<PAGE> 1
[PRINTED ON JOHN HANCOCK LOGO LETTERHEAD]
Dear Fellow Shareholder:
As you may know, the John Hancock family of funds has expanded following the
addition last year of the former Transamerica Funds. This presents an
opportunity to combine the money management efforts serving your investment with
those of a similar mutual fund in the John Hancock Funds family. For this
reason, we are proposing a merger of your fund, John Hancock Tax-Exempt Income
Fund, into the John Hancock Tax-Free Bond Fund.
YOUR BOARD OF TRUSTEES has already unanimously approved this proposal and
BELIEVES THAT THIS MERGER IS APPROPRIATE, GIVEN THAT BOTH FUNDS PURSUE A SIMILAR
INVESTMENT OBJECTIVE.
We believe this merger will benefit you in several respects. Two major benefits
are:
1. Lower Fund Expenses. Your Trustees believe that combining these two Funds may
benefit shareholders by allowing for economies of scale in investment research,
operations and other important areas. By creating a larger combined Fund, the
merger may lead to a long-term reduction of expenses and, ultimately, lower
costs for you.
2. Increased Investment Diversification. By combining both Funds' assets into a
single portfolio, the Tax-Free Bond Fund will be able to achieve greater
diversification. Diversification is a proven technique for reducing investment
risk.
Your Vote is Important!
At a special meeting of shareholders to be held on May 2, 1996 at 9:00 a.m.
E.T., you will be asked to approve the merger of the John Hancock Tax-Exempt
Income Fund into the John Hancock Tax-Free Bond Fund.
Your vote counts, no matter how many shares you own. We urge you to exercise
your right as a shareholder and vote by completing, signing and returning the
enclosed proxy ballot form to us immediately. Your prompt response will help
avoid the necessity of additional mailings at your Fund's expense. For your
convenience, we have enclosed a postage-paid envelope.
If you have questions, please call your financial advisor or your John Hancock
Funds Customer Service Representative at 1-800-225-5291, Monday through Friday
between 8:00 a.m. and 8:00 p.m. Eastern time. Thank you for your prompt
attention to this important matter.
Sincerely,
/s/ Edward J. Boudreau, Jr.
Edward J. Boudreau, Jr.
Chairman and CEO
Enclosure
<PAGE> 2
JOHN HANCOCK TAX-EXEMPT INCOME FUND
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 2, 1996
Notice is hereby given that a Special Meeting of Shareholders (the "Meeting") of
John Hancock Tax-Exempt Income Fund ("Tax-Exempt Income Fund"), a Massachusetts
business trust, will be held at 101 Huntington Avenue, Boston, Massachusetts
02199 on Thursday, May 2, 1996 at 9:00 a.m., Boston time, and at any adjournment
of the Meeting, for the following purposes:
1. To approve an Agreement and Plan of Reorganization between Tax-Exempt
Income Fund and John Hancock Tax-Free Bond Fund ("Tax-Free Bond Fund")
providing for Tax-Free Bond Fund's acquisition of all of Tax-Exempt Income
Fund's assets in exchange solely for the assumption of Tax-Exempt Income
Fund's liabilities, and the issuance of Class A and Class B shares of
Tax-Free Bond Fund to Tax-Exempt Income Fund for distribution to its
shareholders.
2. To consider and act upon any other matters that may properly come before
the Meeting or any adjournment of the Meeting.
The Board of Trustees has fixed the close of business on March 6, 1996 as the
record date to determine the shareholders who are entitled to receive this
notice and to vote at the Meeting and any adjournment of the Meeting.
If you cannot attend the Meeting in person, please complete, date and sign the
enclosed proxy and return it to John Hancock Investor Services Corporation, 101
Huntington Avenue, Boston, Massachusetts 02199 in the enclosed envelope. It is
important that you exercise your right to vote. THE ENCLOSED PROXY IS BEING
SOLICITED BY THE BOARD OF TRUSTEES OF JOHN HANCOCK TAX-EXEMPT INCOME FUND.
By order of the Board of
Trustees,
THOMAS H. DROHAN Secretary
Boston, Massachusetts
March 18, 1996
230PX 3/96
<PAGE> 3
JOHN HANCOCK TAX-EXEMPT INCOME FUND
PROXY STATEMENT
------------------------
JOHN HANCOCK TAX-FREE BOND FUND
PROSPECTUS
------------------------
This Proxy Statement and Prospectus sets forth the information you should know
before voting on the proposed reorganization of John Hancock Tax-Exempt Income
Fund ("Tax-Exempt Income Fund") into John Hancock Tax-Free Bond Fund ("Tax-Free
Bond Fund"). Please read it carefully and retain it for future reference.
This Proxy Statement and Prospectus includes the Prospectus of Tax-Free Bond
Fund for Class A and Class B shares, dated May 1, 1995 as supplemented January
15, 1996 (EXHIBIT A attached). Information about Tax-Exempt Income Fund's shares
is incorporated by reference from the Tax-Exempt Income Fund Prospectus which is
available at no charge upon request to Tax-Exempt Income Fund at 1-800-225-5291.
A Statement of Additional Information, dated March 18, 1996, relating to this
Proxy Statement and Prospectus, and containing additional information about each
of Tax-Free Bond Fund and Tax-Exempt Income Fund, including historical financial
statements, is on file with the Securities and Exchange Commission ("SEC"). It
is available from Tax-Free Bond Fund upon telephone request and at no charge at
the toll-free number stated above. The Statement of Additional Information is
incorporated by reference into this Prospectus.
This Proxy Statement and Prospectus relates to Class A and Class B shares of
beneficial interest, par value of $0.01 per share (collectively, the "Tax-Free
Bond Fund Shares"), of Tax-Free Bond Fund which will be issued in exchange for
all of Tax-Exempt Income Fund's assets. In exchange for these assets, Tax-Free
Bond Fund will also assume all of the liabilities of Tax-Exempt Income Fund.
- ---------------------------
(continued on next page)
SHARES OF TAX-FREE BOND FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION, AND THE SHARES OF TAX-
FREE BOND FUND 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.
<PAGE> 4
(continued)
- ---------------------------
The Tax-Free Bond Fund Class A Shares issued to Tax-Exempt Income Fund for
distribution to Tax-Exempt Income Fund's Class A shareholders will have an
aggregate net asset value equal to the aggregate net asset value of Tax-Exempt
Income Fund's Class A shares. The Tax-Free Bond Fund Class B Shares issued to
Tax-Exempt Income Fund for distribution to Tax-Exempt Income Fund's Class B
shareholders will have an aggregate net asset value equal to the aggregate net
asset value of Tax-Exempt Income Fund's Class B shares. The asset values of
Tax-Exempt Income Fund and Tax-Free Bond Fund will be determined at the close of
business (4:00 p.m. Eastern Time) on the Closing Date (as defined below) for
purposes of the proposed reorganization.
Following the receipt of Tax-Free Bond Fund Shares (1) Tax-Exempt Income Fund
will be liquidated, (2) the Tax-Free Bond Fund Shares will be distributed to
Tax-Exempt Income Fund's shareholders pro rata in exchange for their shares of
Tax-Exempt Income Fund and (3) Tax-Exempt Income Fund will be terminated.
Consequently, Class A Tax-Exempt Income Fund shareholders will become Class A
shareholders of Tax-Free Bond Fund, and Class B Tax-Exempt Income Fund
shareholders will become Class B shareholders of Tax-Free Bond Fund. These
transactions are collectively referred to in this Proxy Statement and Prospectus
as the "Reorganization." The Reorganization is being structured as a tax-free
reorganization so that, in the opinion of tax counsel, no gain or loss will be
recognized by Tax-Free Bond Fund, Tax-Exempt Income Fund or the shareholders of
Tax-Exempt Income Fund. The terms and conditions of the Reorganization are more
fully described in this Proxy Statement and Prospectus, and in the Agreement and
Plan of Reorganization that is attached as EXHIBIT B.
Tax-Free Bond Fund is a diversified open-end management investment company
organized as a Massachusetts business trust in 1989. Tax-Free Bond Fund seeks to
obtain as high a level of interest income exempt from federal income taxes as is
consistent with preservation of capital. Tax-Free Bond Fund seeks to obtain this
objective by investing primarily in municipal obligations, including bonds,
notes and commercial paper, the interest on which is exempt from federal income
taxes.
The principal place of business of both Tax-Free Bond Fund and Tax-Exempt Income
Fund is at 101 Huntington Avenue, Boston, Massachusetts 02199. Their toll-free
telephone number is 1-800-225-5291.
The date of this Proxy Statement and Prospectus is March 18, 1996.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION..................................................... 1
SUMMARY.......................................................... 2
RISK FACTORS AND SPECIAL CONSIDERATIONS.......................... 15
INFORMATION CONCERNING THE MEETING............................... 17
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION..... 18
CAPITALIZATION................................................... 24
COMPARATIVE PERFORMANCE INFORMATION.............................. 25
BUSINESS OF TAX-EXEMPT INCOME FUND............................... 27
General........................................................ 27
Investment Objective and Policies.............................. 27
Trustees....................................................... 27
Investment Adviser and Distributor............................. 27
Expenses....................................................... 27
Custodian and Transfer Agent................................... 27
Tax-Exempt Income Fund Shares.................................. 28
Purchase of Tax-Exempt Income Fund Shares...................... 28
Redemption of Tax-Exempt Income Fund Shares.................... 28
Dividends, Distributions and Taxes............................. 28
BUSINESS OF TAX-FREE BOND FUND................................... 28
Investment Objective and Policies.............................. 28
Trustees....................................................... 28
Investment Adviser and Distributor............................. 28
Expenses....................................................... 29
Custodian and Transfer Agent................................... 29
Tax-Free Bond Fund Shares...................................... 29
Purchase of Tax-Free Bond Fund Shares.......................... 29
Redemption of Tax-Free Bond Fund Shares........................ 29
Dividends, Distributions and Taxes............................. 29
EXPERTS.......................................................... 29
AVAILABLE INFORMATION............................................ 29
EXHIBIT A........................................................ A-1
EXHIBIT B........................................................ B-1
</TABLE>
-i-
<PAGE> 6
EXHIBITS
<TABLE>
<S> <C>
A -- Prospectus of John Hancock Tax-Free Bond Fund for Class A and
Class B shares, dated May 1, 1995 as supplemented January 15, 1996
(attached to this document).
B -- Agreement and Plan of Reorganization by and between John Hancock
Tax-Exempt Income Fund and John Hancock Tax-Free Bond Fund
(attached to this document).
C -- Annual Report to Shareholders of John Hancock Tax-Free Bond Fund,
dated December 31, 1995 (included with this document).
</TABLE>
-ii-
<PAGE> 7
PROXY STATEMENT AND PROSPECTUS
FOR SPECIAL MEETING OF SHAREHOLDERS OF
JOHN HANCOCK TAX-EXEMPT INCOME FUND
TO BE HELD ON MAY 2, 1996
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies by the Board of Trustees of Tax-Exempt Income Fund (the
"Board of Trustees"). The proxies will be voted at the Special Meeting of
Shareholders (the "Meeting") of Tax-Exempt Income Fund to be held at 101
Huntington Avenue, Boston, Massachusetts 02199 on Thursday, May 2, 1996 at 9:00
a.m., Boston time, and at any adjournment or adjournments of the Meeting. The
purposes of the Meeting are set forth in the accompanying Notice of Special
Meeting of Shareholders.
This Proxy Statement and Prospectus (i) incorporates by reference the Prospectus
of Tax-Exempt Income Fund, dated May 1, 1995 as supplemented December 11, 1995
(the "Tax-Exempt Income Fund Prospectus") which is available upon request and
(ii) includes the prospectus of Tax-Free Bond Fund for Class A and Class B
shares, dated May 1, 1995 as supplemented January 15, 1996 (the "Tax-Free Bond
Fund Prospectus"). The Annual Report to Shareholders of Tax-Free Bond Fund,
dated December 31, 1995, is included with this Proxy Statement and Prospectus.
These materials will be mailed to shareholders of Tax-Exempt Income Fund on or
after March 18, 1996. Tax-Exempt Income Fund's Annual Report to Shareholders was
previously sent to shareholders of Tax-Exempt Income Fund on or about February
29, 1996.
As of March 6, 1996, 44,660,695.412 Class A and 919,370.542 Class B shares of
beneficial interest of Tax-Exempt Income Fund were outstanding. Shareholders of
record on March 6, 1996 (the "Record Date") are entitled to notice of and to
vote at the Meeting.
All properly executed proxies received by management prior to the Meeting,
unless revoked, will be voted at the Meeting according to the instructions on
the proxies. If no instructions are given, shares of Tax-Exempt Income Fund
represented by proxies will be voted FOR the proposal (the "Proposal") to
approve the Agreement and Plan of Reorganization (the "Agreement") between
Tax-Exempt Income Fund and Tax-Free Bond Fund.
The Board of Trustees knows of no business to be presented for consideration at
the Meeting other than that mentioned in the immediately preceding paragraph. If
other business is properly brought before the Meeting, proxies will be voted
according to the best judgment of the persons named as proxies.
In addition to the mailing of these proxy materials, proxies may be solicited in
person or by telephone by Trustees, officers and employees of Tax-Exempt Income
Fund; by personnel of Tax-Exempt Income Fund's investment adviser, John Hancock
Advisers, Inc. (the "Adviser") and its transfer agent, John Hancock Investor
Services Corporation ("Investor Services"); or by broker-dealer firms. Investor
Services has agreed to provide proxy solicitation services to Tax-Exempt Income
Fund at a cost of approximately $5,000. Investor Services is providing this
proxy solicitation service to Tax-Exempt Income Fund at a lower cost than would
be charged by a third party solicitation firm.
1
<PAGE> 8
Tax-Exempt Income Fund and Tax-Free Bond Fund (each, a "Fund" and collectively,
the "Funds") will each bear its own fees and expenses in connection with the
Reorganization discussed in this Proxy Statement and Prospectus.
The information concerning Tax-Exempt Income Fund in this Proxy Statement and
Prospectus has been supplied by Tax-Exempt Income Fund. The information
concerning Tax-Free Bond Fund in this Proxy Statement and Prospectus has been
supplied by Tax-Free Bond Fund.
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement and Prospectus. The summary is qualified by reference to the
more complete information contained in this Proxy Statement and Prospectus, and
in the EXHIBITS attached to or included with this document. Please read this
entire Proxy Statement and Prospectus carefully.
REASONS FOR THE PROPOSED REORGANIZATION
Tax-Exempt Income Fund's Board of Trustees has determined that the proposed
Reorganization is in the best interests of Tax-Exempt Income Fund and its
shareholders. In making this determination, the Trustees considered several
relevant factors, including (i) the fact that the investment objectives and
policies of the Funds are substantially similar, (ii) the fact that combining
the Funds' assets into a single portfolio will enable Tax-Free Bond Fund to
achieve greater diversification than either Fund is now able to achieve, (iii)
the fact that Tax-Exempt Income Fund shareholders will be subject to lower
management fees from the Closing Date (as defined below) until December 23, 1996
or later, and the fact that the Adviser has agreed to reduce the management fee
rate applicable to Tax-Free Bond Fund to the same rate applicable to Tax-Exempt
Income Fund as of the Closing Date if the shareholders of Tax-Exempt Income Fund
approve the Reorganization, (iv) the fact that Tax-Exempt Income Fund
shareholders will be subject to lower Rule 12b-1 fees from the Closing Date
until December 23, 1996 or later, and (v) the likelihood that the Reorganization
will result in improved economies of scale over time and a corresponding
decrease in the total expenses currently borne by Tax-Exempt Income Fund's
shareholders. Tax-Exempt Income Fund's Board of Trustees believes that the
Tax-Free Bond Fund Shares received in the Reorganization will provide existing
Tax-Exempt Income Fund shareholders with substantially the same investment
advantages that they currently enjoy at a comparable level of risk. For a more
detailed discussion of the reasons for the proposed Reorganization, see
"Proposal to Approve the Agreement and Plan of Reorganization -- Reasons for the
Proposed Reorganization."
THE FUNDS' EXPENSES
Both Funds and their shareholders are subject to various fees and expenses. The
tables set forth below show the shareholder transaction and operating expenses
of Class A and Class B shares of the Funds and the effect of applicable expense
limitations. With respect to each Fund, these expenses are based on fees and
expenses incurred during the Fund's fiscal year ended December 31, 1995.
2
<PAGE> 9
TAX-EXEMPT INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(As a percentage of offering price)............ 4.50%* None
Maximum sales charge imposed on reinvested
dividends...................................... None None
Maximum deferred sales charge.................... None* 5.00%
Redemption fee+.................................. None None
Exchange fee..................................... None None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management fee................................... 0.55% 0.55%
12b-1 fee**...................................... 0.30% 1.00%
Other expenses***................................ 0.20% 0.20%
Total Fund operating expenses.................... 1.05% 1.75%
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments in Class A
shares of $1 million or more, but a contingent deferred sales charge may be
imposed on these investments, as described under the caption "Share Price"
in the Fund's Prospectus, in the event of certain redemption transactions
within 12 months after the end of the calendar month in which the purchase
was made.
** The amount of the 12b-1 fee used to cover service expenses will be up to
0.25% of the Fund's average net assets attributable to the respective Class,
and the remaining portion will be used to cover distribution expenses.
*** Other expenses include transfer agent, legal, audit, custody and other
expenses.
+ Redemption by wire fee (currently $4.00) not included.
TAX-FREE BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(As a percentage of offering price)............ 4.50%* None
Maximum sales charge imposed on reinvested
dividends...................................... None None
Maximum deferred sales charge.................... None* 5.00%
Redemption fee+.................................. None None
Exchange fee..................................... None None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management fee (net of limitation)**............. 0.43% 0.43%
12b-1 fee (net of limitation - Class B
shares)***..................................... 0.15% 0.90%
Other expenses****............................... 0.27% 0.27%
Total Fund operating expenses
(net of limitation)*****....................... 0.85% 1.60%
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments in
Class A shares of $1 million or more, but for these investments a
contingent deferred sales charge may be imposed in the event of certain
3
<PAGE> 10
redemption transactions within 12 months after the end of the calendar month in
which the purchase was made.
** In the absence of the Adviser's and the Fund's agreement not to impose a
portion of the management fee, the fee would have been 0.55% of average
annual net assets.
*** 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 attributable
to Class B shares, and the remaining portion will be used to cover
distribution expenses. In the absence of the agreement between the Fund's
distributor and the Fund not to impose a portion of the Class B 12b-1 fee,
the fee would have been 1.00% of average net assets attributable to Class
B shares.
**** Other expenses include transfer agent, legal, audit, custody and other
expenses.
***** Total Fund operating expenses in the table reflect voluntary limitations
by the Adviser and the Fund's distributor. Without such limitations the
Total Fund operating expenses of Class A shares and Class B shares would
be 0.97% and 1.82%, respectively.
+ Redemption by wire fee (currently $4.00) not included.
TAX-FREE BOND FUND (PRO FORMA)
The table set forth below shows the pro forma operating expenses of Class A and
Class B shares of Tax-Free Bond Fund which assumes that the Reorganization took
place on December 31, 1995.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management fee (net of limitation)*................ 0.49% 0.49%
12b-1 fee (net of limitation -- Class B
shares)**........................................ 0.15%*** 0.90%
Other expenses****................................. 0.21% 0.21%
Total Fund operating expenses
(net of limitations)*****........................ 0.85% 1.60%
</TABLE>
- ---------------
* The Adviser's and the Fund's voluntary agreement not to impose a portion
of the management fee will terminate on December 23, 1996, at which time
the management fee will be 0.54% of the Fund's average annual net assets.
** The distributor's and the Fund's voluntary agreement not to impose a
portion of the Class B Rule 12b-1 fee will terminate on December 23, 1996,
at which time the Class B Rule 12b-1 fee will be 1.00% of the Fund's
average annual net assets attributable to Class B shares. The amount of
the Class B Rule 12b-1 fee used to cover service expenses will be up to
0.25% of assets attributable to Class B shares, and the remaining portion
will be used to cover distribution expenses.
*** The Class A Rule 12b-1 fee will increase to 0.25% of average net assets
attributable to Class A shares on December 23, 1996, if the shareholders
of Tax-Free Bond Fund approve the increase.
4
<PAGE> 11
**** Other expenses include transfer agent, legal, audit, custody and other
expenses.
***** Total Fund operating expenses in the table reflect (i) voluntary
limitations in the management fee and the Class B Rule 12b-1 fee and (ii)
a Class A Rule 12b-1 fee that is subject to change pending approval by
Tax-Free Bond Fund shareholders. On December 23, 1996, after termination
of the agreements to limit the Fund's expenses and after shareholder
approval of the increase to the Class A Rule 12b-1 fee, the Total Fund
operating expenses for Class A and Class B shares will be 1.00% and 1.75%,
respectively.
If the Reorganization is consummated, the actual total operating expenses of
Class A and Class B shares of Tax-Free Bond Fund may vary from the pro forma
operating expenses indicated above due to changes in the net asset values of
Tax-Exempt Income Fund and/or Tax-Free Bond Fund between December 31, 1995 and
the Closing Date (defined below).
EXAMPLE
<TABLE>
The following example illustrates the expenses you would pay on a $1,000
investment under the existing fees for Class A and Class B shares of each of
Tax-Exempt Income Fund and Tax-Free Bond Fund and under the pro forma fees if
the Reorganization had occurred on December 31, 1995. The example assumes (1) a
5% annual return and (2) redemption at the end of each time period.
<CAPTION>
CLASS A CLASS B CLASS A CLASS B
SHARES SHARES SHARES SHARES PRO FORMA PRO FORMA
TAX-EXEMPT TAX-EXEMPT TAX-FREE TAX-FREE CLASS A CLASS B
INCOME FUND INCOME FUND BOND BOND SHARES SHARES
----------- ----------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 year...... $ 55 $ 68 $ 53 $ 66 $ 53 $ 66
3 years..... 77 85 71 80 71 80
5 years..... 100 115 90 107 90 107
10 years.... 167 188 145 170 145 170
</TABLE>
<TABLE>
Assuming there is no redemption at the end of each time period, the expenses you
would pay on the same investment would be as follows:
<CAPTION>
CLASS B CLASS B
SHARES SHARES PRO FORMA
TAX-EXEMPT TAX-FREE CLASS B
INCOME FUND BOND FUND SHARES
----------- --------- ---------
<S> <C> <C> <C>
1 year.................................. $ 18 $ 16 $ 16
3 years................................. 55 50 50
5 years................................. 95 87 87
10 years................................ 188 170 170
</TABLE>
The purpose of this example and the tables set forth above is to help you
understand the various costs and expenses of investing in each of the Funds and
what the costs would be had the Reorganization already occurred. The example
above should not be considered a representation of future expenses of the Funds
or of Tax-Free Bond Fund after the Reorganization. Actual expenses may vary from
year to year and may be higher or lower than those shown above.
5
<PAGE> 12
THE FUNDS' INVESTMENT ADVISER
John Hancock Advisers, Inc. acts as investment adviser to both Tax-Exempt Income
Fund and Tax-Free Bond Fund.
BUSINESS OF TAX-EXEMPT INCOME FUND
Tax-Exempt Income Fund is a diversified open-end management investment company
organized as a Massachusetts business trust in 1976. As of December 31, 1995,
Tax-Exempt Income Fund's net assets were $504,377,839.
All investment decisions for Tax-Exempt Income Fund are made by Mr. Thomas C.
Goggins, the Fund's portfolio manager. Mr. Goggins will continue to make all
investment decisions for the Fund until the Reorganization.
BUSINESS OF TAX-FREE BOND FUND
Tax-Free Bond Fund is a diversified open-end management investment company
organized as a Massachusetts business trust in 1989. As of December 31, 1995,
Tax-Free Bond Fund's net assets were $195,621,071.
Mr. Thomas C. Goggins is Senior Vice President of the Adviser and portfolio
manager of the Fund. Mr. Goggins heads up the Adviser's team of municipal
managers and analysts.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES OF TAX-EXEMPT INCOME FUND AND
TAX-FREE BOND FUND
Tax-Exempt Income Fund's investment objective is non-fundamental and may be
changed by a vote of the Fund's Board of Trustees without shareholder approval.
Tax-Free Bond Fund's investment objective is fundamental and may not be changed
without shareholder approval.
In considering whether to approve the Reorganization, you should consider any
differences between the two Funds' investment policies. For a discussion of the
risks associated with an investment in the Funds, see "Risk Factors and Special
Considerations."
6
<PAGE> 13
<TABLE>
<CAPTION>
TAX-EXEMPT INCOME FUND TAX-FREE BOND FUND
----------------------------- ---------------------------
<S> <C> <C>
Investment The Fund seeks to provide The Fund seeks to obtain as
Objective: as high a level of dividend high a level of interest
income exempt from Federal income exempt from federal
income tax as is consistent income taxes as is
with preservation of consistent with
capital and the Fund's preservation of capital.
requirements for liquidity.
Primary The types of securities in The types of securities in
Investments: which the Fund may invest which the Fund may invest
include: include:
(1) municipal bonds and (1) municipal bonds, notes
other securities and commercial paper,
(including certain the interest on which
industrial development is exempt from Federal
or private activity income taxes, including
bonds) the interest on debt obligations issued
which is, at the time of by or on behalf of the
issue, excludable from states, territories and
gross income for Federal possessions of the
income tax purposes United States, the
("Tax-Exempt Bonds") and District of Columbia
short-term municipal debt and the political
instruments ("Short-Term subdivisions, agencies
Municipals"); and or instrumentalities of
the foregoing
("Municipal
Obligations"); and
</TABLE>
7
<PAGE> 14
<TABLE>
<CAPTION>
TAX-EXEMPT INCOME FUND TAX-FREE BOND FUND
--------------------------- ---------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
(2) cash, receivables and (2) pending investment in
short-term taxable Municipal Obligations
investments such as (a) and to meet redemption
U.S. Treasury requests, private
obligations, (b) activity bonds (the
obligations of agencies interest on which may
and instrumentalities be treated as a tax
of the U.S. Government preference item under
and (c) money market the Federal alternative
instruments minimum tax) and in
("Short-Term Taxable taxable money market
Investments). securities including
(a) obligations issued
or guaranteed by the
U.S. Government, its
agencies,
instrumentalities or
authorities, (b)
corporate debt
securities, (c)
commercial paper, (d)
certificates of deposit
of domestic banks with
assets of $1 billion or
more, and (e)
repurchase agreements
secured by U.S.
Government securities
("Taxable Securities").
Investment (1) At least 85% of the (1) At least 80% of the
Policies: Fund's total assets will Fund's total assets will be
consist of Tax-Exempt invested in Municipal
Bonds, the interest on Obligations;
which is not treated as
a tax preference item
under the Federal
alternative minimum
tax;
(2) At least 65% of the (2) At least 65% of the
Fund's investments in Tax- Fund's total assets will
Exempt Bonds and in normally be invested in
Short-Term Municipals municipal bonds rated
will be rated in the at least investment
three highest ratings grade by an NRSRO or,
by a nationally if unrated, determined
recognized statistical by the Adviser to be of
rating organization comparable quality;
("NRSRO");
</TABLE>
8
<PAGE> 15
<TABLE>
<CAPTION>
TAX-EXEMPT INCOME FUND TAX-FREE BOND FUND
--------------------------- ---------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
(3) No more than 15% of the (3) No more than 20% of the
Fund's total assets Fund's total assets
will consist of will be invested in
Short-Term Taxable Taxable Securities
investments; and no except that, for
more than 25% of the temporary defensive
Fund's total assets purposes, up to 100% of
will be invested in the Fund's total assets
Short-Term Municipals. may be invested in
taxable money market
certificates rated in
the three highest
ratings by an NRSRO or,
if unrated, determined
by the Adviser to be of
comparable quality.
(4) Up to 35% of the Fund's (4) Up to 35% of the Fund's
total assets may be total assets may be
invested in Tax-Exempt invested in municipal
Bonds rated B or better bonds and notes rated B
by an NRSRO and up to or better by an NRSRO
20% of the Fund's or, if unrated,
assets may be invested determined by the
in unrated long-term Adviser to be of
Tax-Exempt Bonds comparable quality.
determined by the
Adviser to be of
comparable quality to
the ratings described
above.
(5) No corresponding (5) No more than 25% of the
requirement. Fund's total assets may
be invested 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.
(6) The Fund's average (6) There is no limit on
portfolio maturity the Fund's average
ranges from 20 to 25 portfolio maturity.
years.
</TABLE>
9
<PAGE> 16
<TABLE>
<CAPTION>
TAX-EXEMPT INCOME FUND TAX-FREE BOND FUND
--------------------------- ---------------------------
<S> <C> <C>
Investment The investment restrictions applicable to Tax-Free Bond
Restrictions: Fund are substantially similar to or more restrictive
than those of Tax- Exempt Income Fund, except as noted
below:
(1) The Fund may not borrow (1) The Fund may not borrow
money, except from money, except from
banks as a temporary banks as a temporary or
measure and not to emergency measure and
exceed 5% of the Fund's not to exceed 15% of
total assets. the Fund's total
assets.
(2) The Fund may not (2) The Fund may not invest
purchase restricted more than 10% of its
securities. assets in restricted
securities.
Other The Fund may invest up to The Fund may purchase tax-
Investments: 5% of its assets in exempt participation
certificates of interests and municipal
participation in municipal lease obligations, lend its
lease obligations, lend portfolio securities, enter
portfolio securities, enter into repurchase agreements,
into repurchase agreements, purchase restricted and
purchase securities on a illiquid securities,
forward commitment or when- purchase securities on a
issued basis, buy and sell when-issued or forward
municipal bond index commitment basis, buy and
futures contracts, interest sell call and put options
rate futures contracts and on debt securities in which
related options, invest in it may invest and on
variable rate and floating indices composed of debt
rate obligations and engage securities in which it may
in short-term trading. invest, take straddle
positions, buy and sell
interest rate and municipal
bond index futures
contracts and options on
such contracts, and invest
in variable and floating
rate instruments.
</TABLE>
FORM OF ORGANIZATION
Tax-Exempt Income Fund is a Massachusetts business trust organized in 1976.
Tax-Free Bond Fund is a Massachusetts business trust organized in 1989. Both
Funds have authorized and outstanding Class A and Class B shares. After the
Reorganization, Tax-Exempt Income Fund's Class A and Class B shareholders will
become Class A and Class B shareholders, respectively, of Tax-Free Bond Fund and
therefore will become subject to Tax-Free Bond Fund's Declaration of Trust
("Declaration of Trust"). Although there are some differences between the
provisions applicable to each Fund, the only material differences in shareholder
rights are as follows: (i) the Trustees of Tax-Exempt Income Fund have a greater
ability to amend the Fund's Declaration of Trust without shareholder approval
than do the Trustees of Tax-Free Bond Fund, although the Trustees in both cases
are subject to similar limitations, and (ii) Tax-Exempt Income Fund's
10
<PAGE> 17
Declaration of Trust requires the affirmative vote of a higher percentage of
shareholders to approve a merger, consolidation or sale of all or substantially
all of the assets of the Fund or to approve the termination of the Fund than
does the Declaration of Trust of Tax-Free Bond Fund.
Each share of a class of each Fund represents an equal proportionate interest in
the assets belonging to that Fund. The shares of each Fund's classes represent
an interest in the same portfolio of investments of that Fund that are allocated
to that class. Except as stated below, each Fund's classes have equal rights as
to voting, redemption, dividends and liquidation. Each class bears different
distribution and transfer agent fees and may bear other expenses properly
attributable to that class. Shareholders of each Fund's classes have exclusive
voting rights with respect to the Rule 12b-1 distribution plan relating to their
respective class of shares.
SALES CHARGES AND DISTRIBUTION AND SERVICES FEES
Sales Charges. Both Funds impose an initial sales charge on Class A shares as
described above in the table under the caption "The Funds' Expenses." An initial
sales charge does not apply to Class A shares acquired through the reinvestment
of dividends from net investment income or capital gain distributions.
Tax-Free Bond Fund Class A Shares acquired by Tax-Exempt Income Fund's Class A
shareholders pursuant to the Reorganization will not be subject to any initial
sales charge or contingent deferred sales charge ("CDSC") at the time of the
Reorganization but will remain subject to any applicable CDSC upon redemption of
those shares.
Tax-Free Bond Fund and Tax-Exempt Income Fund do not impose an initial sales
charge on Class B shares. However, Class B shares redeemed within six years of
purchase will be subject to a CDSC at the rates set forth below. This CDSC 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, Class
B shareholders will not be assessed a CDSC on an increase in account value above
the initial purchase price. In addition, Class B shareholders will not be
assessed a CDSC on shares derived from reinvested dividends. The amount of the
CDSC, if any, will vary depending on the number of years from the time the Class
B shares were purchased until the time they are redeemed, as follows:
<TABLE>
<CAPTION>
YEAR IN WHICH CLASS B THE CDSC AS A PERCENTAGE
SHARES REDEEMED OF DOLLAR AMOUNT
FOLLOWING PURCHASE 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>
Class B shares of Tax-Free Bond Fund acquired by Tax-Exempt Income Fund's Class
B shareholders pursuant to the Reorganization will not be subject to any CDSC at
the time of the Reorganization, but will remain subject to any CDSC applicable
upon redemption of these shares. For purposes of computing the
11
<PAGE> 18
CDSC payable upon redemption of Class B shares of Tax-Free Bond Fund acquired
pursuant to the Reorganization and the schedule for automatic conversion of
Class B shares into Class A shares, the holding period of the Tax-Exempt Income
Fund Class B shares will be added to that of the Tax-Free Bond Fund Class B
shares acquired in the Reorganization.
Distribution and Service Fees. Both Funds have adopted distribution plans
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Under these plans, each Fund may pay fees to John
Hancock Funds, Inc. ("John Hancock Funds") to reimburse distribution and service
expenses incurred in connection with the Funds' shares. With respect to
Tax-Exempt Income Fund Class A shares, these fees are payable at an annual rate
of up to 0.30% of the average daily net assets of the Fund attributable to Class
A shares. With respect to Tax-Free Bond Fund Class A shares, these fees are
payable at an annual rate of up to 0.15% of the average daily net assets of the
Fund attributable to Class A shares. Of the fee payable by each Fund, up to
0.25% and 0.15%, respectively, of the net assets of Tax-Exempt Income Fund and
Tax-Free Bond Fund attributable to Class A shares may be used for service
expenses and any remainder for distribution expenses. The fee with respect to
Tax-Free Bond Fund Class A shares will increase to 0.25% on or after December
23, 1996 if the shareholders of Tax-Free Bond Fund approve the increase at a
June 1996 special meeting of those shareholders.
In addition, under the plans, each Fund may pay fees to John Hancock Funds to
reimburse it for distribution and service expenses incurred in connection with
Class B shares. With respect to Tax-Exempt Income Fund's Class B shares, these
fees are payable at an annual rate of up to 1.00% of the average daily net
assets of the Fund attributable to Class B shares. With respect to Tax-Free Bond
Fund Class B shares, these fees are also payable at an annual rate of up to
1.00% of the average daily net assets of the Fund attributable to Class B
shares; however, the Fund and John Hancock Funds have agreed to limit the
payment of expenses pursuant to the Tax-Free Bond Fund's Class B plan to 0.90%.
Of the fee payable by each Fund, up to 0.25% of the net assets of each Fund
attributable to Class B shares may be used for service expenses and the
remainder for distribution expenses. Tax-Free Bond Fund's agreement with John
Hancock Funds to limit the payment of Class B Rule 12b-1 fees to 0.90% will
terminate on or after December 23, 1996, after which the fee with respect to
Tax-Free Bond Fund Class B shares will increase to 1.00%.
PURCHASES AND EXCHANGES
Shares of each Fund may be purchased through certain broker-dealers and through
John Hancock Funds at the public offering price, which is based on the next
determined net asset value per share, plus any applicable sales charge. The
minimum initial investment in shares of each Fund is $1,000 ($250 for group
investments and, with respect to Tax-Free Bond Fund, retirement plans). In
anticipation of the Reorganization, after the Record Date, no new accounts may
be opened in Tax-Exempt Income Fund. Existing shareholders of Tax-Exempt Income
Fund may continue to acquire shares of the Fund after the Record Date by direct
purchase, through a monthly automatic accumulation plan or through the
reinvestment of dividends and distributions.
12
<PAGE> 19
Shareholders of each Fund may exchange their shares at net asset value for
shares of the same class, if applicable, of other John Hancock funds. For this
purpose, the shares of John Hancock funds with only one class of shares are
treated as Class A shares whether or not they have been so designated. Shares of
any fund acquired by exchange that are subject to a CDSC will incur the CDSC
upon redemption. The rate of this charge will be the rate in effect for the
exchanged shares at the time of the exchange (except that exchanges into John
Hancock Short-Term Strategic Income Fund, John Hancock Limited Term Government
Fund and John Hancock Intermediate Maturity Government Fund will be subject to
the initial fund's CDSC). The exchange privilege is available only in states
where the exchange can be made legally.
MANAGEMENT FEES
<TABLE>
Tax-Exempt Income Fund pays management fees to the Adviser as follows:
<CAPTION>
NET ASSET VALUE ANNUAL RATE
- ----------------------------------------------------------- -----------
<S> <C>
First $500,000,000......................................... 0.55%
Next $500,000,000.......................................... 0.50%
Amount over $1,000,000,000................................. 0.45%
</TABLE>
During the fiscal year ended December 31, 1995, Tax-Exempt Income Fund paid
investment management fees of $2,683,990 to the Adviser.
Tax-Free Bond Fund pays management fees to the Adviser at a rate equal to 0.55%
of the Fund's average daily net asset value. During the fiscal year ended
December 31, 1995, Tax-Free Bond Fund paid investment management fees of
$1,048,120 to the Adviser.
DISTRIBUTION PROCEDURES
It is the policy of both Funds to declare dividends daily and to pay dividends
monthly from net investment income. Each Fund also distributes annually all of
its other taxable income, including any net short-term and long-term capital
gains it has realized. Tax-Exempt Income Fund will make, immediately prior to
the Closing Date (as defined below), a distribution of any net income and net
realized capital gains it has not yet distributed.
REINVESTMENT OPTIONS
Unless an election is made to receive cash, the shareholders of both Funds
automatically reinvest all of their respective dividends and capital gain
distributions in additional shares of the same class of the same Fund. These
reinvestments are made at the net asset value per share and are not subject to
any sales charge.
REDEMPTION PROCEDURES
Shares of both Funds may be redeemed on any business day at a price equal to the
net asset value of the shares next determined after receipt of a redemption
request in good order, less any applicable CDSC. Alternatively, shareholders of
both Funds may sell their shares through securities dealers, who may charge a
fee. Redemptions and repurchases of Class B shares and certain Class A shares of
each Fund are subject to the applicable CDSC, if any. Class A and Class B
13
<PAGE> 20
shares of Tax-Exempt Income Fund may be redeemed up to and including the Closing
Date (as defined below).
REORGANIZATION
Effect of the Reorganization. Pursuant to the terms of the Agreement, the
proposed Reorganization will consist of the acquisition by Tax-Free Bond Fund of
all the assets of Tax-Exempt Income Fund in exchange solely for (i) the
assumption by Tax-Free Bond Fund of all the liabilities of Tax-Exempt Income
Fund and (ii) the issuance of Tax-Free Bond Fund Class A and Class B Shares
equal to the value of these assets, less the amount of these liabilities, to
Tax-Exempt Income Fund. As part of the liquidation process, Tax-Exempt Income
Fund will immediately distribute to its shareholders these Tax-Free Bond Fund
Shares in exchange for their shares of Tax-Exempt Income Fund. Consequently,
Class A shareholders of Tax-Exempt Income Fund will become Class A shareholders
of Tax-Free Bond Fund and Class B shareholders of Tax-Exempt Income Fund will
become Class B shareholders of Tax-Free Bond Fund. After completion of the
Reorganization, the existence of Tax-Exempt Income Fund will be terminated.
The Reorganization will become effective as of 5:00 p.m. on the closing date,
scheduled for May 3, 1996, or another date on or before December 31, 1996 as
authorized representatives of the Funds may agree (the "Closing Date"). The Tax-
Free Bond Fund Class A shares issued to Tax-Exempt Income Fund for distribution
to Tax-Exempt Income Fund's Class A shareholders will have an aggregate net
asset value equal to the aggregate net asset value of Tax-Exempt Income Fund's
Class A shares. Similarly, the Tax-Free Bond Fund Class B shares issued to
Tax-Exempt Income Fund for distribution to Tax-Exempt Income Fund's Class B
shareholders will have an aggregate net asset value equal to the aggregate net
asset value of Tax-Exempt Income Fund's Class B shares. For purposes of the
Reorganization, the Funds' respective asset values will be determined as of the
close of business (4:00 p.m. Eastern Time) on the Closing Date.
The Board of Trustees of Tax-Exempt Income Fund, including the trustees who are
not "interested persons" of either Fund or the Adviser (the "Independent
Trustees"), approved the Reorganization, and determined that it was in the best
interests of Tax-Exempt Income Fund and that the interests of Tax-Exempt Income
Fund's shareholders would not be diluted as a result of the Reorganization.
Similarly, the Board of Trustees of Tax-Free Bond Fund, including the Trustees
who are not "interested persons" of either Fund or the Adviser, approved the
Reorganization, and determined that it was in the best interests of Tax-Free
Bond Fund and that the interests of Tax-Free Bond Fund's shareholders would not
be diluted as a result of the Reorganization.
Tax Considerations. The consummation of the Reorganization is subject to the
receipt of an opinion of Hale and Dorr, counsel to the Funds, satisfactory to
each Fund, which will provide generally (as more specifically set forth in the
Agreement) that with respect to the transfers and exchanges comprising the
Reorganization:
(a) The acquisition by Tax-Free Bond Fund of all of the assets of Tax-Exempt
Income Fund will constitute a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the
14
<PAGE> 21
"Code"), and Tax-Exempt Income Fund and Tax-Free Bond Fund will each be "a party
to a reorganization" within the meaning of Section 368(b) of the Code;
(b) no gain or loss will be recognized by Tax-Exempt Income Fund upon (i) the
transfer of all of its assets to Tax-Free Bond Fund and (ii) the distribution by
Tax-Exempt Income Fund of the Tax-Free Bond Fund Shares to the shareholders of
Tax-Exempt Income Fund;
(c) no gain or loss will be recognized by Tax-Free Bond Fund upon the receipt of
Tax-Exempt Income Fund's assets;
(d) the basis of the assets of Tax-Exempt Income Fund acquired by Tax-Free Bond
Fund will remain the same as immediately prior to the transfer;
(e) the tax holding period of the assets of Tax-Exempt Income Fund in the hands
of Tax-Free Bond Fund will include Tax-Exempt Income Fund's tax holding period
for those assets;
(f) the shareholders of Tax-Exempt Income Fund will not recognize gain or loss
upon the exchange of their shares of Tax-Exempt Income Fund solely for Tax-Free
Bond Fund Shares in the Reorganization;
(g) the basis of the Tax-Free Bond Fund Shares received by Tax-Exempt Income
Fund shareholders in the Reorganization will be the same; and
(h) the tax holding period of the Tax-Free Bond Fund Shares received by Tax-
Exempt Income Fund shareholders will include the tax holding period of Tax-
Exempt Income Fund shares that were held as capital assets.
THE MEETING
Time, Place and Date. The Meeting will be held on Thursday, May 2, 1996, at 101
Huntington Avenue, Boston, Massachusetts 02199, at 9:00 a.m., Boston time.
RECORD DATE
The Record Date for determining shareholders entitled to notice of and to vote
at the Meeting is March 6, 1996.
VOTE REQUIRED
Approval of the Agreement by the shareholders of Tax-Exempt Income Fund requires
the affirmative vote of a majority of the shares of Tax-Exempt Income Fund
outstanding and entitled to vote. For this purpose, a majority of the
outstanding shares of Tax-Exempt Income Fund means the vote of the lesser of (i)
67% or more of the shares present at the Meeting, if the holders of more than
50% of the shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Fund ("Majority Shareholder Vote").
The Reorganization does not require the approval of Tax-Free Bond Fund's
shareholders. See "Proposal to Approve the Agreement and Plan of
Reorganization -- Voting Rights and Required Vote."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Please see the Tax-Free Bond Fund Prospectus and the Tax-Exempt Income Fund
Prospectus for a more complete description of each Fund's investment objectives
and policies, as well as their risk factors. In deciding whether to
15
<PAGE> 22
approve the Reorganization, you should consider the similarities and differences
between the Funds' investment objectives, policies and risk factors.
The investment objectives and policies of the Funds are substantially similar.
For this reason, the risks associated with an investment in the Funds are
substantially similar. Each Fund invests primarily in municipal bonds and other
securities whose interest is exempt from Federal income taxes. Under normal
circumstances, at least 80% of Tax-Free Bond Fund's total assets will be
invested in these securities and 85% of Tax-Exempt Income Fund's total assets
will be invested in these securities.
Tax-Exempt Income Fund may invest up to 35% of its total assets in municipal
securities and Tax-Free Bond Fund may invest up to 35% of its total assets in
municipal bonds and notes rated B or better by an NRSRO or, if not rated,
determined by the Adviser to be of comparable quality. Bonds and notes which are
rated B or determined to be of comparable quality are considered speculative and
are commonly called "junk bonds." While generally providing greater income than
investments in higher quality securities, these investments involve greater risk
of principal and income loss, including the possibility of default. These
investments may have greater price volatility, especially during periods of
economic uncertainty or changes. Bonds and notes rated B are currently meeting
debt service requirements but provide a limited margin of safety and are
vulnerable to default in the event of adverse business, financial or economic
conditions. In addition, the market for these bonds may be less liquid than the
market for higher rated securities. Therefore, the Adviser's judgment at times
plays a greater role in the performance and valuation of investments in these
securities.
Up to 20% of Tax-Free Bond Fund's total assets may be invested in securities
that are taxable, while only up to 15% of Tax-Exempt Income Fund's total assets
may be so invested.
There is no limit on Tax-Free Bond Fund's average portfolio maturity. Tax-Exempt
Income Fund's average portfolio maturity ranges from 20 to 25 years. Generally,
the longer the average portfolio maturity, the greater will be the impact of
interest rate fluctuations on the value of that Fund's assets and net asset
value per share.
Tax-Free Bond Fund may buy and 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 also sell straddles, which are combinations of
put and call options on the same security. The Fund may make these investments
to hedge its exposure to changing interest rates and security prices. Options
are derivative instruments and may involve certain risks. If the Adviser applies
a hedge at an inappropriate time or judges market conditions incorrectly,
options may lower the Fund's return. If option prices are not correctly
correlated with the Fund's other investments or if the Fund is not able to close
out its positions, the Fund may experience losses. Also, options do not pay
interest but may produce taxable gains or losses. Tax-Exempt Income Fund may not
invest in those options or straddles but may buy and sell municipal bond index
futures contracts, interest rate futures contracts and related options to hedge
against changes in securities prices or interest rates or for speculative
purposes. Tax-Exempt Income
16
<PAGE> 23
Fund may not engage in a futures or options transaction for speculative purposes
if the sum of initial margin deposits exceeds 5% of the Fund's net assets.
INFORMATION CONCERNING THE MEETING
SOLICITATION, REVOCATION AND USE OF PROXIES
The presence at the meeting of a majority of Tax-Exempt Income Fund's
outstanding shares entitled to vote will be considered a quorum for the
transaction of business. A Tax-Exempt Income Fund shareholder executing and
returning a proxy has the power to revoke it at any time before it is exercised,
by filing a written notice of revocation with Tax-Exempt Income Fund's transfer
agent, Investor Services, P.O. Box 9116, Boston, Massachusetts 02205-9116, or by
returning a duly executed proxy with a later date before the time of the
Meeting. Any shareholder who has executed a proxy but is present at the Meeting
and wishes to vote in person may revoke his or her proxy by notifying the
Secretary of Tax-Exempt Income Fund (without complying with any formalities) at
any time before it is voted. Presence at the Meeting alone will not serve to
revoke a previously executed and returned proxy.
If a quorum is not present in person or by proxy at the time any session of the
Meeting is called to order, the persons named as proxies may vote those proxies
that have been received to adjourn the Meeting to a later date. If a quorum is
present but there are not sufficient votes in favor of the Proposal, the persons
named as proxies may propose one or more adjournments of the Meeting to permit
further solicitation of proxies with respect to the Proposal. Any adjournment
will require the affirmative vote of a majority of the shares of Tax-Exempt
Income Fund, represented in person or by proxy, at the session of the Meeting to
be adjourned. If an adjournment of the Meeting is proposed because there are not
sufficient votes in favor of the Reorganization, the persons named as proxies
will vote those proxies in favor of the Reorganization in favor of adjournment,
and will vote those proxies against the Reorganization against adjournment.
In addition to the solicitation of proxies by mail or in person, Tax-Exempt
Income Fund may also arrange to have votes recorded by telephone by officers and
employees of the Fund or by personnel of the Adviser or Investor Services. The
telephone voting procedure is designed to authenticate a shareholder's identity,
to allow a shareholder to authorize the voting of shares in accordance with the
shareholder's instructions and to confirm that the voting instructions have been
properly recorded. If these procedures were subject to a successful legal
challenge, these telephone votes would not be counted at the Meeting. The Fund
has not sought to obtain an opinion of counsel on this matter and is unaware of
any challenge at this time. A shareholder will be called on a recorded line at
the telephone number in the Fund's account records and will be asked the
shareholder's Social Security number or other identifying information. The
shareholder will then be given an opportunity to authorize proxies to vote his
or her shares at the Meeting in accordance with the shareholder's instructions.
To ensure that the shareholder's instructions have been recorded correctly, the
shareholder will also receive a confirmation of the voting instructions in the
mail. A special toll-free number will be available in case the voting
information contained in the confirmation is incorrect. If the shareholder
decides after voting
17
<PAGE> 24
by telephone to attend the Meeting, the shareholder can revoke the proxy at that
time and vote the shares at the Meeting.
OUTSTANDING SHARES AND COMMON STOCK
At the close of business on March 6, 1996, 44,660,695.412 Class A and
919,370.542 Class B shares of beneficial interest of Tax-Exempt Income Fund were
outstanding and entitled to vote. Only Tax-Exempt Income Fund shareholders of
record at the close of business on the Record Date are entitled to notice of and
to vote at the Meeting and any adjournment of the Meeting. As of the Record
Date, 11,948,222.814 Class A and 7,440,231.822 Class B shares of beneficial
interest of Tax-Free Bond Fund were outstanding.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
TAX-EXEMPT INCOME FUND AND TAX-FREE BOND FUND
To the knowledge of Tax-Exempt Income Fund, as of February 15, 1996, no person
owned of record or beneficially 5% or more of the outstanding Class A or Class B
shares of beneficial interest of the Fund.
To the knowledge of Tax-Free Bond Fund, as of February 15, 1996, no person owned
of record or beneficially 5% or more of the outstanding Class A shares of
beneficial interest of Tax-Free Bond Fund.
To the knowledge of Tax-Free Bond Fund, as of February 15, 1996, the following
person owned of record or beneficially 5% or more of the outstanding Class B
shares of beneficial interest of Tax-Free Bond Fund: Merrill Lynch Pierce Fenner
& Smith Inc., Trade House Account -- Book Entry, Team-B, 3rd Floor, 4800
Deerlake Drive East, Jacksonville, Florida 32246-6484 (924,141 shares (12.42%)).
As of March 6, 1996, the Trustees and officers of Tax-Exempt Income Fund, as a
group, owned in the aggregate less than 1% of the outstanding Class A and Class
B shares of beneficial interest of Tax-Exempt Income Fund. As of March 6, 1996,
the Trustees and officers of Tax-Free Bond Fund, as a group, owned in the
aggregate less than 1% of the outstanding Class A and Class B shares of
beneficial interest of Tax-Free Bond Fund.
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
GENERAL
The shareholders of Tax-Exempt Income Fund are being asked to approve the
Agreement, a copy of which is attached as EXHIBIT B. The Reorganization will
consist of: (a) the transfer of all of Tax-Exempt Income Fund's assets to Tax-
Free Bond Fund, in exchange solely for the issuance of Tax-Free Bond Fund Shares
to Tax-Exempt Income Fund and the assumption of Tax-Exempt Income Fund's
liabilities by Tax-Free Bond Fund, (b) the subsequent distribution by Tax-Exempt
Income Fund, as part of its liquidation, of the Tax-Free Bond Fund Shares to
Tax-Exempt Income Fund's shareholders and (c) the termination of Tax-Exempt
Income Fund's existence. The Tax-Free Bond Fund Class A shares issued upon the
consummation of the Reorganization will have an aggregate net asset value equal
to the aggregate net asset value of the assets attributable to Tax-Exempt Income
Fund's Class A shares, less liabilities attributable to Tax-
18
<PAGE> 25
Exempt Income Fund's Class A shares. Similarly, the Tax-Free Bond Fund Class B
shares issued upon the consummation of the Reorganization will have an aggregate
net asset value equal to the aggregate net asset value of the assets
attributable to Tax-Exempt Income Fund's Class B shares, less liabilities
attributable to Tax-Exempt Income Fund's Class B shares. As noted above, the
asset values of Tax-Exempt Income Fund and Tax-Free Bond Fund will be determined
at the close of business (4:00 p.m. Eastern Time) on the Closing Date for
purposes of the Reorganization. See "Description of Agreement" below.
Pursuant to the Agreement, Tax-Exempt Income Fund will liquidate and distribute
the Tax-Free Bond Fund Shares received, as described above, pro rata to the
shareholders of record of each class determined as of the close of regular
trading on the New York Stock Exchange on the Closing Date. The result of the
transfer of assets will be that Tax-Free Bond Fund will add to its portfolio the
net assets of Tax-Exempt Income Fund. Class A shareholders of Tax-Exempt Income
Fund will become Class A shareholders of Tax-Free Bond Fund, and Class B
shareholders of Tax-Exempt Income Fund will become Class B shareholders of
Tax-Free Bond Fund.
The Agreement and the Reorganization were approved by the Board of Trustees of
Tax-Exempt Income Fund at a meeting held on December 11, 1995. The Agreement and
the Reorganization were approved by the Board of Trustees of Tax-Free Bond Fund
at a meeting held on November 28, 1995. In connection with their approval of the
Reorganization, the Board of Trustees considered several matters described in
greater detail below.
REASONS FOR THE PROPOSED REORGANIZATION
The Board of Trustees of Tax-Exempt Income Fund believes that the proposed
Reorganization will be advantageous to the shareholders of Tax-Exempt Income
Fund in several respects. The Board of Trustees considered the following
matters, among others, in approving the Proposal.
First, the Board of Trustees believes that it is not advantageous to operate and
market Tax-Exempt Income Fund separately from Tax-Free Bond Fund because their
investment objectives and policies are substantially similar. By being offered
simultaneously, each Fund hinders the other Fund's potential for asset growth.
Second, the Board of Trustees considered that shareholders may be better served
by a fund offering greater diversification. To the extent that the Funds' assets
are combined into a single portfolio and a larger asset base is created as a
result of the Reorganization, greater diversification of Tax-Free Bond Fund's
investment portfolio can be achieved than is currently possible in either Fund.
Greater diversification is expected to be beneficial to shareholders of both
Funds because it may reduce the negative effect which the adverse performance of
any one security may have on the performance of the entire portfolio.
Third, the Board of Trustees considered the fact that Tax-Free Bond Fund is
subject to a higher management fee rate than Tax-Exempt Income Fund. The Board
of Trustees also considered, however, the fact that Tax-Exempt Income Fund
shareholders will benefit from the Adviser's agreement not to impose a portion
of the management fee owed by Tax-Free Bond Fund until December 23, 1996, or
later. The Board of Trustees also considered the proposal by the Adviser to
reduce its management fee rate for the Tax-Free Bond Fund if the
19
<PAGE> 26
Reorganization is approved by Tax-Exempt Income Fund's shareholders to the same
rate currently applicable to Tax-Exempt Income Fund as of the Closing Date. The
Board of Trustees believes that the decrease in management fee rate will not
result in Tax-Free Bond Fund receiving lower quality of services from the
Adviser. The Adviser believes that the merger may result in a lower overall
management fee rate for the current fiscal year.
Fourth, the Board of Trustees considered the fact that after the Reorganization
the assets of Tax-Free Bond Fund attributable to Tax-Exempt Income Fund will
immediately be subject to a Class A Rule 12b-1 fee of 0.15% of average net
assets attributable to Class A shares. The shareholders of Tax-Free Bond Fund
will, at their special meeting in June 1996, consider a proposal by John Hancock
Funds to increase the Fund's Class A Rule 12b-1 fee from its current rate of
0.15% to 0.25%, yet this increased fee, if approved, is lower than Tax-Exempt
Income Fund's current Class A Rule 12b-1 fee of 0.30%. Furthermore, the increase
will not take effect until December 23, 1996 or later. In addition, the Board of
Trustees of Tax-Exempt Income Fund considered the fact that after the
Reorganization the assets of Tax-Free Bond Fund attributable to Tax-Exempt
Income Fund will immediately be subject to a Class B Rule 12b-1 fee of 0.90% of
average net assets attributable to Class B shares. On December 23, 1996 or
later, John Hancock Funds' and the Fund's agreement to limit the Class B Rule
12b-1 fee to 0.90% will terminate. As a result, the Class B Rule 12b-1 fee will
increase to 1.00%, which is the same Class B Rule 12b-1 fee currently paid by
Tax-Exempt Income Fund.
Fifth, the Board of Trustees believes that the Tax-Free Bond Fund Shares
received in the Reorganization will provide existing Tax-Exempt Income Fund
shareholders with substantially the same investment advantages that they
currently enjoy at a comparable level of risk. The Board of Trustees also
considered the performance history of each Fund.
Sixth, a combined fund offers economies of scale that may have a positive effect
on the expenses currently borne by Tax-Exempt Income Fund, and hence,
indirectly, its shareholders. Both Funds incur substantial costs for accounting,
legal, insurance, and custodial and administrative services. The Board of
Trustees expects that the Reorganization may result in a decrease over time in
the expenses currently borne indirectly by Tax-Exempt Income Fund's
shareholders. The Board of Trustees also considered the fact that immediately
following the Reorganization, all shareholders will benefit from lower total
Fund operating expenses. Although the agreements by the Adviser and John Hancock
Funds not to impose a portion of the fees to which they are entitled will expire
on or after December 23, 1996, no shareholder will pay higher total Fund
operating expenses as a result of the Reorganization. See expense information in
"Summary -- the Funds' Expenses."
The Board of Trustees considered the fact that, from the perspective of Tax-Free
Bond Fund, the Reorganization presents an opportunity to acquire assets without
the obligation to pay commissions or other similar costs that are normally
associated with the purchase of securities. This opportunity provides an
economic benefit to Tax-Free Bond Fund and its shareholders.
The Board of Trustees also considered the fact that the Adviser and John Hancock
Funds will receive certain benefits from the Reorganization. The
20
<PAGE> 27
consolidated portfolio management effort might result in time savings for the
Adviser and the preparation of fewer prospectuses, reports and regulatory
filings. The Trustees, however, believe that this consideration will not amount
to a significant economic benefit.
CAPITAL LOSS CARRYOVERS
As of December 31, 1995, Tax-Exempt Income Fund had capital loss carryovers, as
determined for federal income tax purposes, in the aggregate amount of
approximately $8,110,320, of which $2,374,664 expires on December 31, 2002, and
$5,735,656 expires on December 31, 2003. If the Reorganization does not occur,
Tax-Exempt Income Fund may use these capital loss carryovers to offset any net
capital gain, which would reduce the amount of net capital gain Tax-Exempt
Income Fund would be required to distribute to its shareholders in order to
avoid fund level income and/or excise taxes on undistributed capital gain.
If the Reorganization is consummated, Tax-Free Bond Fund will succeed to and
take into account Tax-Exempt Income Fund's capital loss carryovers and will be
able to use such carryovers, along with any carryovers it may have, to offset
any net capital gain, subject to certain limitations under the Code that may be
applicable because of the Reorganization and certain other changes in the past
or future share ownership of Tax-Free Bond Fund. These limitations could result
in the expiration of all or portions of such carryovers before they are fully
used.
UNREIMBURSED DISTRIBUTION AND SHAREHOLDER SERVICE EXPENSES
The Board of Trustees has determined that, if the Reorganization is consummated,
distribution and shareholder service expenses incurred in connection with shares
of Tax-Exempt Income Fund, and not reimbursed under Tax-Exempt Income Fund's
Rule 12b-1 Plans or through CDSCs, will be reimbursable expenses under Tax-Free
Bond Fund's Rule 12b-1 Plans (the "assumption"). However, the maximum aggregate
amounts payable during any fiscal year under Tax-Free Bond Fund's Rule 12b-1
Plans (0.15% of average daily net assets attributable to Class A shares (0.25%
if approved by Tax-Free Bond Fund's shareholders) and 1.00% of average daily net
assets attributable to Class B shares) will not be affected by the assumption.
With respect to Tax-Free Bond Fund's Class A and Class B shares, the percentage
of net assets on a pro forma combined basis that the unreimbursed expenses
represent will decrease as a result of the Reorganization and the assumption. As
of December 31, 1995 the unreimbursed distribution and shareholder service
expenses of Tax-Free Bond Fund attributable to Class A and Class B shares were
$105,329 (.09%) of Tax-Free Bond Fund's net assets attributable to Class A
shares and $3,009,952 (3.96%) of Tax-Free Bond Fund's net assets attributable to
Class B shares, respectively. As of the same date, the unreimbursed distribution
and shareholder service expenses of Tax-Exempt Income Fund attributable to Class
A and Class B shares were $495,815 (.01%) attributable to Class A shares and
$298,337 (3.52%) of Tax-Exempt Income Fund's net assets attributable to Class B
shares, respectively.
After the Reorganization on a pro forma combined basis, the unreimbursed
distribution and shareholder service expenses of Tax-Free Bond Fund attributable
21
<PAGE> 28
to Class A and Class B shares will be $601,144 (0.01% of Tax-Free Bond Fund's
pro forma net assets attributable to Class A shares) and $3,299,889 (3.92% of
Tax-Free Bond Fund's pro forma net assets attributable to Class B shares),
respectively.
The assumption will have no immediate effect upon the payments made under
Tax-Free Bond Fund's Rule 12b-1 Plans. While John Hancock Funds hopes to recover
unreimbursed distribution and shareholder service expenses over an extended
period of time, Tax-Free Bond Fund is not obligated to assure that these amounts
are recouped by John Hancock Funds.
Unreimbursed distribution and shareholder service expenses do not currently
appear as an expense or liability in the financial statements of either Fund,
nor will they appear in the financial statements of Tax-Free Bond Fund after the
Reorganization until paid or accrued. Even in the event of termination or
noncontinuance of Tax-Free Bond Fund's Rule 12b-1 Plans, Tax-Free Bond Fund is
not legally committed, and is not required to commit, to the payment of any
unreimbursed distribution and shareholder service expenses. For this reason,
unreimbursed expenses do not enter into the calculation of a Fund's net asset
value or the formula for calculating Rule 12b-1 payments. The staff of the SEC
has not approved or disapproved the treatment of the unreimbursed distribution
and shareholder service expenses described in this Proxy Statement.
BOARDS' EVALUATION AND RECOMMENDATION
On the basis of the factors described above and other factors, the Board of
Trustees, including a majority of the Independent Trustees, determined that the
Reorganization is in the best interests of Tax-Exempt Income Fund and that the
interests of Tax-Exempt Income Fund's shareholders will not be diluted as a
result of the Reorganization. On the same basis, the Board of Trustees of Tax-
Free Bond Fund, including a majority of the Independent Trustees, determined
that the Reorganization is in the best interests of Tax-Free Bond Fund and that
the interests of Tax-Free Bond Fund's shareholders will not be diluted as a
result of the Reorganization.
THE TRUSTEES OF JOHN HANCOCK TAX-EXEMPT INCOME FUND RECOMMEND THAT THE
SHAREHOLDERS OF JOHN HANCOCK TAX-EXEMPT INCOME FUND VOTE FOR THE PROPOSAL TO
APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION.
DESCRIPTION OF AGREEMENT
The following description of the Agreement is a summary, does not purport to be
complete, and is subject in all respects to the provisions of the Agreement, and
is qualified in its entirety by reference to the Agreement. A copy of the
Agreement is attached to this Proxy Statement and Prospectus as EXHIBIT B and
should be read in its entirety. Paragraph references are to appropriate
provisions of the Agreement.
Method of Carrying Out Reorganization. If Tax-Exempt Income Fund shareholders
approve the Agreement, the Reorganization will be consummated promptly after the
various conditions to the obligations of each of the parties are satisfied (see
Agreement, paragraphs 6 through 8). The Reorganization will be completed on the
Closing Date.
22
<PAGE> 29
On the Closing Date, Tax-Exempt Income Fund will transfer all of its assets to
Tax-Free Bond Fund in exchange for Tax-Free Bond Fund Shares with an aggregate
net asset value equal to the value of the assets delivered, less the liabilities
of Tax-Exempt Income Fund assumed, as of the close of business on the Closing
Date (see Agreement, paragraphs 1 and 2).
The value of Tax-Exempt Income Fund's assets and Tax-Free Bond Fund's net asset
values per Class A share and per Class B share will be determined according to
the valuation procedures set forth in Tax-Exempt Income Fund's Prospectus and
Statement of Additional Information and in the Tax-Free Bond Fund Prospectus,
respectively (see "Share Price" in the Tax-Free Bond Fund Prospectus).
Surrender of Share Certificates. Tax-Exempt Income Fund shareholders whose
shares are represented by one or more share certificates should, prior to the
Closing Date, either surrender their certificates to Tax-Exempt Income Fund or
deliver to Tax-Exempt Income Fund an affidavit with respect to lost
certificates, in the form and accompanied by the surety bonds that Tax-Exempt
Income Fund may require (collectively, an "Affidavit"). On the Closing Date, all
certificates which have not been surrendered will be deemed to be cancelled,
will no longer evidence ownership of Tax-Exempt Income Fund's shares and will
evidence ownership of Tax-Free Bond Fund Shares. Shareholders may not redeem or
transfer Tax-Free Bond Fund Shares received in the Reorganization until they
have surrendered their Tax-Exempt Income Fund share certificates or delivered an
Affidavit relating to them. Tax-Free Bond Fund will not issue share certificates
in the Reorganization.
Conditions Precedent to Closing. The obligation of Tax-Exempt Income Fund to
consummate the Reorganization is subject to the satisfaction of certain
conditions precedent, including the performance by Tax-Free Bond Fund of all
acts and undertakings required under the Agreement and the receipt of all
consents, orders and permits necessary to consummate the Reorganization (see
Agreement, paragraphs 6 through 8).
The obligation of Tax-Free Bond Fund to consummate the Reorganization is subject
to the satisfaction of certain conditions precedent, including Tax-Exempt Income
Fund's performance of all acts and undertakings to be performed under the
Agreement, the receipt of certain documents and financial statements from
Tax-Exempt Income Fund, and the receipt of all consents, orders and permits
necessary to consummate the Reorganization (see Agreement, paragraphs 6 through
8).
The obligations of both parties are subject to the receipt of approval and
authorization of the Agreement by the requisite vote of the holders of the
outstanding shares of beneficial interest of Tax-Exempt Income Fund in
accordance with the provisions of the Fund's Declaration of Trust, as amended,
and By-Laws and the receipt of a favorable opinion of Hale and Dorr as to the
federal income tax consequences of the Reorganization. (See Agreement, paragraph
8).
Termination of Agreement. The Agreement may be terminated, whether or not
approval of Tax-Exempt Income Fund's shareholders has been obtained, by mutual
agreement of the parties. In addition, either party may terminate its
obligations under the Agreement at or prior to the Closing Date, because of a
23
<PAGE> 30
material breach by the other party of any representations, warranties or
agreements contained in the Agreement, or if a condition precedent in the
Agreement has not been met.
Expenses of the Reorganization. Tax-Free Bond Fund and Tax-Exempt Income Fund
will each be responsible for its own expenses incurred in connection with
entering into and carrying out the provisions of the Agreement, whether or not
the Reorganization is consummated.
Tax Considerations. The consummation of the Reorganization is subject to the
receipt of a favorable opinion of Hale and Dorr, counsel to the Funds,
satisfactory to Tax-Exempt Income Fund and Tax-Free Bond Fund and described
above under the caption "Summary -- Reorganization -- Tax Considerations."
VOTING RIGHTS AND REQUIRED VOTE
Each Tax-Exempt Income Fund share is entitled to one vote. Approval of the
Proposal requires an affirmative Majority Shareholder Vote.
Shares of beneficial interest of Tax-Exempt Income Fund represented in person or
by proxy, including shares which abstain or do not vote with respect to the
Proposal, will be counted for purposes of determining whether a quorum is
present at the Meeting. Accordingly, an abstention from voting has the same
effect as a vote against the Proposal. However, if a broker or nominee holding
shares in "street name" indicates on the proxy card that it does not have
discretionary authority to vote on the Proposal, those shares will not be
considered as present and entitled to vote with respect to the Proposal.
Accordingly, a "broker non-vote" has no effect on the voting in determining
whether the Proposal has been adopted pursuant to the requirement that the
Proposal be approved by 67% or more of the shares present at the Meeting,
provided that the holders of more than 50% of the outstanding shares (excluding
the "broker non-votes") are present or represented. However, for purposes of
determining whether the Agreement has been adopted pursuant to the requirement
that the Proposal be approved by more than 50% of the outstanding shares of the
Fund, a "broker non-vote" has the same effect as a vote against the Proposal
because shares represented by a "broker non-vote" are considered to be
outstanding shares.
If the requisite approval of shareholders is not obtained, Tax-Exempt Income
Fund will continue to engage in business as a registered open-end, management
investment company and the Board of Trustees will consider what further action
may be appropriate.
CAPITALIZATION
(UNAUDITED)
The following table sets forth the capitalization of each Fund as of December
31, 1995, and the pro forma combined capitalization of both Funds as if the
Reorganization had occurred on such date. The table reflects pro forma exchange
ratios of approximately 1.0314 Class A Tax-Free Bond Fund Shares being issued
for each Class A share of Tax-Exempt Income Fund and approximately 1.0312 Class
B Tax-Free Bond Fund Shares being issued for each Class B share of Tax-Exempt
Income Fund. If the Reorganization is consummated, the actual exchange ratios on
the Closing Date may vary from the exchange ratios indicated
24
<PAGE> 31
due to changes in the market value of the portfolio securities of both Tax-Free
Bond Fund and Tax-Exempt Income Fund between December 31, 1995 and the Closing
Date, changes in the amount of undistributed net investment income and net
realized capital gains of Tax-Free Bond Fund and Tax-Exempt Income Fund during
that period resulting from income and distributions, and changes in the accrued
liabilities of Tax Free Bond Fund and Tax-Exempt Income Fund during the same
period.
<TABLE>
<CAPTION>
TAX-EXEMPT TAX-FREE PRO FORMA
INCOME FUND BOND FUND COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
Net Assets
Class A...................... $495,730,615 $118,797,313 $614,527,928
Class B...................... 8,647,224 76,823,758 85,470,982
Net Asset Value Per Share
Class A...................... $ 11.00 $ 10.67 $ 10.67
Class B...................... 11.00 10.67 10.67
Shares Outstanding
Class A...................... 45,056,903 11,137,117 57,611,315
Class B...................... 786,183 7,202,812 8,013,555
</TABLE>
If the Reorganization had taken place on December 31, 1995, Tax-Exempt Income
Fund would have received 46,474,198 Class A shares and 810,743 Class B shares of
Tax-Free Bond Fund which would have been available for distribution to
shareholders of the applicable class of Tax-Exempt Income Fund. No assurance can
be given as to the number of Class A shares or Class B shares of Tax-Free Bond
Fund that will be received by Tax-Exempt Income Fund on the Closing Date. The
foregoing is merely an example of what Tax-Exempt Income Fund would have
received and distributed had the Reorganization been consummated on December 31,
1995, and should not be relied upon to reflect the amount that will actually be
received on the Closing Date.
COMPARATIVE PERFORMANCE INFORMATION
TOTAL RETURN
The average annual total return at public offering price on Tax-Exempt Income
Fund's Class A shares for the one-year, five-year and ten-year periods ended
December 31, 1995 was 11.33%, 7.28%, and 8.28%, respectively. The average annual
total return on Tax-Exempt Income Fund's Class B shares for the one-year and
life-of-class periods ended December 31, 1995 was 10.73% and 2.24%,
respectively. Total returns on Class B shares reflect the applicable contingent
deferred sales charge.
The average annual total return at public offering price on Tax-Free Bond Fund's
Class A shares for the one-year, five-year and life-of-class periods ended
December 31, 1995 was 14.79%, 8.84%, and 8.39%, respectively. The average annual
total return at public offering price on Tax-Free Bond Fund's Class B shares for
the one-year and life-of-class periods ended December 31, 1995 was 14.42% and
7.24%, respectively. Total returns on Class B shares reflect the applicable
contingent deferred sales charge.
The average annual total return of each class of the Funds is determined by
multiplying a hypothetical initial investment of $1,000 in a class by the
average
25
<PAGE> 32
annual compound rate of return (including capital appreciation/depreciation, and
dividends and distributions paid and reinvested) attributable to that class for
the stated period and annualizing the result.
The table below indicates the total return (capital changes plus reinvestment of
all dividends and distributions) on a hypothetical investment of $1,000 in each
class of each Fund covering the indicated periods ending December 31, 1995. The
data below represent historical performance which should not be considered
indicative of future performance of either Fund. Each Fund's performance and net
asset value will fluctuate such that shares, when redeemed, may be worth more or
less than their original cost.
<TABLE>
VALUE OF A $1,000 INVESTMENT IN JOHN HANCOCK TAX-EXEMPT INCOME FUND
(UNAUDITED)
<CAPTION>
VALUE OF
INVESTMENT ON
DEC. 31, 1995 TOTAL RETURN TOTAL RETURN
INVESTMENT INVESTMENT AMOUNT OF INCLUDING INCLUDING SALES CHARGE EXCLUDING SALES CHARGE
PERIOD DATE INVESTMENT SALES CHARGE CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
- -------------- ---------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A
SHARES:
1 year ended
12/31/95..... 12/31/94 $1,000 $ 1,114 11.35% 11.35% 16.60% 16.60%
5 years ended
12/31/95..... 12/31/90 $1,000 $ 1,421 42.08% 7.28% 48.79% 8.27%
10 years ended
12/31/95..... 12/31/85 $1,000 $ 2,216 121.64% 8.29% 132.12% 8.79%
CLASS B
SHARES:
1 year ended
12/31/95..... 12/31/94 $1,000 $ 1,107 10.73% 10.73% 15.70% 15.70%
Life-of-Class
ended
12/31/95..... 1/3/94 $1,000 $ 1,045 4.52% 2.24% 8.52% 4.19%
</TABLE>
<TABLE>
VALUE OF A $1,000 INVESTMENT IN JOHN HANCOCK TAX-FREE BOND FUND
(UNAUDITED)
<CAPTION>
VALUE OF
INVESTMENT ON
DEC. 31, 1995 TOTAL RETURN TOTAL RETURN
INVESTMENT INVESTMENT AMOUNT OF INCLUDING INCLUDING SALES CHARGE EXCLUDING SALES CHARGE
PERIOD DATE INVESTMENT SALES CHARGE CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
- -------------- ---------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A
SHARES:
1 year ended
12/31/95..... 12/31/94 $1,000 $ 1,148 14.79% 14.79% 20.20% 20.20%
5 years ended
12/31/95..... 12/31/90 $1,000 $ 1,527 52.69% 8.84% 59.94% 9.84%
Life-of-Class
ended
12/31/95..... 1/5/90 $1,000 $ 1,620 62.00% 8.39% 69.61% 9.23%
CLASS B
SHARES:
1 year ended
12/31/95..... 12/31/94 $1,000 $ 1,144 14.42% 14.42% 19.41% 19.41%
Life-of-Class
ended
12/31/95..... 12/31/91 $1,000 $ 1,322 32.24% 7.24% 35.24% 7.84%
</TABLE>
26
<PAGE> 33
<TABLE>
YIELD AND EFFECTIVE YIELD
The following table shows the average yield and tax equivalent yield achieved by
each Fund for the thirty day period ended December 31, 1995. These figures are
computed in accordance with the SEC's standard formula.
<CAPTION>
TAX EQUIVALENT
AVERAGE YIELD YIELD*
----------------- -----------------
THIRTY DAYS THIRTY DAYS
ENDED ENDED
FUND DECEMBER 31, 1995 DECEMBER 31, 1995
- ---------------------------------------- ----------------- -----------------
<S> <C> <C>
Tax-Exempt Income Fund
Class A Shares........................ 4.65% 7.70%
Class B Shares........................ 4.17% 6.90%
Tax-Free Bond Fund
Class A Shares........................ 5.11% 8.46%
Class B Shares........................ 4.61% 7.63%
<FN>
- ---------------
* Based on maximum federal tax rate of 39.6%.
</TABLE>
BUSINESS OF TAX-EXEMPT INCOME FUND
GENERAL
For a discussion of the organization and operation of Tax-Exempt Income Fund,
see "Investment Objective and Policies" and "Organization and Management of the
Fund" in the Tax-Exempt Income Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Tax-Exempt Income Fund's investment objective and policies,
see "Investment Objective and Policies" in the Tax-Exempt Income Fund
Prospectus.
TRUSTEES
For a discussion of the responsibilities of the Board of Trustees, see
"Organization and Management of the Fund" in the Tax-Exempt Income Fund
Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For a discussion regarding Tax-Exempt Income Fund's investment adviser and
distributor, see "Organization and Management of the Fund," "How to Buy Shares"
and "Share Price" in the Tax-Exempt Income Fund Prospectus.
EXPENSES
For a discussion of Tax-Exempt Income Fund's expenses, see "Expense Information"
and "The Fund's Expenses" in the Tax-Exempt Income Fund Prospectus.
CUSTODIAN AND TRANSFER AGENT
Tax-Exempt Income Fund's custodian is Investors Bank and Trust Company.
Tax-Exempt Income Fund's transfer agent is John Hancock Investor Services
Corporation.
27
<PAGE> 34
TAX-EXEMPT INCOME FUND SHARES
For a discussion of Tax-Exempt Income Fund's shares of beneficial interest, see
"Organization and Management of the Fund" in the Tax-Exempt Income Fund
Prospectus.
PURCHASE OF TAX-EXEMPT INCOME FUND SHARES
For a discussion of how Class A and Class B shares of Tax-Exempt Income Fund may
be purchased or exchanged, see "How to Buy Shares" and "Additional Services and
Programs" in the Tax-Exempt Income Fund Prospectus. In anticipation of the
Reorganization, after the Record Date, no new accounts may be opened in Tax-
Exempt Income Fund. Existing shareholders of Tax-Exempt Income Fund may continue
to acquire shares of the Fund after the Record Date by direct purchase, through
a monthly automatic accumulation plan and through reinvestment of dividends and
distributions.
REDEMPTION OF TAX-EXEMPT INCOME FUND SHARES
For a discussion of how Class A and Class B shares of Tax-Exempt Income Fund may
be redeemed (other than in the Reorganization), see "How to Redeem Shares" in
the Tax-Exempt Income Fund Prospectus. Tax-Exempt Income Fund shareholders whose
shares are represented by share certificates will be required to surrender their
certificates for cancellation or deliver an affidavit of loss accompanied by an
adequate surety bond to John Hancock Investor Services Corporation in order to
redeem Tax-Free Bond Fund Shares received in the Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of Tax-Exempt Income Fund's policy with respect to dividends,
distributions and taxes, see "Dividends and Taxes" in the Tax-Exempt Income Fund
Prospectus.
BUSINESS OF TAX-FREE BOND FUND
For a discussion of the organization and current operation of Tax-Free Bond
Fund, see "Investment Objective and Policies" and "Organization and Management
of the Fund" in the Tax-Free Bond Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Tax-Free Bond Fund's investment objective and policies, see
"Investment Objective and Policies" in the Tax-Free Bond Fund Prospectus.
TRUSTEES
For a discussion of the responsibilities of the Board of Trustees, see
"Organization and Management of the Fund" in the Tax-Free Bond Fund Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For a discussion regarding Tax-Free Bond Fund's investment adviser and
distributor, see "Organization and Management of the Fund," "How to Buy Shares"
and "Share Price" in the Tax-Free Bond Fund Prospectus.
28
<PAGE> 35
EXPENSES
For a discussion of Tax-Free Bond Fund's expenses, see "Expense Information" and
"The Fund's Expenses" in the Tax-Free Bond Fund Prospectus.
CUSTODIAN AND TRANSFER AGENT
Tax-Free Bond Fund's custodian is Investors Bank and Trust Company. Tax-Free
Bond Fund's transfer agent is John Hancock Investor Services Corporation.
TAX-FREE BOND FUND SHARES
For a discussion of Tax-Free Bond Fund Shares, see "Organization and Management
of the Fund" in the Tax-Free Bond Fund Prospectus.
PURCHASE OF TAX-FREE BOND FUND SHARES
For a discussion of how Class A and Class B shares of Tax-Free Bond Fund may be
purchased or exchanged, see "How to Buy Shares" and "Additional Services and
Programs" in the Tax-Free Bond Fund Prospectus.
REDEMPTION OF TAX-FREE BOND FUND SHARES
For a discussion of how Class A and Class B shares of Tax-Free Bond Fund may be
redeemed, see "How to Redeem Shares" in the Tax-Free Bond Fund Prospectus.
Former shareholders of Tax-Exempt Income Fund whose shares are represented by
share certificates will be required to surrender their certificates for
cancellation or deliver an affidavit of loss accompanied by an adequate surety
bond to John Hancock Investor Services Corporation in order to redeem Tax-Free
Bond Fund Shares received in the Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of Tax-Free Bond Fund's policy with respect to dividends,
distributions and taxes, see "Dividends and Taxes" in the Tax-Free Bond Fund
Prospectus.
EXPERTS
The respective financial statements and the financial highlights of Tax-Free
Bond Fund and Tax-Exempt Income Fund as of December 31, 1995 and for the year
then ended, incorporated by reference into the Proxy Statement and Prospectus,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing in the Statement of Additional Information, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act, and in accordance therewith
files reports, proxy statements and other information with the SEC. These
reports, proxy statements and other information filed by Tax-Exempt Income Fund
and Tax-Free Bond Fund, can be inspected and copied (at prescribed rates) at the
public reference facilities of the SEC at 450 Fifth Street, N.W., Washington,
D.C., and at the following regional office: New York (7 World Trade Center,
Suite 1300, New York, New York). Copies of such material can also be obtained by
mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
29
<PAGE> 36
EXHIBIT A
JOHN HANCOCK TAX-FREE BOND FUND, MAY 1, 1995
SUPPLEMENT TO CLASS A AND CLASS B PROSPECTUS
The "INVESTMENT OBJECTIVE AND POLICIES" section is amended as follows:
The Fund may invest up to 35% of its assets in municipal bonds and notes rated,
at time of purchase, Ba, B by Moody's Investors Services, Inc., BB, B by
Standard and Poor's Rating Group or Fitch or, if not rated, determined by the
John Hancock Advisers, Inc. (the "Adviser") to be of comparable credit quality.
These bonds are considered speculative and are generally referred to as junk
bonds. While generally providing greater income than investments and in higher
quality securities, these bonds involve greater risk of principal and income
loss, including the possibility of default. These bonds may have greater price
volatility, especially during periods of economic uncertainty or change. Bonds
rated B are currently meeting debt services requirements but provide a limited
margin of safety and are vulnerable to default in the event of adverse business,
financial or economic conditions. In addition, the market for these bonds may be
less liquid than the market for higher rated securities. Therefore, the
Adviser's judgment at times play a greater role in the performance and valuation
of the Fund's investments in these bonds.
"THE FUND'S EXPENSES" section is amended as follows:
The Trustees of the Fund have voted to recommend that the Class A shareholders
of the Fund approve an increase in the Rule 12b-1 fee for Class A shares of the
Fund from 0.15% of average daily net assets to 0.25% of average daily net assets
effective at the end of 1996. Also at the end of 1996, the Distributor will
remove its Rule 12b-1 fee reduction on Class B shares Rule 12b-1 plan so that
the fee increases from 0.90% of average daily net assets to 1.00% of average
daily net assets.
November 28, 1995
The "ORGANIZATION AND MANAGEMENT OF THE FUND" section is amended as follows:
Thomas C. Goggins is Senior Vice President of the Adviser and portfolio manager
of the Fund. Mr. Goggins heads up John Hancock's team of municipal managers and
analysts. He joined the Adviser in 1995. Previously to that date, Mr. Goggins
was a municipal bond portfolio manager at Putnam Investments and Transamerica
Investment Services, Inc.
January 15, 1996
A-1
<PAGE> 37
The "Qualifying for a Reduced Sales Charge" section under SHARE PRICE is
supplemented as follows:
Effective March 1, 1996, members of an approved affinity group financial service
plan, may purchase Class A shares of the Fund without paying a sales charge.*
- ---------------
* For investments made under these provisions, John Hancock Funds, Inc. 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.
March 1, 1996
5200S 3/96
A-2
<PAGE> 38
<TABLE>
JOHN HANCOCK
TAX-FREE
BOND FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1995
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
Expense Information........................................ 2
The Fund's Financial Highlights............................ 3
Investment Objective and Policies.......................... 5
Organization and Management of the Fund.................... 8
Alternative Purchase Arrangements.......................... 9
The Fund's Expenses........................................ 11
Dividends and Taxes........................................ 12
Performance................................................ 13
How to Buy Shares.......................................... 15
Share Price................................................ 16
How to Redeem Shares....................................... 23
Additional Services and Programs........................... 25
Investments, Techniques and Risk Factors................... 29
Derivative Instruments..................................... 31
</TABLE>
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.
1
<PAGE> 39
EXPENSE INFORMATION
<TABLE>
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.
<CAPTION>
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
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%
<FN>
- ---------------
* 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.
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
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
</TABLE>
(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."
2
<PAGE> 40
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.
<TABLE>
Selected data for each class of shares outstanding throughout each period
is as follows:
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------------------------ ----------------------------
YEAR ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED DECEMBER 31,
------------------------------------- DECEMBER 31, ----------------------------
1994(1) 1993 1992 1991 1990(2) 1994(1) 1993 1992(3)
------- ------ ------ ------ ------------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------ ------ ------ ------ ------ ------ ------ ------
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)
------ ------ ------ ------ ------ ------ ------ ------
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%
</TABLE>
3
<PAGE> 41
<TABLE>
THE FUND'S FINANCIAL HIGHLIGHTS -- Continued
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------------------------ ----------------------------
YEAR ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED DECEMBER 31,
------------------------------------- DECEMBER 31, ----------------------------
1994(1) 1993 1992 1991 1990(2) 1994(1) 1993 1992(3)
------- ------ ------ ------ ------------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets, end of period (in
thousands)........................... $114,539 $136,521 $99,523 $73,393 $45,437 $70,243 $56,384 $18,272
<FN>
- ---------------
(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.
</TABLE>
4
<PAGE> 42
INVESTMENT OBJECTIVE AND POLICIES
THE FUND SEEKS TO PROVIDE INCOME EXEMPT FROM FEDERAL INCOME TAX.
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.
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.
THE FUND'S INVESTMENT IN MUNICIPAL OBLIGATIONS INCLUDES MUNICIPAL BONDS,
MUNICIPAL NOTES AND MUNICIPAL COMMERCIAL PAPER.
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
5
<PAGE> 43
and project notes. Municipal commercial paper obligations are unsecured
promissory notes issued by municipalities to meet short-term credit needs.
THE FUND INVESTS IN MUNICIPAL OBLIGATIONS.
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.
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.
THERE IS NO RESTRICTION ON THE MATURITIES OF THE FUND'S MUNICIPAL
OBLIGATIONS.
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.
THE FUND MAY EMPLOY CERTAIN INVESTMENT STRATEGIES TO HELP ACHIEVE ITS
INVESTMENT OBJECTIVE.
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
6
<PAGE> 44
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.
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 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 FOLLOWS CERTAIN POLICIES WHICH MAY HELP TO REDUCE INVESTMENT RISK.
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
7
<PAGE> 45
trustees of the John Hancock Group of Funds. There can be no assurance that the
Fund will achieve its investment objective.
RISK FACTORS. An investment in the Fund is intended for long-term
investors who can accept the risks associated with investing primarily in
fixed-income securities. The Fund's investments will be subject to market
fluctuation and other risks inherent in all securities. The 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."
BROKERS ARE CHOSEN ON BEST PRICE AND EXECUTION.
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.
ORGANIZATION AND MANAGEMENT OF THE FUND
THE TRUSTEES ELECT OFFICERS AND RETAIN THE INVESTMENT ADVISER WHO IS
RESPONSIBLE FOR THE DAY-TO-DAY OPERATIONS OF THE FUND, SUBJECT TO THE TRUSTEES'
POLICIES AND SUPERVISION.
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.
JOHN HANCOCK ADVISERS, INC. ADVISES INVESTMENT COMPANIES HAVING A TOTAL
ASSET VALUE OF MORE THAN $13 BILLION.
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
8
<PAGE> 46
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.
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
AN ALTERNATIVE PURCHASE PLAN ALLOWS YOU TO CHOOSE THE METHOD OF PAYMENT
THAT IS BEST FOR YOU.
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.
INVESTMENTS IN CLASS A SHARES ARE SUBJECT TO AN INITIAL SALES CHARGE.
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."
INVESTMENTS IN CLASS B SHARES ARE SUBJECT TO A CONTINGENT DEFERRED SALES
CHARGE.
CLASS B SHARES. You will not incur a sales charge when you purchase Class
B shares, but the shares are subject to a sales charge if you redeem them within
six years of purchase (the "contingent deferred sales charge" or the "CDSC").
Class B shares are subject to ongoing distribution and service fees at a
9
<PAGE> 47
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.
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.
YOU SHOULD CONSIDER WHICH CLASS OF SHARES WOULD BE MORE BENEFICIAL TO YOU.
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."
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 proceeds of the ongoing distribution and service fees, as well
as
10
<PAGE> 48
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 FUND PAYS DISTRIBUTION AND SERVICE FEES FOR MARKETING AND
SALES-RELATED SHAREHOLDER SERVICING.
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.
11
<PAGE> 49
In the event John Hancock Funds is not fully reimbursed for payments it
makes or expenses it incurs under the Class A Plan, these expenses will not be
carried beyond one year from the date they were incurred. Unreimbursed expenses
under the Class B Plan will be carried forward together with interest on the
balance of these unreimbursed expenses. For the fiscal year ended December 31,
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
YOU SHOULD KEEP YOUR ACCOUNT STATEMENTS RECEIVED BY THE FUND FOR YOUR
PERSONAL TAX RECORDS.
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).
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.
12
<PAGE> 50
Dividends from the Fund's net taxable income, if any, including any market
discount included in the Fund's income, and from the Fund's net short-term
capital gains are taxable to you as ordinary income. Dividends from the Fund's
net long-term capital gains are taxable as long-term capital gain. These
dividends are taxable, whether received in cash or reinvested in additional
shares. Certain dividends may be paid by the Fund in January of a given year but
may be treated as if you received them the previous December.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, the Fund will not be
subject to Federal income tax on any net investment income or net realized
capital gains distributed to its shareholders within the time period prescribed
by the Code. When you redeem (sell) or exchange shares, you may realize a
taxable gain or loss.
On the account application you must certify that 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
THE FUND MAY ADVERTISE ITS YIELD AND TOTAL RETURN.
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
13
<PAGE> 51
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'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 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."
14
<PAGE> 52
<TABLE>
HOW TO BUY SHARES
- ---------------------------------------------------------------------------------------------------------
OPENING AN ACCOUNT
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.
- ---------------------------------------------------------------------------------------------------------
<S> <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" sections on the
AUTOMATIC Account Privileges Application designating a bank account from which funds
ACCUMULATION may be drawn.
PROGRAM 2. The amount you elect to invest will be automatically withdran from your
(MAAP) 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) i 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>
15
<PAGE> 53
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<S> <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
share you own, your account number and the name(s) in which the account is
registered.
2. Make your check payable to John Hancock Investor Services Corporation.
3. Mail the account information and check to:
John Hancock Investor Services Corporation
P.O. Box 9115
Boston, MA 02205-9115
or deliver it to your registered representative or Selling Broker.
- ---------------------------------------------------------------------------------------------------------
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 ACCOUNT STATEMENTS THAT YOU SHOULD KEEP TO HELP WITH YOUR
PERSONAL RECORDKEEPING.
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.
SHARE PRICE
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 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
16
<PAGE> 54
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 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 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.
<TABLE>
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:
<CAPTION>
COMBINED REALLOWANCE
REALLOWANCE TO SELLING
AND SERVICE BROKERS AS A
FEE AS A PERCENTAGE
SALES CHARGE AS SALES CHARGE AS PERCENTAGE OF THE
AMOUNT INVESTED A PERCENTAGE OF A PERCENTAGE OF OF OFFERING OFFERING
(INCLUDING SALES CHARGE) OFFERING PRICE THE AMOUNT INVESTED PRICE(+) PRICE(*)
------------------------ --------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999 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%(***) 0.00%(***)
<FN>
- ---------------
(*) 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.
</TABLE>
17
<PAGE> 55
Sales charges ARE NOT APPLIED to any dividends that are reinvested in
additional Class A shares of the Fund.
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."
<TABLE>
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:
<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
18
<PAGE> 56
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.
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:
CLASS A SHARES MAY BE AVAILABLE WITHOUT A SALES CHARGE TO CERTAIN
INDIVIDUALS AND ORGANIZATIONS.
- - 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.
- - 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.
19
<PAGE> 57
- - 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.
[FN]
- ---------------
*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 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:
<TABLE>
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:
<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
20
<PAGE> 58
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.
<TABLE>
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.
<CAPTION>
CONTINGENT DEFERRED SALES
YEAR IN WHICH CLASS B SHARES CHARGE AS A PERCENTAGE OF
REDEEMED FOLLOWING 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>
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.
UNDER CERTAIN CIRCUMSTANCES, THE CDSC ON CLASS B AND CERTAIN CLASS A SHARE
REDEMPTIONS WILL BE WAIVED.
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.
- 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.
21
<PAGE> 59
- 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.
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.
22
<PAGE> 60
HOW TO REDEEM SHARES
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION REQUEST, PLEASE FOLLOW THESE
PROCEDURES.
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).
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.
- --------------------------------------------------------------------------------
<TABLE>
<S> <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.
- ---------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 61
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
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>
<TABLE>
<CAPTION>
TYPE OF REGISTRATION REQUIREMENTS
-------------------- ------------
<S> <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.
- ---------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT REDEMPTIONS.
THROUGH YOUR BROKER. Your broker may be able to initiate the redemption.
Contact your broker for instructions.
- ---------------------------------------------------------------------------------
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>
24
<PAGE> 62
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
YOU MAY EXCHANGE SHARES OF THE FUND ONLY FOR SHARES OF THE SAME CLASS OF
ANOTHER JOHN HANCOCK FUND.
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.
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.
25
<PAGE> 63
Under exchange agreements with John Hancock Funds, certain dealers, brokers
and investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
Because Fund performance and shareholders can be hurt by excessive trading,
the Fund reserves the right to terminate the exchange privilege for any person
or group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely. The
Fund may also temporarily or permanently terminate the exchange privilege for
any person who makes seven or more exchanges out of the Fund per calendar year.
Accounts under common control or ownership will be aggregated for this purpose.
Although the Fund will attempt to give 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.
26
<PAGE> 64
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
REINVESTMENT PRIVILEGE
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.
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.
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
YOU CAN PAY ROUTINE BILLS FROM YOUR ACCOUNT, OR MAKE PERIODIC DISBURSEMENTS
OF FUNDS FROM YOUR RETIREMENT ACCOUNT TO COMPLY WITH IRS REGULATIONS.
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.
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.
27
<PAGE> 65
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)
YOU CAN MAKE AUTOMATIC INVESTMENTS AND SIMPLIFY YOUR INVESTING.
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.
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
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS MAY ESTABLISH ACCOUNTS.
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.
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.
28
<PAGE> 66
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 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."
29
<PAGE> 67
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 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
30
<PAGE> 68
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 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
31
<PAGE> 69
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.
32
<PAGE> 70
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1995)
<TABLE>
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
<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%
$117,951-256,000 $143,256-250,000 36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
Over $256,000 Over $256,000 39.6% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
<FN>
- ---------------
* 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.
</TABLE>
33
<PAGE> 71
JOHN HANCOCK
TAX-FREE
BOND FUND
INVESTMENT ADVISOR
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services
Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For Service Information
For Telephone Exchange
For Investment-by-Phone call 1-800-225-5291
For Telephone Redemption
For TDD call 1-800-554-6713
T240P 5/95 (LOGO) Printed on Recycled Paper
JOHN HANCOCK
TAX-FREE
BOND FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1995
A MUTUAL FUND SEEKING TO
OBTAIN AS HIGH LEVEL OF
INTEREST INCOME EXEMPT
FROM FEDERAL INCOME TAX AS
IS CONSISTENT WITH
PRESERVATION OF CAPITAL.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
TELEPHONE 1-800-225-5291
<PAGE> 72
EXHIBIT B
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 18th
day of March, 1996, by and between John Hancock Tax-Free Bond Fund (the
"Acquiring Fund"), a Massachusetts business trust, and John Hancock Tax-Exempt
Income Fund (the "Acquired Fund"), a Massachusetts business trust, each with
their principal place of business at 101 Huntington Avenue, Boston,
Massachusetts 02199. The Acquiring Fund and the Acquired Fund are sometimes
referred to collectively herein as the "Funds" and individually as a "Fund."
This Agreement is intended to be and is adopted as a plan of "reorganization,"
as such term is used in Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization will consist of the transfer of all of
the assets of the Acquired Fund to the Acquiring Fund in exchange solely for the
issuance of Class A and Class B shares of beneficial interest of the Acquiring
Fund (the "Acquiring Fund Shares") to the Acquired Fund and the assumption by
the Acquiring Fund of all of the liabilities of the Acquired Fund, followed by
the distribution by the Acquired Fund, on or promptly after the Closing Date
hereinafter referred to, of the Acquiring Fund Shares to the shareholders of the
Acquired Fund in liquidation and termination of the Acquired Fund as provided
herein, all upon the terms and conditions set forth in this Agreement.
In consideration of the premises of the covenants and agreements hereinafter set
forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF
LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE
ACQUIRED FUND
1.1 The Acquired Fund will transfer all of its assets (consisting, without
limitation, of portfolio securities and instruments, dividends and interest
receivables, cash and other assets), as set forth in the statement of assets
and liabilities referred to in Paragraph 7.2 hereof (the "Statement of
Assets and Liabilities"), to the Acquiring Fund free and clear of all liens
and encumbrances, except as otherwise provided herein, in exchange for (i)
the assumption by the Acquiring Fund of the known and unknown liabilities of
the Acquired Fund, including the liabilities set forth in the Statement of
Assets and Liabilities (the "Acquired Fund Liabilities"), which shall be
assigned and transferred to the Acquiring Fund by the Acquired Fund and
assumed by the Acquiring Fund, and (ii) delivery by the Acquiring Fund to
the Acquired Fund, for distribution pro rata by the Acquired Fund to its
Class A and Class B shareholders in proportion to their respective ownership
of Class A and Class B shares of beneficial interest of the Acquired Fund,
as of the close of business on the closing date (the "Closing Date"), of a
number of the Acquiring Fund Shares having an aggregate net asset value
equal to the value of the assets, less such liabilities (herein referred to
as the "net value of the assets"), attributable to the corresponding class
of the Acquired Fund so transferred, assumed, assigned and delivered, all
determined as provided in Paragraph 2.1 hereof and as of a date and time as
specified therein. Such transactions shall take place at the closing
provided
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for in Paragraph 3.1 hereof (the "Closing"). All computations shall be
provided by Investors Bank and Trust Company (the "Custodian"), as custodian
and pricing agent for the Acquiring Fund and the Acquired Fund.
1.2 The Acquired Fund has provided the Acquiring Fund with a list of the current
securities holdings of the Acquired Fund as of the date of execution of this
Agreement. The Acquired Fund reserves the right to sell any of these
securities (except to the extent sales may be limited by representations
made in connection with issuance of the tax opinion provided for in
paragraph 8.6 hereof) but will not, without the prior approval of the
Acquiring Fund, acquire any additional securities other than securities of
the type in which the Acquiring Fund is permitted to invest.
1.3 The Acquiring Fund and the Acquired Fund shall each bear its own expenses in
connection with the transactions contemplated by this Agreement.
1.4 On or as soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), the Acquired Fund will liquidate and distribute pro
rata to shareholders of record of the applicable class (the "Acquired Fund
shareholders"), determined as of the close of regular trading on the New
York Stock Exchange on the Closing Date, the Acquiring Fund Shares received
by the Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund
Shares then credited to the account of the Acquired Fund on the books of the
Acquiring Fund, to open accounts on the share records of the Acquiring Fund
in the names of the Acquired Fund shareholders and representing the
respective pro rata number and class of Acquiring Fund Shares due such
shareholders. Acquired Fund shareholders who own Class A shares of the
Acquired Fund will receive Class A Acquiring Fund Shares, and Acquired Fund
shareholders who own Class B shares of the Acquired Fund will receive Class
B Acquiring Fund Shares. If shares of the Acquired Fund acquired in an
exchange from another mutual fund are subject to a contingent deferred sales
charge ("CDSC") immediately prior to the Closing, the successor Acquiring
Fund Shares received in the Reorganization shall be subject to the same
CDSC, including all terms and conditions for computing and applying such
CDSC. The Acquiring Fund shall not issue certificates representing Acquiring
Fund Shares in connection with such exchange.
1.5 The Acquired Fund shareholders holding certificates representing their
ownership of shares of beneficial interest of the Acquired Fund shall
surrender such certificates or deliver an affidavit with respect to lost
certificates in such form and accompanied by such surety bonds as the
Acquired Fund may require (collectively, an "Affidavit"), to John Hancock
Investor Services Corporation prior to the Closing Date. Any Acquired Fund
share certificate which remains outstanding on the Closing Date shall be
deemed to be cancelled, shall no longer evidence ownership of shares of
beneficial interest of the Acquired Fund and shall evidence ownership of
Acquiring Fund Shares. Unless and until any such certificate shall be so
surrendered or an Affidavit relating thereto shall be delivered, dividends
and other distributions payable by the Acquiring Fund subsequent to the
Liquidation Date with respect to Acquiring Fund Shares shall be paid to the
holder of such certificate(s), but such shareholders may not redeem or
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transfer Acquiring Fund Shares received in the Reorganization. The Acquiring
Fund will not issue stock certificates in the Reorganization.
1.6 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a name
other than the registered holder of the Acquired Fund Shares on the books of
the Acquired Fund as of that time shall, as a condition of such issuance and
transfer, be paid by the person to whom such Acquiring Fund Shares are to be
issued and transferred.
1.7 The existence of the Acquired Fund shall be terminated as promptly as
practicable following the Liquidation Date.
1.8 Any reporting responsibility of the Acquired Fund, including, but not
limited to, the responsibility for filing of regulatory reports, tax
returns, or other documents with the Securities and Exchange Commission (the
"Commission"), any state securities commissions, and any federal, state or
local tax authorities or any other relevant regulatory authority, is and
shall remain the responsibility of the Acquired Fund.
2. VALUATION
2.1 The net asset values of the Class A and Class B Acquiring Fund Shares and
the net values of the assets and liabilities of the Acquired Fund
attributable to its Class A and Class B shares to be transferred or assumed
shall, in each case, be determined as of the close of business (4:00 p.m.
Boston time) on the Closing Date. The net asset values of the Class A and
Class B Acquiring Fund Shares shall be computed by the Custodian in the
manner set forth in the Acquiring Fund's Declaration of Trust, as amended,
or By-laws and the Acquiring Fund's then-current prospectus and statement of
additional information and shall be computed in each case to not fewer than
four decimal places. The net values of the assets of the Acquired Fund
attributable to its Class A and Class B shares to be transferred shall be
computed by the Custodian by calculating the value of the assets of each
class transferred by the Acquired Fund and by subtracting therefrom the
amount of the liabilities of each respective class assigned and transferred
to and assumed by the Acquiring Fund on the Closing Date, said assets and
liabilities to be valued in the manner set forth in the Acquired Fund's
then-current prospectus and statement of additional information and shall be
computed in each case to not fewer than four decimal places.
2.2 The number of shares of each class of Acquiring Fund Shares to be issued
(including fractional shares, if any) in exchange for the Acquired Fund's
assets shall be determined by dividing the value of the Acquired Fund's
assets attributable to a class, less the liabilities attributable to that
class assumed by the Acquiring Fund, by the Acquiring Fund's net asset value
per share of the same class, all as determined in accordance with Paragraph
2.1 hereof.
2.3 All computations of value shall be made by the Custodian in accordance with
its regular practice as pricing agent for the Funds.
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3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be May 3, 1996 or such other date on or before
December 31, 1996 as the parties may agree. The Closing shall be held as of
5:00 p.m. at the offices of the Funds, 101 Huntington Avenue, Boston,
Massachusetts 02199, or at such other time and/or place as the parties may
agree.
3.2 Portfolio securities that are not held in book-entry form in the name of the
Custodian as record holder for the Acquired Fund shall be presented by the
Acquired Fund to the Custodian for examination no later than five business
days preceding the Closing Date. Portfolio securities which are not held in
book-entry form shall be delivered by the Acquired Fund to the Custodian for
the account of the Acquiring Fund on the Closing Date, duly endorsed in
proper form for transfer, in such condition as to constitute good delivery
thereof in accordance with the custom of brokers, and shall be accompanied
by all necessary federal and state stock transfer stamps or a check for the
appropriate purchase price thereof. Portfolio securities held of record by
the Custodian in book-entry form on behalf of the Acquired Fund shall be
delivered to the Acquiring Fund by the Custodian by recording the transfer
of beneficial ownership thereof on its records. The cash delivered shall be
in the form of currency or by the Custodian crediting the Acquiring Fund's
account maintained with the Custodian with immediately available funds.
3.3 In the event that on the Closing Date (a) the New York Stock Exchange shall
be closed to trading or trading thereon shall be restricted or (b) trading
or the reporting of trading on said Exchange or elsewhere shall be disrupted
so that accurate appraisal of the value of the net assets of the Acquiring
Fund or the Acquired Fund is impracticable, the Closing Date shall be
postponed until the first business day after the day when trading shall have
been fully resumed and reporting shall have been restored; provided that if
trading shall not be fully resumed and reporting restored on or before
December 31, 1996, this Agreement may be terminated by the Acquiring Fund or
by the Acquired Fund upon the giving of written notice to the other party.
3.4 The Acquired Fund shall deliver at the Closing a list of the names,
addresses, federal taxpayer identification numbers and backup withholding
and nonresident alien withholding status of the Acquired Fund shareholders
and the number of outstanding shares of each class of beneficial interest of
the Acquired Fund owned by each such shareholder, all as of the close of
business on the Closing Date, certified by its Treasurer, Secretary or other
authorized officer (the "Shareholder List"). The Acquiring Fund shall issue
and deliver to the Acquired Fund a confirmation evidencing the Acquiring
Fund Shares to be credited on the Closing Date, or provide evidence
satisfactory to the Acquired Fund that such Acquiring Fund have been
credited to the Acquired Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, stock certificates, receipts or other documents as such
other party or its counsel may reasonably request.
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4. REPRESENTATIONS AND WARRANTIES
4.1 The Acquired Fund represents, warrants and covenants to the Acquiring Fund
as follows:
(a) The Acquired Fund is a voluntary association with transferable shares of
the type commonly referred to as a business trust, duly organized and
validly existing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and, subject to
approval by the shareholders of the Acquired Fund, to carry out the
transactions contemplated by this Agreement. The Acquired Fund is not
required to qualify to do business in any jurisdiction in which it is
not so qualified or where failure to qualify would subject it to any
material liability or disability. The Acquired Fund has all necessary
federal, state and local authorizations to own all of its properties and
assets and to carry on its business as now being conducted;
(b) The Acquired Fund is a registered investment company classified as a
management company and its registration with the Commission as an
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"), is in full force and effect. The Acquired Fund is a
diversified fund;
(c) The Acquired Fund is not, and the execution, delivery and performance of
its obligations under this Agreement will not result, in violation of
any provision of the Acquired Fund's Declaration of Trust, as amended,
or By-Laws or of any agreement, indenture, instrument, contract, lease
or other undertaking to which the Acquired Fund is a party or by which
it is bound;
(d) Except as otherwise disclosed in writing and accepted by the Acquiring
Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Acquired Fund or any of the Acquired
Fund's properties or assets. The Acquired Fund knows of no facts which
might form the basis for the institution of such proceedings, and the
Acquired Fund is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects the Acquired Fund's business or its
ability to consummate the transactions herein contemplated;
(e) The Acquired Fund has no material contracts or other commitments (other
than this Agreement or agreements for the purchase of securities entered
into in the ordinary course of business and consistent with its
obligations under this Agreement) which will not be terminated without
liability to the Acquired Fund at or prior to the Closing Date;
(f) The audited statement of assets and liabilities, including the schedule
of investments, of the Acquired Fund as of December 31, 1995 and the
related statement of operations and the statement of changes in net
assets for the years ended December 31, 1995 and 1994 (copies of which
have been furnished to the Acquiring Fund) present fairly in all
material respects the financial condition of the Acquired Fund as of
December 31, 1995 and the results of its operations for the period then
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ended in accordance with generally accepted accounting principles
consistently applied, and there were no known actual or contingent
liabilities of the Acquired Fund as of the respective dates thereof not
disclosed therein;
(g) Since December 31, 1995, there has not been any material adverse change
in the Acquired Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Acquired Fund of indebtedness
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by the Acquiring
Fund;
(h) At the date hereof and by the Closing Date, all federal, state and other
tax returns and reports, including information returns and payee
statements, of the Acquired Fund required by law to have been filed or
furnished by such dates shall have been filed or furnished, and all
federal, state and other taxes, interest and penalties shall have been
paid so far as due, or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge no such return
is currently under audit and no assessment has been asserted with
respect to such returns or reports;
(i) The Acquired Fund has elected to be treated as a regulated investment
company for federal income tax purposes, has qualified as such for each
taxable year of its operation and will qualify as such as of the Closing
Date with respect to its final taxable year ending on the Closing Date;
(j) The authorized capital of the Acquired Fund consists of an unlimited
number of shares of beneficial interest, no par value. All issued and
outstanding shares of beneficial interest of the Acquired Fund are, and
at the Closing Date will be, duly and validly issued and outstanding,
fully paid and nonassessable by the Acquired Fund. All of the issued and
outstanding shares of beneficial interest of the Acquired Fund will, at
the time of Closing, be held by the persons and in the amounts and
classes set forth in the Shareholder List submitted to the Acquiring
Fund pursuant to Paragraph 3.4 hereof. The Acquired Fund does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares of beneficial interest, nor is there
outstanding any security convertible into any of its shares of
beneficial interest;
(k) At the Closing Date, the Acquired Fund will have good and marketable
title to the assets to be transferred to the Acquiring Fund pursuant to
Paragraph 1.1 hereof, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder, and upon delivery
and payment for such assets, the Acquiring Fund will acquire good and
marketable title thereto subject to no restrictions on the full transfer
thereof, including such restrictions as might arise under the Securities
Act of 1933, as amended (the "1933 Act");
(l) The execution, delivery and performance of this Agreement have been duly
authorized by all necessary action on the part of the Acquired Fund, and
this Agreement constitutes a valid and binding obligation of the
Acquired Fund enforceable in accordance with its terms, subject to the
approval of the Acquired Fund's shareholders;
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(m) The information to be furnished by the Acquired Fund to the Acquiring
Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete and
shall comply in all material respects with federal securities and other
laws and regulations thereunder applicable thereto;
(n) The proxy statement of the Acquired Fund (the "Proxy Statement") to be
included in the Registration Statement referred to in Paragraphs 4.2(c)
and 5.7 hereof (other than written information furnished by the
Acquiring Fund for inclusion therein, as covered by the Acquiring Fund's
warranty in Paragraph 4.2(m) hereof), on the effective date of the
Registration Statement, on the date of the meeting of the Acquired Fund
shareholders and on the Closing Date, shall not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated by this Agreement;
(p) All of the issued and outstanding shares of beneficial interest of the
Acquired Fund have been offered for sale and sold in conformity with all
applicable federal and state securities laws;
(q) The prospectus of the Acquired Fund, dated May 1, 1995 as supplemented
December 11, 1995 (the "Acquired Fund Prospectus"), previously furnished
to the Acquiring Fund, does not contain any untrue statements of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
4.2 The Acquiring Fund represents, warrants and covenants to the Acquired Fund
as follows:
(a) The Acquiring Fund is a business trust duly organized, validly existing
and in good standing under The Commonwealth of Massachusetts and has the
power to own all of its properties and assets and to carry out the
Agreement. The Acquiring Fund is not required to qualify to do business
in any jurisdiction in which it is not so qualified or where failure to
qualify would subject it to any material liability or disability. The
Acquiring Fund has all necessary federal, state and local authorizations
to own all of its properties and assets and to carry on its business as
now being conducted;
(b) The Acquiring Fund is a registered investment company classified as a
management company and its registration with the Commission as an
investment company under the 1940 Act is in full force and effect. The
Acquiring Fund is a diversified investment company under the 1940 Act;
(c) The prospectus (the "Acquiring Fund Prospectus") and statement of
additional information for Class A and Class B shares of the Acquiring
Fund, each dated May 1, 1995, and any amendments or supplements
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thereto on or prior to the Closing Date, and the Registration Statement
on Form N-14 to be filed in connection with this Agreement (the
"Registration Statement") (other than written information furnished by
the Acquired Fund for inclusion therein, as covered by the Acquired
Fund's warranty in Paragraph 4.1(m) hereof) will conform in all material
respects to the applicable requirements of the 1933 Act and the 1940 Act
and the rules and regulations of the Commission thereunder, the
Acquiring Fund Prospectus does not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and the
Registration Statement will not include any untrue statement of material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(d) At the Closing Date, the Acquiring Fund will have good and marketable
title to the assets of the Acquiring Fund;
(e) The Acquiring Fund is not, and the execution, delivery and performance
of its obligations under this Agreement will not result, in violation of
any provisions of the Acquiring Fund's Declaration of Trust, as amended,
or By-laws or of any agreement, indenture, instrument, contract, lease
or other undertaking to which the Acquiring Fund is a party or by which
the Acquiring Fund is bound;
(f) Except as otherwise disclosed in writing and accepted by the Acquired
Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Acquiring Fund or any of the Acquiring
Fund's properties or assets. The Acquiring Fund knows of no facts which
might form the basis for the institution of such proceedings, and the
Acquiring Fund is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects the Acquiring Fund's business or its
ability to consummate the transactions herein contemplated;
(g) The audited statement of assets and liabilities, including the schedule
of investments, of the Acquiring Fund as of December 31, 1995 and the
related statement of operations and the statement of changes in net
assets for the years ended December 31, 1995 and 1994 (copies of which
have been furnished to the Acquired Fund), present fairly in all
material respects the financial condition of the Acquiring Fund as of
December 31, 1995 and the results of its operations for the period then
ended in accordance with generally accepted accounting principles
consistently applied, and there were no known actual or contingent
liabilities of the Acquiring Fund as of the respective dates thereof not
disclosed herein;
(h) Since December 31, 1995, there has not been any material adverse change
in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Acquiring Fund of indebtedness
maturing more
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than one year from the date such indebtedness was incurred, except as
disclosed to and accepted by the Acquired Fund;
(i) The Acquiring Fund has elected to be treated as a regulated investment
company for federal income tax purposes, has qualified as such for each
taxable year of its operation and will qualify as such as of the Closing
Date;
(j) The authorized capital of the Acquiring Fund consists of an unlimited
number of shares of beneficial interest, no par value. All issued and
outstanding shares of beneficial interest of the Acquiring Fund are, and
at the Closing Date will be, duly and validly issued and outstanding,
fully paid and nonassessable by the Acquiring Fund. The Acquiring Fund
does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of its shares of beneficial interest, nor
is there outstanding any security convertible into any of its shares of
beneficial interest;
(k) The execution, delivery and performance of this Agreement has been duly
authorized by all necessary action on the part of the Acquiring Fund,
and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms;
(l) The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund pursuant to the terms of this Agreement, when so issued and
delivered, will be duly and validly issued shares of beneficial interest
of the Acquiring Fund and will be fully paid and nonassessable by the
Acquiring Fund;
(m) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements, proxy materials and
other documents which may be necessary in connection with the
transactions contemplated hereby shall be accurate and complete and
shall comply in all material respects with federal securities and other
laws and regulations applicable thereto; and
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated by the Agreement, except for the
registration of the Acquiring Fund Shares under the 1933 Act, the 1940
Act and under state securities laws.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as expressly contemplated herein to the contrary, the Acquired Fund
and the Acquiring Fund will operate their respective businesses in the
ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include customary
dividends and distributions and any other distributions necessary or
desirable to avoid federal income or excise taxes.
5.2 The Acquired Fund will call a meeting of the Acquired Fund shareholders to
consider and act upon this Agreement and to take all other action necessary
to obtain approval of the transactions contemplated herein.
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5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be issued
hereunder are not being acquired by the Acquired Fund for the purpose of
making any distribution thereof other than in accordance with the terms of
this Agreement.
5.4 The Acquired Fund will provide such information within its possession or
reasonably obtainable as the Acquiring Fund requests concerning the
beneficial ownership of the Acquired Fund's shares of beneficial interest.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund each shall take, or cause to be taken, all action, and do or
cause to be done, all things reasonably necessary, proper or advisable to
consummate the transactions contemplated by this Agreement.
5.6 The Acquired Fund shall furnish to the Acquiring Fund on the Closing Date
the Statement of Assets and Liabilities of the Acquired Fund as of the
Closing Date, which statement shall be prepared in accordance with generally
accepted accounting principles consistently applied and shall be certified
by the Acquired Fund's Treasurer or Assistant Treasurer. As promptly as
practicable but in any case within 60 days after the Closing Date, the
Acquired Fund shall furnish to the Acquiring Fund, in such form as is
reasonably satisfactory to the Acquiring Fund, a statement of the earnings
and profits of the Acquired Fund for federal income tax purposes and of any
capital loss carryovers and other items that will be carried over to the
Acquiring Fund as a result of Section 381 of the Code, and which statement
will be certified by the President of the Acquired Fund.
5.7 The Acquiring Fund will prepare and file with the Commission the
Registration Statement in compliance with the 1933 Act and the 1940 Act in
connection with the issuance of the Acquiring Fund Shares as contemplated
herein.
5.8 The Acquired Fund will prepare a Proxy Statement, to be included in the
Registration Statement in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act and the
rules and regulations thereunder (collectively, the "Acts") in connection
with the special meeting of shareholders of the Acquired Fund to consider
approval of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to complete the transactions provided for
herein shall be, at its election, subject to the performance by the Acquiring
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date, and, in addition thereto, the following further conditions:
6.1 All representations and warranties of the Acquiring Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as
if made on and as of the Closing Date; and
6.2 The Acquiring Fund shall have delivered to the Acquired Fund a certificate
executed in its name by its President or Vice President and its Treasurer or
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Assistant Treasurer, in form and substance satisfactory to the Acquired Fund
and dated as of the Closing Date, to the effect that the representations and
warranties of the Acquiring Fund made in this Agreement are true and correct
at and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as
the Acquired Fund shall reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions provided for
herein shall be, at its election, subject to the performance by the Acquired
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of the Acquired Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as
if made on and as of the Closing Date;
7.2 The Acquired Fund shall have delivered to the Acquiring Fund the Statement
of Assets and Liabilities of the Acquired Fund, together with a list of its
portfolio securities showing the federal income tax bases and holding
periods of such securities, as of the Closing Date, certified by the
Treasurer or Assistant Treasurer of the Acquired Fund;
7.3 The Acquired Fund shall have delivered to the Acquiring Fund on the Closing
Date a certificate executed in the name of the Acquired Fund by a President
or Vice President and a Treasurer or Assistant Treasurer of the Acquired
Fund, in form and substance satisfactory to the Acquiring Fund and dated as
of the Closing Date, to the effect that the representations and warranties
of the Acquired Fund in this Agreement are true and correct at and as of the
Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the
Acquiring Fund shall reasonably request; and
7.4 At or prior to the Closing Date, the Acquired Fund's investment adviser, or
an affiliate thereof, shall have made all payments, or applied all credits,
to the Acquired Fund required by any applicable contractual or state-imposed
expense limitation.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
The obligations of the Acquiring Fund and the Acquired Fund hereunder are each
subject to the further conditions that on or before the Closing Date:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of
beneficial interest of the Acquired Fund in accordance with the provisions
of the Acquired Fund's Declaration of Trust, as amended, and By-Laws, and
certified copies of the resolutions evidencing such approval by the Acquired
Fund's shareholders shall have been delivered by the Acquired Fund to the
Acquiring Fund;
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8.2 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain changes or other relief in connection with, this
Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and permits of
federal, state and local regulatory authorities (including those of the
Commission and of state Blue Sky and securities authorities, including "no-
action" positions of such federal or state authorities) deemed necessary by
the Acquired Fund and the Acquiring Fund to permit consummation, in all
material respects, of the transactions contemplated hereby shall have been
obtained, except where failure to obtain any such consent, order or permit
would not involve a risk of a material adverse effect on the assets or
properties of the Acquiring Fund or the Acquired Fund, provided that either
party hereto may waive any such conditions for itself;
8.4 The Registration Statement shall have become effective under the 1933 Act
and the 1940 Act and no stop orders suspending the effectiveness thereof
shall have been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been instituted or
be pending, threatened or contemplated under the 1933 Act or the 1940 Act;
8.5 The Acquired Fund shall have distributed to its shareholders all of its
investment company taxable income (as defined in Section 852(b)(2) of the
Code) for its taxable year ending on the Closing Date, all of the excess of
its interest income excludable from gross income under Section 103(a) of the
Code over its deductions disallowed under Sections 265 and/or 171(a)(2) of
the Code for its taxable year ending on the Closing Date, and all of its net
capital gain (as such term is used in Section 852(b)(3)(C) of the Code),
after reduction by any available capital loss carryforward, for its taxable
year ending on the Closing Date; and
8.6 The parties shall have received an opinion of Messrs. Hale and Dorr,
satisfactory to the Acquired Fund and the Acquiring Fund, substantially to
the effect that for federal income tax purposes:
(a) The acquisition by the Acquiring Fund of all of the assets of the
Acquired Fund solely in exchange for the issuance of Acquiring Fund
Shares to the Acquired Fund and the assumption of all of the Acquired
Fund Liabilities by the Acquiring Fund, followed by the distribution by
the Acquired Fund, in liquidation of the Acquired Fund, of Acquiring
Fund Shares to the shareholders of the Acquired Fund in exchange for
their shares of beneficial interest of the Acquired Fund and the
termination of the Acquired Fund, will constitute a "reorganization"
within the meaning of Section 368(a) of the Code, and the Acquired Fund
and the Acquiring Fund will each be "a party to a reorganization" within
the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Acquired Fund upon (i) the
transfer of all of its assets to the Acquiring Fund solely in exchange
for the issuance of Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund; and (ii) the distribution by the Acquired Fund of such Acquiring
Fund Shares to the shareholders of the Acquired Fund;
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(c) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund solely in exchange for the
issuance of the Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund;
(d) The basis of the assets of the Acquired Fund acquired by the Acquiring
Fund will be, in each instance, the same as the basis of those assets in
the hands of the Acquired Fund immediately prior to the transfer;
(e) The tax holding period of the assets of the Acquired Fund in the hands
of the Acquiring Fund will, in each instance, include the Acquired
Fund's tax holding period for those assets;
(f) The shareholders of the Acquired Fund will not recognize gain or loss
upon the exchange of all of their shares of beneficial interest of the
Acquired Fund solely for Acquiring Fund Shares as part of the
transaction;
(g) The basis of the Acquiring Fund Shares received by the Acquired Fund
shareholders in the transaction will be the same as the basis of the
shares of beneficial interest of the Acquired Fund surrendered in
exchange therefor; and
(h) The tax holding period of the Acquiring Fund Shares received by the
Acquired Fund shareholders will include, for each shareholder, the tax
holding period for the shares of beneficial interest of the Acquired
Fund surrendered in exchange therefor, provided that such Acquired Fund
shares were held as capital assets on the date of the exchange.
The Acquiring Fund and the Acquired Fund agree to make and provide
representations with respect to the Acquiring Fund and the Acquired Fund,
respectively, which are reasonably necessary to enable Hale and Dorr to deliver
an opinion substantially as set forth in this Paragraph 8.6. Notwithstanding
anything herein to the contrary, neither the Acquired Fund nor the Acquiring
Fund may waive the conditions set forth in this Paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1 The Acquiring Fund and the Acquired Fund represent and warrant to the
Acquired Fund and the Acquiring Fund, respectively, that there are no
brokers or finders entitled to receive any payments in connection with the
transactions provided for herein.
9.2 The Acquiring Fund and the Acquired Fund shall each be liable solely for its
own expenses incurred in connection with entering into and carrying out the
provisions of this Agreement whether or not the transactions contemplated
hereby are consummated.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Acquired Fund agree that neither party has made
any representation, warranty or covenant not set forth herein or referred
to in Paragraph 4 hereof and that this Agreement constitutes the entire
agreement between the parties.
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<PAGE> 85
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Acquiring
Fund and the Acquired Fund. In addition, either party may at its option
terminate this Agreement at or prior to the Closing Date:
(a) because of a material breach by the other of any representation,
warranty, covenant or agreement contained herein to be performed at or
prior to the Closing Date;
(b) because of a condition herein expressed to be precedent to the
obligations of the terminating party which has not been met and which
reasonably appears will not or cannot be met;
(c) by resolution of the Acquiring Fund's Board of Trustees if
circumstances should develop that, in the good faith opinion of such
Board, make proceeding with the Agreement not in the best interests of
the Acquiring Fund's shareholders; or
(d) by resolution of the Acquired Fund's Board of Trustees if circumstances
should develop that, in the good faith opinion of such Board, make
proceeding with the Agreement not in the best interests of the Acquired
Fund's shareholders.
11.2 In the event of any such termination, there shall be no liability for
damages on the part of the Acquiring Fund or the Acquired Fund, or the
Trustees or officers of either Fund, but each party shall bear the expenses
incurred by it incidental to the preparation and carrying out of this
Agreement.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as may be
mutually agreed upon by the authorized officers of the Acquired Fund and the
Acquiring Fund. However, following the meeting of shareholders of the Acquired
Fund held pursuant to Paragraph 5.2 of this Agreement, no such amendment may
have the effect of changing the provisions regarding the method for determining
the number of Acquiring Fund Shares to be received by the Acquired Fund
shareholders under this Agreement to the detriment of such shareholders without
their further approval; provided that nothing contained in this Article 12 shall
be construed to prohibit the parties from amending this Agreement to change the
Closing Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any provisions
of this Agreement shall be in writing and shall be given by prepaid telegraph,
telecopy or certified mail addressed to the Acquiring Fund or to the Acquired
Fund, each at 101 Huntington Avenue, Boston, Massachusetts 02199, Attention:
President, and, in either case, with copies to Hale and Dorr, 60 State Street,
Boston, Massachusetts 02109, Attention: Pamela J. Wilson, Esq.
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<PAGE> 86
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by any party
without the prior written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation, other than the parties hereto and
their respective successors and assigns, any rights or remedies under or by
reason of this Agreement.
B-15
<PAGE> 87
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed as of the date first set forth above by its President or Vice President
and has caused its corporate seal to be affixed hereto.
JOHN HANCOCK TAX-FREE BOND FUND
By: /s/ Anne C. Hodsdon
Name: Anne C. Hodsdon
Title: President
JOHN HANCOCK TAX-EXEMPT INCOME FUND
By: /s/ Thomas H. Drohan
Name: Thomas H. Drohan
Title: Senior Vice President
B-16
<PAGE> 88
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
VOTE THIS PROXY CARD TODAY! YOUR PROMPT RESPONSE WILL
SAVE YOUR FUND THE EXPENSE OF ADDITIONAL MAILINGS
JOHN HANCOCK TAX-EXEMPT INCOME FUND
101 HUNTINGTON AVENUE, BOSTON, MASSACHUSETTS 02199
SPECIAL MEETING OF SHAREHOLDERS - MAY 2, 1996
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s) Edward J.
Boudreau, Jr., Thomas H. Drohan and James B. Little, with full power of
substitution in each, to vote all the shares of beneficial interest of John
Hancock Tax-Exempt Income Fund ("Tax-Exempt Income Fund" or the "Fund") which
the undersigned is (are) entitled to vote at the Special Meeting of Shareholders
(the "Meeting") of Tax-Exempt Income Fund to be held at 101 Huntington Avenue,
Boston, Massachusetts, on May 2, 1996 at 9:00 a.m., Boston time, and at any
adjournment of the Meeting. All powers may be exercised by a majority of said
proxy holders or substitutes voting or acting, or, if only one votes and acts,
then by that one. Receipt of the Proxy Statement dated March 18, 1996 is hereby
acknowledged. If not revoked, this proxy shall be voted:
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN ENCLOSED ENVELOPE
Date __________________, 1996
NOTE: Signature(s) should agree
with name(s) printed herein.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give your full title as such.
If a corporation, please sign
in full corporate name by
president or other authorized
officer. If a partnership,
please sign in partnership name
by authorized person.
-------------------------------
Signature(s)
<PAGE> 89
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
VOTE THIS PROXY CARD TODAY! YOUR PROMPT RESPONSE WILL SAVE YOUR FUND THE EXPENSE
OF ADDITIONAL MAILINGS.
THIS PROXY SHALL BE VOTED IN FAVOR OF (FOR) PROPOSAL 1 IF NO SPECIFICATION IS
MADE BELOW. AS TO ANY OTHER MATTER, SAID PROXY OR PROXIES SHALL VOTE IN
ACCORDANCE WITH THEIR BEST JUDGEMENT. PLEASE VOTE BY FILLING IN THE APPROPRIATE
BOX BELOW, AS SHOWN, USING BLUE OR BLACK INK OR DARK PENCIL. DO NOT USE RED INK.
(1) To approve an Agreement and Plan of Reorganization between Tax-Exempt
Income Fund and John Hancock Tax-Free Bond Fund ("Tax-Free Bond Fund")
providing for Tax-Free Bond Fund's acquisition of all of Tax-Exempt
Income Fund's assets in exchange solely for the assumption of
Tax-Exempt Income Fund's liabilities, and the issuance of Class A and
Class B shares of Tax-Free Bond Fund to Tax-Exempt Income Fund for
distribution to its shareholders.
FOR / / AGAINST / / ABSTAIN / /
PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD.
