement filed with the Securities and Exchange Commission. The
complete Registration Statement may be obtained from the Securities and Exchange
Commission upon payment of the fee prescribed by the rules and regulations of
the Commission.
TAX STATUS
The Fund has qualified and elected to be treated as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), and intends to continue to so qualify in the future. As such and
by complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on taxable income
(including net short-term and long-term capital gains from the disposition of
portfolio securities or the right to when-issued securities prior to issuance,
or from the lapse, exercise, delivery under or closing out of options or futures
contracts, income from repurchase agreements and other taxable securities,
income attributable to accrued market discount, income from securities lending,
and a portion of the discount from certain stripped tax-exempt obligations or
their coupons) which is distributed to shareholders at least annually in
accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in Fund shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
The Fund's distributions of tax-exempt interest ("exempt-interest
dividends") timely designated as such will be treated as tax-exempt interest
under the Code, provided that the Fund qualifies as a regulated investment
company and at least 50% of the value of its assets at the end of each quarter
of its taxable year is invested in tax-exempt obligations. Shareholders are
required to report their receipt of tax-exempt interest, including such
distributions, on their Federal income tax returns. The portion of the Fund's
distributions designated as exempt-interest dividends may differ from the actual
percentage that its tax-exempt income comprised of its total income during the
period of any particular shareholder's investment. The Fund will report to
shareholders the amount designated as exempt-interest dividends for each year.
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Interest income from certain types of tax-exempt bonds that are private
activity bonds in which the Fund may invest is treated as an item of tax
preference for purposes of the Federal alternative minimum tax. To the extent
that the Fund invests in these types of tax-exempt bonds, shareholders will be
required to treat as an item of tax preference for Federal alternative minimum
purposes that part of the Fund's exempt-interest dividends which is derived from
interest on these tax-exempt bonds. Exempt-interest dividends derived from
interest income from all tax-exempt bonds may be included in corporate "adjusted
current earnings" for purposes of computing the alternative minimum tax
liability, if any, of corporate shareholders of the Fund.
The amount of the Fund's net short-term and long-term capital gains, if any,
in any given year will vary depending upon the Adviser's current investment
strategy and whether the Adviser believes it to be in the best interest of the
Fund to dispose of portfolio securities or enter into options or futures
transactions that will generate capital gains. At the time of an investor's
purchase of Fund shares, a portion of the purchase price is often attributable
to realized or unrealized appreciation in the Fund's portfolio or, less
frequently, to undistributed taxable income of the Fund. Consequently,
subsequent distributions from such appreciation or income may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon his basis in his shares. Such gain or loss will be treated as capital gain
or loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon the shareholder's tax holding period for
the shares. A sales charge paid in purchasing Class A shares of the Fund cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
shares of the Fund or another John Hancock Fund are subsequently acquired
without payment of a sales charge pursuant to the reinvestment or exchange
privilege. Such disregarded load will result in an increase in the shareholder's
tax basis in the shares subsequently acquired. Also, any loss realized on a
redemption or exchange will be disallowed to the extent the shares disposed of
are replaced with identical or substantially identical securities within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to an election to reinvest dividends in
additional shares. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be disallowed to
the extent of all exempt-interest dividends paid with respect to such shares
and, if not thus disallowed, will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gain with
respect to such shares.
Although its present intention is to distribute all net short-term and
long-term capital gains, if any, the Fund reserves the right to retain and
reinvest all or any portion of its "net capital gain," which is the excess, as
computed for Federal income tax purposes, of net long-term capital gain over net
short-term capital loss in any year. The Fund will not in any event distribute
net capital gain realized in any year to the extent that a capital loss is
carried forward from prior years against such gain. To the extent such excess
was retained and not exhausted by the carry forward of prior years' capital
losses, it would be subject to Federal income tax in the hands of the Fund. Each
shareholder would be treated for Federal income tax purposes as if the Fund had
distributed to him on the last day of its taxable year his pro rata share of
such excess, and he had paid his pro rata share of the taxes paid by the Fund
and reinvested the remainder in the Fund. Accordingly, each shareholder would
(a) include his pro rata share of such excess as long-term capital gain income
in his return for his taxable year in which the last day of the Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by the
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Fund, and (c) be entitled to increase the adjusted tax basis for his shares in
the Fund by the difference between his pro rata share of such excess and his pro
rata share of such taxes.
For Federal income tax purposes, the Fund is generally permitted to carry
forward a net capital loss in any year to offset its net capital gains, if any,
during the eight years following the year of the loss. To the extent subsequent
net capital gains are offset by such losses, they would not result in Federal
income tax liability to the Fund and, as noted above, would not be distributed
as such to shareholders. The Fund has $7,349,795 of capital loss carry forwards,
which expire in 2002, available to offset future net capital gains.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for Federal income tax purposes to the
extent it is deemed related to exempt-interest dividends paid by the Fund.
Pursuant to published guidelines, the Internal Revenue Service may deem
indebtedness to have been incurred for the purpose of purchasing or carrying
shares of the Fund even though the borrowed funds may not be directly traceable
to the purchase of shares.
Dividends paid by the Fund to its corporate shareholders will not qualify
for the corporate dividends received deduction in their hands.
If the Fund invests in zero coupon securities or, in general, any other
securities with original issue discount (or with market discount if the Fund
elects to include accrued market discount in income currently), the Fund must
accrue income on such investments prior to the receipt of the corresponding cash
payments. However, the Fund must distribute, at least annually, all or
substantially all of its net income, including such accrued income, to
shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, the Fund may have to dispose
of its portfolio securities under disadvantageous circumstances to generate
cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting portfolio positions may be deferred rather
than being taken into account currently in calculating the Fund's gains. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. Certain of the applicable tax rules may be
modified if the Fund is eligible and chooses to make one or more of certain tax
elections that may be available. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options and
futures contracts in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax
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consequences of ownership of shares of, and receipt of distributions from, the
Fund in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non- U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Investment Adviser pursuant
to recommendations made by its investment committee, which consists of officers
and directors of the Investment Adviser and affiliates and officers and Trustees
who are interested persons of the Fund. Orders for purchases and sales of
securities are placed in a manner which, in the opinion of the Investment
Adviser, will offer the best price and market for the execution of each such
transaction. Purchases from underwriters of portfolio securities may include a
commission or commissions paid by the issuer and transactions with dealers
serving as market makers reflect a "spread." Investments in debt securities are
generally traded on a net basis through dealers acting for their own account as
principals and not as brokers; no brokerage commissions are payable on such
transactions.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the NASD and other policies that the Trustees may
determine, the Investment Adviser may consider sales of shares of the Fund as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
To the extent consistent with the foregoing, the Fund will be governed in
the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Investment
Adviser of the Fund, and their value and expected contribution to the
performance of the Fund. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Investment Adviser. The
receipt of research information is not expected to reduce significantly the
expenses of the Investment Adviser. The research information and statistical
assistance furnished by brokers and dealers may benefit the Life Company or
other advisory clients of the Investment Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Investment Adviser
may result in research information and statistical assistance beneficial to the
Fund. The Fund will make no commitments to allocate portfolio transactions upon
any prescribed basis. While the Fund's officers will be primarily responsible
for the allocation of the Fund's brokerage business, their
-30-
<PAGE> 62
policies and practices in this regard must be consistent with the foregoing and
will at all times be subject to review by the Trustees. For the fiscal years
ended December 31, 1994, 1993 and 1992, no negotiated brokerage commissions were
paid on portfolio transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Fund may pay to a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. During the fiscal year ended December 31, 1994, 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 Investment Adviser's indirect parent, the Life Company, is the indirect
sole shareholder of John Hancock Freedom Securities Corporation and its
subsidiaries, three of which, Tucker Anthony Incorporated ("Tucker Anthony")
John Hancock Distributors, Inc. ("John Hancock Distributors") and Sutro &
Company, Inc. ("Sutro"), are broker-dealers ("Affiliated Brokers"). Pursuant to
procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through Tucker Anthony, Sutro or John Hancock Distributors. During the year
ended December 31, 1994, the Fund did not execute any portfolio transactions
with then affiliated brokers.
Any of the Affiliated Brokers may act as broker for the Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the 1940 Act.
Commissions paid to an Affiliated Broker must be at least as favorable as those
which the Trustees believe to be contemporaneously charged by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold. A transaction would not be placed with an Affiliated Broker
if the Fund would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions for its
other most favored, but unaffiliated, customers, except for accounts for which
the Affiliated Broker acts as a clearing broker for another brokerage firm, and
any customers of the Affiliated Broker not comparable to the Fund as determined
by a majority of the Trustees who are not interested persons (as defined in the
1940 Act) of the Fund, the Investment Adviser or the Affiliated Brokers. Because
the Investment Adviser, which is affiliated with the Affiliated Brokers, has, as
an investment adviser to the Fund, the obligation to provide investment
management services, which includes elements of research and related investment
skills, such research and related skills will not be used by the Affiliated
Brokers as a basis for negotiating commissions at a rate higher than that
determined in accordance with the above criteria. The Fund will not effect
principal transactions with Affiliated Brokers.
The Fund's portfolio turnover rates for the fiscal years ended December 31,
1993 and 1994 were 116% and 107%, respectively.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205-9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Investor Services
a monthly transfer agent fee of $19 per account for the Class A Shares and
$22.50 per account for the Class B Shares, plus out-of-pocket expenses.
-31-
<PAGE> 63
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has
been selected as the independent auditors of the Fund. The financial statements
of the Fund included in the Prospectus and this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods indicated in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
CUSTODY OF PORTFOLIO
Investor Bank and Trust ("IBT") 24 Federal Street, Boston, Massachusetts,
serves as custodian of the cash and investment securities of the Fund. IBT is
also responsible for, among other things, receipt and delivery of the Fund's
investment securities in accordance with procedures and conditions specified in
the custody agreement.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1994, the annualized yields of the
Fund's Class A Shares and Class B Shares were 6.13% and 5.68%, respectively.
As of December 31, 1994, the average annual total returns of the Class A
Shares of the Fund for the one year period and since inception on January 1,
1990 were -13.61% and 6.11%, respectively (-13.71% and 5.74%, respectively,
without taking into account the expense limitation arrangements). As of December
31, 1994, the average annual returns for the Fund's Class B Shares for the one
year period and since inception on December 31, 1991 were -15.05% and 3.31%,
respectively (-15.05% and 3.11%, respectively, without taking into account the
expense limitation arrangements).
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
Yield = 2 [ (a-b + 1 )6 -1]
---
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the period
that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the period (NAV
where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by dividing
that portion of the yield of the Fund which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield of
the Fund that is not tax-exempt. The tax equivalent yields for the Fund's Class
A and Class B Shares at the maximum 36% tax rate for the 30-day period ended
December 31, 1994 were 9.70% and 9.40%, respectively.
-32-
<PAGE> 64
The Fund's total return is computed by finding the average annual compounded
rate of return over the 1-year, 5-year, and 10-year periods that would equate
the initial amount invested to the ending redeemable value according to the
following formula:
P(1 + T)n = ERV
Where:
P= a hypothetical initial investment of $1,000.
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 investment made at the
beginning of the 1-year and life-of-fund periods.
In the case of Class A Shares or Class B Shares, this calculation assumes
the maximum sales charge is included in the initial investment or the CDSC is
applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period.
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's maximum sales
charge on Class A Shares or the CDSC on Class B Shares into account. Excluding
the Fund's sales charge on Class A Shares and the CDSC on Class B Shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on approximately 1,700 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 a the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also be
utilized. The Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta is a reflection of the market-related risk of the Fund by
showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
-33-
<PAGE> 65
ADDITIONAL PERFORMANCE INFORMATION. The Fund may use comparative performance
information from certain industry research materials and/or published in various
periodicals. The characteristics of the investments in such comparisons may be
different from those investments of the Fund's portfolio. In addition, the
formula used to calculate the performance statistics of such investments may not
be identical to the formula used by the Fund to calculate its performance
figures. From time to time, advertisements or information for the Fund may
include a discussion of certain attributes or benefits to be derived by an
investment in the Fund. Such advertisements or information may include symbols,
headlines or other material which highlight or summarize the information
discussed in more detail in the communication.
The following publications, indexes, averages and investments which may be
used in advertisements or information concerning the Fund for dissemination to
investors or shareholders, include, but are not limited, to:
a) Dow Jones Composite Average or its component averages - an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks (Dow Jones Utilities
Average), and 20 transportation company stocks. Comparisons of performance
assume reinvestment of dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks
listed on the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities of which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income
Analysis, and Lipper Mutual Fund indices - measure total return and average
current yield for the mutual fund industry. Ranks individual mutual fund
performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
g) Mutual Fund Source Book and other similar rating publications by
Morningstar, Inc. - independent performance monitor of equity and fixed
income mutual funds. Morningstar ratings (ranging from one star for lowest
and five stars for highest) are based on analysis of a fund's ratio, i.e.,
price yield, risk (volatility) and total return, including all loads and
fees, compared with similar funds for three-, five- and ten-year periods.
h) Financial publications: Barrons, Business Week, Personal Finance,
Financial World, Forbes, Fortune, "The Wall Street Journal", "New York
Times", Weisenberger Investment Companies Service, Institutional Investor,
and Money - rate fund performance over specified time periods and provide
other relative performance or industry information.
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<PAGE> 66
i) Consumer Price Index (or Cost of Living Index), published by the U. S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasure bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U. S.
Savings & Loan League Fact Book.
l) Salomon Brothers Broad Bond Index or its component indices - The Broad
Index measures yield, price and total return for Treasury, Agency,
Corporate, and Mortgage bonds.
m) Salomon Brothers Composite High Yield Index or its component indices -
The High Yield Index measures yield, price and total return for Long-Term
High-Yield Index, Intermediate-Term High-Yield index and Long-Term Utility
High-Yield Index.
n) Shearson Lehman Brothers Aggregate Bond index or its component indices
(including Municipal Bond Index) - The Aggregate Bond Index measures yield,
price and total return for Treasury, Agency, Corporate, Mortgage, and Yankee
bonds.
o) Standard & Poor's Bond Indices - measure yield and price of Corporate,
Municipal, and government bonds.
p) Other taxable investments, including certificates of deposit (CDs), money
market deposit accounts (MMDAs), checking accounts, savings accounts, money
market mutual funds, and repurchase agreements.
q) Historical data supplied by the research departments of Shearson Lehman
Hutton, First Boston Corporation, Morgan Stanley, Salomon Brothers, Merrill
Lynch, and Donaldson Lufkin and Jenrette.
r) Donoghues's Money Fund Report - industry averages for 7-day annualized
and compounded yields of taxable, tax-free and government money funds.
s) Russell 2000 (small capitalization stock index), Bond Buyer 25 Revenue
Bond Index and other indices as may from time to time become available.
t) The Value Line Mutual Fund Survey, published by Value Line, assigns
rankings of 1 (best) to 5 (worst) in terms of risk adjusted performance
covering more than 2,000 equity and fixed income mutual funds.
From time to time, in reports and promotional literature, the Fund's
performance will be compared to other mutual funds and investment vehicles such
as F.C. Towers.
In addition, advertisements and sales materials may from time to time,
contain hypothetical performance examples for purposes of illustrating
reinvestment (or "compounding") of dividends at fixed rates of return or tax
advantages to be derived from deferring payment of federal (and state) income
taxes (at maximum rates) as compared to taxable investments assuming fixed rates
of return. Illustrations may also include (1) hypothetical investments in
various
-35-
<PAGE> 67
retirement plans, such as IRAs, made by investors of various ages or (2)
comparisons to retirement plans funded by annuity or bank products.
In assessing such comparisons, an investor should consider the following
factors:
a) It is generally either not possible or not practicable to invest in an
average or index of certain investments.
b) Certificates of deposit issued by banks and other depository institutions
represent an alternative income producing product. Certificates of deposit
may offer fixed or variable interest rates and principal is guaranteed and
may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository
institutions are subject to change at any time specified by the issuing
institution.
The Fund may from time to time advertise its comparative performance as
measured or refer to results published by various periodicals including, but not
limited to, Lipper Analytical Services, Inc. Barron's, "The Wall Street
Journal", "New York Times", Weisenberger Investment Companies Service,
Donoghue's Money Fund Report, Stanger's Investment Advisor, Financial Planning,
Money, Fortune, Personal Finance, Muni Week, Institutional Investor, Business
Week, Financial World and Forbes. In addition, the Fund may from time to time
advertise its performance relative to certain indexes and benchmark investments,
including: (a) the Shearson Lehman Municipal Bond Index, (b) Bond Buyer 25
Review Bond Index, (c) the Consumer Price Index, and (d) taxable investments
such as certificates of deposit, money market deposit accounts, checking
accounts, savings accounts, money market mutual funds.
The composition of the investments in such indexes and the characteristics
of such benchmark investments are not identical to, and in some cases are very
different from, those of the Fund's portfolio. These indexes and averages are
generally unmanaged and the items included in the calculations of such indexes
and averages may not be identical to the formulas used by the Fund to calculate
its performance figures.
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<PAGE> 68
APPENDIX A
CORPORATE AND TAX-EXEMPT BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S)
ASS, AA, A AND BAA - Tax-exempt bonds rated Aaa are judged to be of the
"best quality." The rating of Aa is assigned to bonds that are of "high quality
by all standards," but long-term risks appear somewhat larger than Aaa rated
bonds. The Aaa and Aa rated bonds are generally known as "high grade bonds." The
foregoing ratings for tax-exempt bonds are rated conditionally. Bonds for which
the security depends upon the completion of some act or upon the fulfillment of
some condition are rated conditionally. These are bonds secured by (a) earnings
of projects under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals that begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Such parenthetical
ratings denotes the probable credit stature upon completion of construction or
elimination of the basis of the condition. Bonds rated A are considered as upper
medium grade obligations. Principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. Bonds rated Baa are considered a medium grade obligations; i.e.,
they are neither highly protected or 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.
STANDARD & POOR'S CORPORATION ("S&P")
AAA, AA, A AND BBB - Bonds rated AAA bear the highest rating assigned to
debt obligations and indicates an extremely strong capacity to pay principal and
interest. Bonds rated AA are considered "high grade," are only slightly less
marked than those of AAA ratings and have the second strongest capacity for
payment of debt service. Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat susceptible to the adverse effects or
changes in circumstances and economic conditions. The foregoing ratings are
sometimes followed by a "p" indicating that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the bonds being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. Although a provisional rating addresses credit quality subsequent of
completion of the project, it makes no comment on the likelihood of, or the risk
of default upon failure of, such completion. Bonds rated BBB are regarded as
having an adequate capacity to repay principal and pay interest. Whereas they
normally exhibit protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to repay principal
and pay interest for bonds in this category than for bonds in the A category.
FITCH INVESTORS SERVICE ("FITCH")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and
of the highest quality. The obligor has an extraordinary ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue. Bonds rated A are considered to be
investment grade and of
A-1
<PAGE> 69
good quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated BBB are considered to be investment grade and of satisfactory 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 weaken this ability than bonds with higher ratings.
TAX-EXEMPT NOTE RATINGS
MOODY'S - MIG-1 AND MIG-2. Notes rated MIG-1 are judged to be of the best
quality, enjoying strong protection from established cash flow or funds for
their services or from established and broad-based access to the market for
refinancing or both. Notes rated MIG-2 are judged to be of high quality with
ample margins of protection, though not as large as MIG-1.
S&P - SP-1 AND SP-2. SP-1 denotes a very strong or strong capacity to pay
principal and interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+). SP-2 denotes a
satisfactory capacity to pay principal interest.
FITCH - FIN-1 AND FIN-2. Notes assigned FIN-1 are regarded as having the
strongest degree of assurance for timely payment. A plus symbol may be used to
indicate relative standing. Notes assigned FIN-2 reflect a degree of assurance
for timely payment only slightly less in degree than the highest category.
CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
MOODY'S - Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Prime-1, indicates highest quality repayment capacity of
rated issue and Prime-2 indicates higher quality.
S&P - Commercial Paper ratings are a current assessment of the likelihood of
timely payment of debts having an original maturity of no more than 365 days.
Issues rated A have the greatest capacity for a timely payment and the
designation 1, 2 and 3 indicates the relative degree of safety. Issues rated
"A-1+" are those with an "overwhelming degree of credit protection."
FITCH - Commercial Paper ratings reflect current appraisal of the degree of
assurance of timely payment. F-1 issues are regarded as having the strongest
degree of assurance for timely payment. (+) is used to designate the relative
position of an issuer within the rating category. F-2 issues reflect an
assurance of timely payment only slightly less in degree than the strongest
issues. The symbol (LOC) may follow either category and indicates that a letter
of credit issued by a commercial bank is attached to the commercial paper note.
OTHER CONSIDERATIONS - The ratings of S&P, Moody's, and Fitch represent
their respective opinions of the quality of the municipal securities they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, municipal securities
with the same maturity, coupon and ratings may have different yields and
municipal securities of the same maturity and coupon with different ratings may
have the same yield.
A-2
<PAGE> 70
SCHEDULE OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
Face
Issuer Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL
OBLIGATIONS-96.51%
ALABAMA-0.50%
Moundville Industrial
Development Board
Revenue Refunding Bonds
6.750% due 12/01/11 . . . . . . . . . . . . $ 1,000,000 $ 920,000
ARIZONA-1.18%
Arizona Health Facilities
Authority Hospital
System Revenue
Refunding Bonds
8.200% due 06/01/21 . . . . . . . . . . . 2,150,000 2,179,563
CALIFORNIA-6.99%
California Statewide
Community Development
Corp. Revenue
Certificates of
Participation
6.500% due 08/01/22 . . . . . . . . . . . 2,750,000 2,440,625
Duarte City of Hope
Medical Center
Certificates of
Participation
6.250% due 04/01/23 . . . . . . . . . . . 4,060,000 3,379,950
Fontana Special Tax
Community Facilities
District Bonds
8.400% due 04/01/15 . . . . . . . . . . . 500,000 411,875
Saddleback Valley Unified
School District
Community Facilities
District Bonds
7.750% due 09/01/16 . . . . . . . . . . . 2,000,000 1,952,500
San Bernardino County
Certificates of
Participation
5.500% due 08/01/17 . . . . . . . . . . . 5,000,000 3,875,000
Santa Cruz County Public
Financing Revenue Bonds
6.100% due 09/01/15 . . . . . . . . . . . 1,000,000 850,000
-------------------
12,909,950
COLORADO-2.53%
Denver City & County
Airport Revenue Bonds
Series A
7.250% due 11/15/25 . . . . . . . . . . . 2,000,000 1,815,000
7.500% due 11/15/23 . . . . . . . . . . . 3,100,000 2,855,875
-------------------
4,670,875
DISTRICT OF
COLUMBIA-0.54%
District of Columbia
National Public Radio
Revenue Bonds
7.700% due 01/01/23 . . . . . . . . . . . 1,000,000 1,006,250
FLORIDA-5.07%
Jacksonville Electric
Authority Revenue
Refunding Bonds
5.250% due 10/01/28 . . . . . . . . . . . . 9,000,000 7,323,750
Northern Palm Beach
County Water Control
District Bonds
6.625% due 11/01/13 . . . . . . . . . . . 1,470,000 1,354,237
6.750% due 11/01/07 . . . . . . . . . . . 725,000 687,844
-------------------
9,365,831
</TABLE>
B-1
<PAGE> 71
SCHEDULE OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Face
Issuer Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
GEORGIA-9.42%
Georgia Municipal Electric
Authority Power Revenue
Refunding Bonds
5.500% due 01/01/20 . . . . . . . . . . . 5,840,000 4,964,000
5.700% due 01/01/19 . . . . . . . . . . . 5,000,000 4,381,250
7.250% due 01/01/24 . . . . . . . . . . . 2,000,000 2,150,000
Monroe County
Development Authority
Pollution Control
Revenue Bonds
6.800% due 01/01/12 . . . . . . . . . . . 1,000,000 981,250
Savannah Hospital
Authority Revenue
Refunding Bonds
7.000% due 01/01/23 . . . . . . . . . . . 5,470,000 4,923,000
-------------------
17,399,500
ILLINOIS-14.86%
Chicago Skyway Toll Bridge
Revenue Refunding Bonds
6.750% due 01/01/17 . . . . . . . . . . . 2,000,000 1,857,500
Du Page County
General Obligation Bonds
5.600% due 01/01/21 . . . . . . . . . . . 10,000,000 8,575,000
Illinois Development
Finance Authority
Pollution Control
Revenue Refunding Bonds
5.850% due 01/15/14 . . . . . . . . . . . 3,000,000 2,512,500
Illinois Development
Finance Authority
Revenue Refunding Bonds
8.500% due 02/01/15 . . . . . . . . . . . 2,150,000 2,233,313
Illinois Educational
Facilities Authority
Revenue Bonds
6.125% due 12/01/18 . . . . . . . . . . . 3,065,000 2,620,575
6.875% due 12/01/17 . . . . . . . . . . . 1,300,000 1,213,875
Illinois Health Facilities
Authority Revenue
Refunding Bonds
6.000% with various
maturities to 09/01/19 . . . . . . . . . 3,800,000 3,237,250
6.125% due 08/15/20 . . . . . . . . . . . 4,565,000 3,657,706
6.750% due 12/01/08 . . . . . . . . . . . 1,640,000 1,553,900
-------------------
27,461,619
IOWA-0.73%
Ottumwa Hospital Facility
Revenue Refunding and
Improvement Bonds
6.000% due 10/01/18 . . . . . . . . . . . 1,700,000 1,357,875
LOUISIANA-1.41%
LaFourche Parish Hospital
Service Revenue Bonds
6.000% due 10/01/23 . . . . . . . . . . . 1,000,000 775,000
West Feliciana Parish
Pollution Control
Revenue Bonds
7.000% due 11/01/15 . . . . . . . . . . . 2,000,000 1,840,000
-------------------
2,615,000
MAINE-1.71%
Skowhegan Pollution
Control Revenue
Refunding Bonds
5.900% due 11/01/13 3,710,000 3,158,137
MASSACHUSETTS-1.97%
Health & Educational
Facilities Authority
Revenue Bonds
6.625% due 04/01/12 4,000,000 3,640,000
</TABLE>
B-2
<PAGE> 72
SCHEDULE OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Face
Issuer Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
MICHIGAN-7.01%
Dickinson County
Economic Development
Corp. Pollution Control
Revenue Bonds
5.850% due 10/01/18 . . . . . . . . . . . 3,000,000 2,497,500
Kalamazoo Hospital
Finance Authority
Hospital Facility Revenue
Refunding Bonds
6.375% due 05/15/17 . . . . . . . . . . . 2,000,000 1,837,500
Michigan State Hospital
Finance Authority
Revenue Refunding Bonds
6.500% due 08/15/18 . . . . . . . . . . . 3,500,000 3,163,125
8.250% due 07/01/12 . . . . . . . . . . . 2,250,000 2,337,188
Michigan State Housing
Development Authority
Rental Housing
Revenue Bonds
Zero coupon due
10/01/13 (A) . . . . . . . . . . . . . . 5,100,000 3,111,000
-------------------
12,946,313
MISSISSIPPI-2.55%
Washington County
Pollution Control
Revenue Refunding Bonds
7.000% due 04/01/22 . . . . . . . . . . . 5,000,000 4,712,500
NEVADA-4.54%
Clark County Industrial
Development
Revenue Bonds
6.500% due 12/01/33 . . . . . . . . . . . 10,000,000 8,387,500
HAMPSHIRE HAMPSHIRE-0.60%
New Hampshire Higher
Educational & Health
Facilities Authority
Revenue Refunding Bonds
5.375% due 01/01/15 . . . . . . . . . . . 1,300,000 1,105,000
NEW JERSEY-2.40%
New Jersey Turnpike
Authority Revenue
Refunding Bonds
6.500% due 01/01/16 . . . . . . . . . . . 4,500,000 4,438,125
NEW YORK-1.02%
New York State
Local Government
Assistance Corp. General
Obligation Bonds
6.250% due 04/01/18 . . . . . . . . . . . 2,000,000 1,882,500
NORTH CAROLINA-0.93%
North Carolina Eastern
Municipal Power Agency
Power System Revenue
Refunding Bonds
6.000% due 01/01/22 . . . . . . . . . . . 2,000,000 1,720,000
OHIO-3.04%
Ohio State Air
Quality Development
Authority Revenue Bonds
6.250% due 12/01/20 . . . . . . . . . . . 4,500,000 3,976,875
Student Loan Funding Corp.
of Cincinnati
Revenue Bonds
8.875% due 08/01/08 . . . . . . . . . . . 1,620,000 1,632,150
-------------------
5,609,025
</TABLE>
B-3
<PAGE> 73
SCHEDULE OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Face
Issuer Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
PENNSYLVANIA-10.09%
Allegheny County
Industrial Development
Authority Revenue
Refunding Bonds
6.700% due 12/01/20 . . . . . . . . . . . . . . 5,000,000 4,556,250
Cumberland County
Municipal Authority
First Mortgage
Revenue Bonds
6.800% due 11/15/14 . . . . . . . . . . . . . . 3,000,000 2,636,250
Montgomery County
Redevelopment Authority
Multi-Family Housing
Revenue Bonds
6.375% due 07/01/12 . . . . . . . . . . . . . . 2,000,000 1,782,500
Philadelphia Hospitals &
Higher Education
Facilities Authority
Revenue Bonds
7.000% due 08/15/12 . . . . . . . . . . . . . . 1,250,000 1,162,500
8.625% due 07/01/21 . . . . . . . . . . . . . . 2,700,000 2,598,750
Philadelphia Water & Sewer
Revenue Bonds Series 16
7.500% due 08/01/10 . . . . . . . . . . . . . . 3,000,000 3,120,000
Scranton-Lackawanna
Health & Welfare
Authority Revenue Bonds
7.600% due 07/15/20 . . . . . . . . . . . . . . 3,000,000 2,786,250
-------------------
18,642,500
SOUTH CAROLINA-0.36%
Lee County Industrial
Revenue Bonds
7.000% due 09/15/13 . . . . . . . . . . . . . . 750,000 671,250
TEXAS-11.71%
Dallas-Fort Worth
international Airport
Facility Improvement
Corp. Revenue Bonds
7.250% due 11/01/30 . . . . . . . . . . . . . 10,250,000 9,378,750
Ector County Hospital
District Revenue Bonds
7.300% due 04/15/12 . . . . . . . . . . . . . 4,000,000 3,945,000
El Paso International
Airport Revenue
Refunding Bonds
7.750% due 03/01/12 . . . . . . . . . . . . . 1,410,000 1,357,125
Harris County Industrial
Development Corp.
Revenue Refunding Bonds
6.625% due 02/01/24 . . . . . . . . . . . . . 1,000,000 920,000
Sam Rayburn Municipal
Power Agency Power
Supply System Revenue
Refunding Bonds
6.250% due 10/01/17 . . . . . . . . . . . . . 7,100,000 6,043,875
-------------------
21,644,750
UTAH-1.01%
Carbon County Solid Waste
Disposal Revenue
Refunding Bonds
9.000% due 07/01/12 . . . . . . . . . . . . . 1,000,000 1,023,750
Davis County Solid Waste
Management & Energy
Recovery Revenue
Refunding Bonds
6.125% due 06/15/09 . . . . . . . . . . . . . 1,000,000 838,750
-------------------
1,862,500
</TABLE>
B-4
<PAGE> 74
SCHEDULE OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Face
Issuer Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
VIRGINIA-2.38%
Pittsylvania County
Industrial Development
Authority Revenue Bonds
7.550% due 01/01/19 4,500,000 4,393,125
WASHINGTON-0.88%
Washington State Public
Power Supply System
Nuclear Project #3
Revenue Refunding Bonds
5.500% due 07/01/18 2,000,000 1,625,000
WISCONSIN-1.08%
Wisconsin Health &
Educational Facilities
Authority Revenue
Refunding Bonds
7.000% due 02/15/22 . . . . . . . . . . . 2,115,000 2,003,962
-------------------
TOTAL LONG-TERM
MUNICIPAL OBLIGATIONS
(Cost $194,770,622) . . . . . . . . . . . . 178,328,650
-------------------
TOTAL INVESTMENTS-96.51%
(Cost $194,770,622) . . . . . . . . . . . . 178,328,650
CASH AND OTHER ASSETS,
LESS LIABILITIES-3.49% . . . . . . . . . . 6,452,992
-------------------
NET ASSETS, at value,
equivalent to $9.39
per share for 12,203,457
Class A Shares ($.01
par value) outstanding
and $9.38 per share
for 7,485,326 Class B
Shares ($.01 par value)
outstanding-100.00% . . . . . . . . . . . 184,781,642
===================
</TABLE>
(A) LIBOR RANGE FLOATER.
See Notes to Financial Statements
B-5
<PAGE> 75
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (cost $194,770,622) . . . . . . . . . $178,328,650
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 241,707
Receivable for:
Investments sold . . . . . . . . . . . . . . . . . . . . $7,132,365
Interest . . . . . . . . . . . . . . . . . . . . . . . . 4,038,531
Shares sold . . . . . . . . . . . . . . . . . . . . . . . 52,268 11,223,164
----------
Other assets . . . . . . . . . . . . . . . . . . . . . . . 60,206
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . 189,853,727
LIABILITIES
Payable for:
Investments purchased . . . . . . . . . . . . . . . . . . 4,092,571
Dividends . . . . . . . . . . . . . . . . . . . . . . . . 387,780
Shares repurchased . . . . . . . . . . . . . . . . . . . 342,380 4,822,731
----------
Payable to Investment Adviser for:
Distribution expenses . . . . . . . . . . . . . . . . . . 117,109
Management fees . . . . . . . . . . . . . . . . . . . . . 74,327
Administrative service fees . . . . . . . . . . . . . . . 12,556 203,992
----------
Other liabilities . . . . . . . . . . . . . . . . . . . . . 45,362
------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . 5,072,085
------------
NET ASSETS, at value, equivalent to $9.39 per share for
12,203,457 Class A Shares ($.01 par value) outstanding
and $9.38 per share for 7,485,326 Class B Shares ($.01
par value) outstanding . . . . . . . . . . . . . . . . . $184,781,642
============
</TABLE>
See Notes to Financial Statements
B-6
<PAGE> 76
STATEMENT OF OPERATIONS / STATEMENTS OF CHANGES IN NET ASSETS
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,590,420
EXPENSES
Management fees . . . . . . . . . . . . . . . . . . . . . . $1,136,532
Distribution expenses
(see Note D) . . . . . . . . . . . . . . . . . . . . . . 859,051
Transfer agent fees . . . . . . . . . . . . . . . . . . . . 189,396
Administrative service fees . . . . . . . . . . . . . . . . 116,742
Custodian fees . . . . . . . . . . . . . . . . . . . . . . 67,118
Registration fees . . . . . . . . . . . . . . . . . . . . . 57,702
Audit and legal fees . . . . . . . . . . . . . . . . . . . 34,502
Trustees' fees and expenses . . . . . . . . . . . . . . . . 26,968
Shareholder reports . . . . . . . . . . . . . . . . . . . . 18,343
Organization costs . . . . . . . . . . . . . . . . . . . . 4,937
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 26,680
Less: Expense
reimbursement . . . . . . . . . . . . . . . . . . . . . . (232,531) 2,305,440
--------- ------------
NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . 11,284,980
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS
Net realized loss on
investments . . . . . . . . . . . . . . . . . . . . . . . (7,349,795)
Net change in unrealized
depreciation of
investments . . . . . . . . . . . . . . . . . . . . . . . (25,666,689)
------------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS . . . . . . . . . . . . . . . . . . . (33,016,484)
------------
DECREASE IN NET ASSETS
RESULTING FROM
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . $(21,731,504)
------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993
------------ ------------
<S> <C> <C>
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . $ 11,284,980 $ 8,664,655
Net realized gain (loss) on investments . . . . . . . . . . (7,349,795) 7,465,369
Net change in unrealized appreciation
(depreciation) of investments . . . . . . . . . . . . . . (25,666,689) 5,108,175
------------ ------------
Increase (decrease) in net assets
resulting from operations . . . . . . . . . . . . . . . . (21,731,504) 21,238,199
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income-
Class A . . . . . . . . . . . . . . . . . . . . . . . . . (7,588,474) (6,933,021)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . (3,611,510) (1,725,276)
Net realized gain on investments-
Class A . . . . . . . . . . . . . . . . . . . . . . . . . - (5,248,953)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . - (2,162,925)
------------ ------------
Total distributions to shareholders . . . . . . . . . . . . (11,199,984) (16,070,175)
SHARE TRANSACTIONS
Increase in shares outstanding . . . . . . . . . . . . . 24,808,198 69,942,033
------------ ------------
Increase (decrease) in net assets . . . . . . . . . . . . (8,123,290) 75,110,057
NET ASSETS
Beginning of year . . . . . . . . . . . . . . . . . . . . . 192,904,932 117,794,875
------------ ------------
End of year . . . . . . . . . . . . . . . . . . . . . . . . $184,781,642 $192,904,932
============ ============
Undistributed Net Investment Income . . . . . . . . . . . . $ 84,996 $ 0
============ ============
</TABLE>
See Notes to Financial Statements.
B-7
<PAGE> 77
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
John Hancock Tax-Free Bond Fund (the "Fund"), formerly Transamerica Tax-Free
Bond Fund, is a diversified, open-end management investment company registered
under the Investment Company Act of 1940, as amended. On December 16, 1994, the
shareholders of each of the mutual funds managed by Transamerica Fund
Management Company (TFMC) voted to approve new Investment Advisory contracts
with John Hancock Advisers, Inc. Each such approval was subject to the
acquisition of TFMC by The Berkeley Financial Group (known beginning January 1,
1995 as John Hancock Funds), the parent company of John Hancock Advisers, Inc.
The aquisition became effective on December 22, 1994. The Fund's name change
was also effective on this date.
The Fund offers two classes of shares to the public. Class A Shares
are subject to an initial sales charge of up to 4.75% and a 12b-1 distribution
plan. Class B Shares are subject to a contingent deferred sales charge and a
separate 12b-1 distribution plan. The following is a summary of significant
accounting policies consistently followed by the Fund.
(1) The Fund values its investments by using quotations provided by
market makers, estimates of market value, or values received from an
independent pricing service. Securities for which market quotations are not
readily available are valued at a fair value as determined in good faith by the
Fund's Board of Trustees. Short-term investments are valued at amortized cost
(original cost plus amortized discount or accrued interest).
(2) Security transactions are accounted for on the trade date.
Interest income is accrued daily. Debt premiums and original issue discounts
are amortized using the yield-to-maturity method. Discounts other than original
issue are not amortized. Realized gains and losses from security transactions
are determined on the basis of identified cost for both financial reporting and
federal income tax purposes.
(3) Income dividends are declared daily by the Fund and paid to
shareholders or reinvested at net asset value monthly. Other distributions are
recorded on the ex-dividend date and may be reinvested at net asset value.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
(4) No provision for federal income taxes has been made since it is
the Fund's intention to distribute all of its taxable income and profits to its
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code. At December 31, 1994, the Fund had a realized capital loss
carryforward of approximately $7,350,000, which will expire in 2002.
(5) The Fund reports custodian fees net of credits and charges
resulting from cash positions in the custodial accounts greater than or less
than the amounts required to settle portfolio transactions. For the year ended
December 31, 1994, these amounts were $11,511 and $21,380, respectively.
(6) On a daily basis, income, unrealized and realized gains and
losses, and expenses which are not class specific are allocated to each class
based on their respective relative net assets. Class specific expenses, such as
distribution expenses, are applied to the class to which they are attributed.
NOTE B-MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
From January 1, 1994 through December 21, 1994, TFMC acted as the Investment
Adviser to the Fund. On December 22, 1994, John Hancock Advisers, Inc., a
wholly-owned subsidiary of John Hancock Funds, became Investment Adviser
following the approval of the Fund's shareholders. Throughout these financial
statement notes, TFMC and John Hancock Advisers, Inc. are referred to
collectively as the "Investment Adviser", as each acted in this capacity during
the time periods noted above. The Investment Adviser has a sub-advisory
agreement with, and pays a fee to, Transamerica Investment Services, Inc. (the
"Sub-Adviser"). TFMC was, prior to December 22, 1994, and the Sub-Adviser is
presently a subsidiary of Transamerica Corporation.
The Fund's management fee is payable monthly and is calculated based
on the monthly average daily net assets of the Fund at an annual rate of 0.55%.
The Investment Adviser also provided administrative services to the
Fund pursuant to an administrative service agreement. During the year ended
December 31, 1994, the Fund paid or accrued $81,515 to the Investment Adviser
for these services.
The Investment Adviser voluntarily agreed to reimburse the Fund for
all normal operating expenses, excluding distribution expenses, in excess of
0.70%, on an annual basis, of the Fund's average daily net assets through
December 31, 1994. For the year ended December 31, 1994, the Investment Adviser
reimbursed the Fund $232,531 pursuant to this agreement.
During the year ended December 31, 1994, Transamerica Fund
Distributors, Inc., an affiliate of TFMC and
B-8
<PAGE> 78
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE B (Continued)
principal underwriter of the Fund through December 21, 1994, and John Hancock
Funds, Inc., an affiliate of John Hancock Advisers, Inc. and principal
underwriter since December 22, 1994, retained $47,967 as their portion of the
commissions charged on sales of Class A Shares of the Fund. Throughout these
financial statement notes, Transamerica Fund Distributors, Inc. and John
Hancock Funds, Inc. are referred to collectively as the "Distributor", as each
acted in this capacity during the time periods noted above.
The Fund paid no compensation directly to any officer. Certain
officers of the Fund are affiliated with the Investment Adviser.
During the year ended December 31, 1994, the Fund paid legal fees of
$6,000 to Baker & Botts. A partner with Baker & Botts was an officer of the
Fund until December 22, 1994.
NOTE C-COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the year ended December 31, 1994, purchases and sales of securities,
other than short-term obligations, aggregated $239,868,213 and $214,753,366,
respectively.
At December 31, 1994, the identified cost of investments owned was the
same for both financial reporting and federal income tax purposes. At December
31, 1994, the gross unrealized appreciation and gross unrealized depreciation
of investments for federal income tax purposes were $432,034 and $16,874,006,
respectively.
NOTE D-PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Fund is
authorized under separate distribution plans to finance activities related to
the distribution of its Class A and Class B Shares (the "Class A Plan" and the
"Class B Plan," respectively). The distribution plans, together with the
initial sales charge on Class A Shares and the contingent deferred sales charge
on Class B Shares, comply with the regulations covering maximum sales charges
assessed by mutual funds distributed through securities dealers that are NASD
members.
The Class A Plan and the Class B Plan permit each class to make
payments to the Distributor up to 0.15% annually of average daily net assets
for certain distribution costs such as service fees paid to dealers, production
and distribution of prospectuses to prospective investors, services provided to
new and existing shareholders and other distribution related activities. During
the year ended December 31, 1994, the Fund made payments to the Distributor of
$200,118 or 0.15% for Class A and $109,829 or 0.15% for Class B, related to the
above activities.
The Class B Plan also permits Class B to reimburse the Distributor up
to 0.75% annually of average daily net assets for costs related to compensation
paid to securities dealers, in place of an initial sales charge to investors,
on the sale of Class B Shares. These costs are based upon a commission payment
charge of 5% of the value of Class B Shares sold (excluding shares acquired
through reinvestment), reduced by the amount of contingent deferred sales
charges (CDSC) that have been received by the Distributor on redemptions of
Class B Shares. These costs also include a charge of interest (carrying charge)
at an annual rate of 1% over the prevailing prime rate to the extent cumulative
commission payment charges, plus any previous carrying charges, less CDSC
received by the Distributor, have not been paid in full by the Fund. For the
year ended December 31, 1994, Class B reimbursed the Distributor $549,104 or
0.75% for such costs. For the year ended December 31, 1994, the Distributor
received $209,200 in CDSC.
At December 31, 1994, Class A had $46,863 and Class B had $70,246
payable to the Distributor pursuant to the above distribution plans.
NOTE E-ORGANIZATION
The Fund was organized as a Massachusetts business trust on November 13, 1989.
The Fund had no transactions between that date and January 5, 1990, the date of
the Fund's initial offering of shares to the public, other than the sale at
$10.00 per share (net asset value) of 10,000 shares to TFMC.
The organization expenses of the Fund have been deferred and are being
amortized over a period during which it is expected that a benefit will be
realized, but not longer than five years from the date of commencement of
operations.
B-9
<PAGE> 79
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE F-SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1994 1993
----------------------- --------------------------
Shares Dollars Shares Dollars
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Shares sold-Class A . . . . . . . . . . . . . . . . . . . 2,973,332 31,232,536 4,470,385 49,282,506
Shares sold-Class B . . . . . . . . . . . . . . . . . . . 3,736,809 39,155,237 3,409,810 37,871,570
Shares issued in reinvestment of distributions-Class A . 430,837 4,303,072 676,087 7,438,972
Shares issued in reinvestment of distributions-Class B . 212,691 2,116,235 243,976 2,684,089
Shares redeemed-Class A . . . . . . . . . . . . . . . . . (3,655,146) (36,242,204) (2,199,859) (24,479,013)
Shares redeemed-Class B . . . . . . . . . . . . . . . . . (1,608,678) (15,756,678) (254,950) (2,856,091)
Net increase in shares outstanding . . . . . . . . . . . 2,089,845 24,808,198 6,345,449 69,942,033
The components of net assets at December 31, 1994, are as follows:
Capital paid-in (unlimited number of shares authorized) . . . . . . . . . . . . . . . . . . . . 208,427,624
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,996
Accumulated net realized loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . (7,289,006)
Net unrealized depreciation of investments . . . . . . . . . . . . . . . . . . . . . . . . . . (16,441,972)
------------
Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $184,781,642
============
</TABLE>
B-10
<PAGE> 80
(ERNST & YOUNG LLP LETTERHEAD)
Shareholders and Board of Trustees
of John Hancock Tax-Free Bond Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of John Hancock Tax-Free Bond Fund, formerly
Transamerica Tax-Free Bond Fund, as of December 31, 1994, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Funds
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of John
Hancock Tax-Free Bond Fund at December 31, 1994, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the financial highlights for each of the
indicated periods, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
February 3, 1995
B-11
