REGISTRATION NO. 33-32246
REGISTRATION NO. 811-5968
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
---------
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 9 [X]
AND/OR
REGISTRATION STATEMENT UNDER [X]
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 13
(check appropriate boxes)
-------------------------
JOHN HANCOCK TAX-FREE BOND FUND
(Exact Name of Registrant as Specified in Charter)
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(617) 375-1700
--------------
Thomas H. Drohan
Vice President and Secretary
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
(Name and Address of Agent for Service)
---------------------------------------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule (485 or 486)
CALCULATION OF REGISTRATION FEES UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
=================================================================================================================
PROPOSED MAXIMUM PROPOSED AGGREGATE
TITLE OF SECURITIES AMOUNT OF SHARES OFFERING PRICE MAXIMUM AMOUNT OF
BEING REGISTERED BEING REGISTERED PER SHARE** OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Capital Stock .... Indefinite N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Shares of Capital Stock .... 1,375,931 $10.71 $290,000 $100+
=================================================================================================================
</TABLE>
* Registrant continues its election of register an indefinite number of
shares of its capital stock pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended.
** Registrant elects to calculate the maximum aggrtegate offering price
pursuant to Rule 24c-2. 3,630,113 shares were redeemed during the fiscal
year ended December 31, 1994, 2,281,259 shares were used for reductions
pursuant to Paragraph (c) of 24f-2 during the current fiscal year.
1,375,931 shares is the amount of redeemed shares used for reduction in
this Amendment. Pursuant to Rule 457(c) under the Securities Act of 1933,
the maximum offering price of $10.71 per share on April 19, 1995 is the
price used as the basis for calculating the registration fee. While no fee
is required for the 1,348,854 shares, the Registrant has elected to
register, for $100, an additional $290,000 of shares (approximately 27,077
shares at $10.71 per share).
+ For both National Series and Global Series.
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT HAS
REGISTERED AN INDEFINITE NUMBER OF SECURITIES UNDER THE SECURITIES ACT OF 1933.
THE REGISTRANT FILED THE NOTICE REQUIRED BY RULE 24F-2 FOR ITS MOST RECENT
FISCAL YEAR ON OR ABOUT FEBRUARY 26, 1996.
<PAGE>
<PAGE>
JOHN HANCOCK TAX-FREE BOND FUND
__________________
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A
Item
Part A Caption Prospectus
- ------ ------- ----------
<S> <C> <C>
1... Cover Page Cover Page
2... Synopsis/Summary of Fund Expense Information; The Fund's Expenses;
Expenses Share Price
3... Condensed Financial The Fund's Financial Highlights
Information
4... General Description Investment Objective and Policies;
of Registrant Organization and Management of the Fund
5... Management of the Fund Organization and Management of the Fund;
The Fund's Expenses; Back Cover Page
6... Capital Stock and Organization and Management of the Fund;
Other Securities Dividends and Taxes; How to Buy Shares; How to
Redeem Shares; Additional Services and
Programs
7... Purchase of Securities How To Buy Shares; Share Price; Additional
Being Offered Services and Programs; Alternative Purchase
Arrangements; The Fund's Expenses; Back
Cover Page
8... Redemption or Repurchase How To Redeem Shares
9... Pending Legal Proceedings Not applicable
Part B Caption Statement of Additional Information
- ------ ------- -----------------------------------
10... Cover Page Cover Page
11... Table of Contents Table of Contents
12... General Information The Fund and its Management
and History
13... Investment Objectives Investment Objective and Policies;
and Policies Investment Practices; Investment Restrictions;
Special Investment Techniques
14... Management of the Fund The Fund and its Management; Trustees
and Officers of the Fund
15... Control Persons and The Fund and its Management
Principal Holders of
Securities
ii
<PAGE>
16... Investment Advisory and The Fund and its Management
Other Services
17... Brokerage Allocation Portfolio Transactions and
Brokerage
18... Capital Stock and Additional Information
Other Securities
19... Purchase, Redemption and Purchase of Shares; Determination
Pricing of Securities of Net Asset Value; Shareholder
Being Offered Services; Redemption and Repurchase of Shares
20... Tax Status Dividends, Distributions and Tax Status
21... Underwriters Purchase of Shares-Distributors
22... Calculation of Additional Information Performance Information
Performance Data
23... Financial Statements Financial Statements
</TABLE>
Part C Other Information
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
iii
<PAGE>
JOHN HANCOCK
TAX-FREE
BOND FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1996
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TABLE OF CONTENTS
<TABLE>
<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................................................................... 10
Dividends and Taxes................................................................... 11
Performance........................................................................... 12
How to Buy Shares..................................................................... 14
Share Price........................................................................... 15
How to Redeem Shares.................................................................. 21
Additional Services and Programs...................................................... 24
Investments, Techniques and Risk Factors.............................................. 27
</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, 1996 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.
<PAGE>
EXPENSE INFORMATION
The purpose of the following information is to help you to understand the
various fees and expenses you will bear, directly or indirectly, when you
purchase Fund shares. The operating expenses included in the table and
hypothetical example below are based on actual fees and expenses for the Class A
and Class B shares of the Fund's fiscal year ended December 31, 1995 adjusted to
reflect current fees and expenses. Actual fees and expenses may be greater or
less than those indicated.
<TABLE>
<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***++.................................................................................. 0.25% 1.00%
Other expenses**................................................................................ 0.27% 0.27%
Total Fund operating expenses****............................................................... 1.07% 1.82%
</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, 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.
**** Until December 23, 1996, John Hancock Advisers has agreed to limit total
fund operating expense to 0.85% for Class A shares and 1.60% for Class B
shares.
+ Redemption by wire fee (currently $4.00) not included.
++ The Trustees of the Fund have voted to recommend that the Class A
shareholders of the Fund approve at a shareholder meeting scheduled to be
held on June 26, 1996 an increase in the 12b-1 fee from 0.15% of average
daily net assets to 0.25% effective December 23, 1996. Also effective
December 23, 1996, the 12b-1 fee on Class B shares will be increased from
0.90% of average daily net assets to 1.00%. Prior to the increase of the
12b-1 fee for Class A and Class B shares, the total Fund operating expenses
for Class A and Class B shares should be approximately 0.97% and 1.72% of
average daily net assets, respectively.
<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............................................................... $ 55 $78 $ 101 $170
Class B Shares
-- Assuming complete redemption at end of period......................... $ 68 $87 $ 119 $194
-- Assuming no redemption................................................ $ 18 $57 $ 99 $194
</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>
THE FUND'S FINANCIAL HIGHLIGHTS
The following table of financial highlights has been audited by Ernst & Young
LLP, the Fund's independent auditors, whose unqualified report is included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's Annual Report to Shareholders
which may be obtained free of charge by writing or telephoning John Hancock
Investor Services Corporation ("Investor Services"), at the address or telephone
number listed on the front page of this Prospectus.
Selected data for each class of shares outstanding throughout each period is
as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 5, 1990
YEAR ENDED DECEMBER 31, (COMMENCEMENT
--------------------------------------------------- OF OPERATIONS)
1995 1994(e) 1993 1992 1991 TO DECEMBER 31, 1990
------ ------- ------ ------ ------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period............... $ 9.39 $10.96 $10.47 $10.24 $9.90 $10.00(b)
Net Investment Income.............................. 0.57(d) 0.58 0.62 0.67 0.69 0.71
Net Realized and Unrealized Gain (Loss) on
Investments...................................... 1.28 (1.58 ) 0.93 0.42 0.72 (0.13)
------ ------ ------ ------ ------ ------
Total from Investment Operations................... 1.85 (1.00 ) 1.55 1.09 1.41 0.58
LESS DISTRIBUTIONS
Dividends from Net Investment Income............... (0.57) (0.57 ) (0.62) (0.68) (0.68) (0.68)
Distributions from Net Realized Gains on
Investments Sold................................. -- -- (0.44) (0.18) (0.39) --
------ ------ ------ ------ ------ ------
Total Distributions................................ (0.57) (0.57 ) (1.06) (0.86) (1.07) (0.68)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period..................... $10.67 $ 9.39 $10.96 $10.47 $10.24 $ 9.90
====== ====== ====== ====== ====== ======
Total Investment Return at Net Asset Value......... 20.20% (9.28 )% 15.15% 10.97% 14.78% 6.04%(c)
Total Adjusted Investment Return at Net Asset
Value(a)......................................... 20.08% (9.39 )% 14.98% 10.67% 14.40% 5.18%(c)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted).......... $118,797 $114,539 $136,521 $99,523 $73,393 $45,437
Ratio of Expenses to Average Net Assets............ 0.85% 0.85% 0.78% 0.66% 0.60% 0.40%*
Ratio of Adjusted Expenses to Average Net
Assets(a)........................................ 0.97% 0.96% 0.95% 0.96% 0.98% 1.26%*
Ratio of Net Investment Income to Average Net
Assets........................................... 5.67% 5.72% 5.57% 6.46% 6.86% 7.17%*
Ratio of Adjusted Net Investment Income to
Average Net Assets(a)............................ 5.55% 5.61% 5.40% 6.16% 6.48% 6.31%*
Portfolio Turnover Rate............................ 113% 107% 116% 79% 123% 64%
</TABLE>
- ---------------
* On an annualized basis.
(a) On an unreimbursed basis.
(b) Initial price to commence operations.
(c) Not annualized.
(d) On average month end shares outstanding.
(e) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
3
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994(E) 1993 1992
------ ------- ------ ------
<S> <C> <C> <C> <C>
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period............................................... $ 9.38 $10.96 $10.47 $10.24
Net Investment Income.............................................................. 0.50(d) 0.50 0.54 0.59(d)
Net Realized and Unrealized Gain (Loss) on Investments............................. 1.28 (1.58 ) 0.93 0.42
------ ------ ------ ------
Total from Investment Operations................................................... 1.78 (1.08 ) 1.47 1.01
LESS DISTRIBUTIONS
Dividends from Net Investment Income............................................... (0.49) (0.50 ) (0.54) (0.60)
Distributions from Net Realized Gains on Investments Sold.......................... -- -- (0.44) (0.18)
------ ------ ------ ------
Total Distributions................................................................ (0.49) (0.50 ) (0.98) (0.78)
------ ------ ------ ------
Net Asset Value, End of Period..................................................... $10.67 $ 9.38 $10.96 $10.47
====== ====== ====== ======
Total Investment Return at Net Asset Value......................................... 19.41% (10.05 )% 14.30% 10.15%
Total Adjusted Investment Return at Net Asset Value(a)............................. 19.29% (10.16 )% 14.13% 9.85%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's Omitted).......................................... $76,824 $70,243 $56,384 $18,272
Ratio of Expenses to Average Net Assets............................................ 1.60% 1.60% 1.53% 1.43%
Ratio of Adjusted Expenses to Average Net Assets(a)................................ 1.72% 1.71% 1.70% 1.73%
Ratio of Net Investment Income to Average Net Assets............................... 4.90% 4.97% 4.66% 5.57%
Ratio of Adjusted Net Investment Income to Average Net Assets(a)................... 4.78% 4.86% 4.49% 5.27%
Portfolio Turnover Rate............................................................ 113% 107% 116% 79%
</TABLE>
- ---------------
* On an annualized basis.
(a) On an unreimbursed basis.
(b) Initial price to commence operations.
(c) Not annualized.
(d) On average month end shares outstanding.
(e) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
4
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to obtain as high a level of interest income
exempt from federal income taxes as is consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in municipal
bonds, notes and commercial paper, the interest on which is exempt from federal
income taxes ("Municipal Obligations"). Municipal Obligations include debt
obligations issued by or on behalf of states, territories and possessions of the
United States; the District of Columbia; and the political subdivisions,
agencies or instrumentalities thereof.
- -------------------------------------------------------------------------------
THE FUND SEEKS TO PROVIDE INCOME EXEMPT
FROM FEDERAL INCOME TAX.
- -------------------------------------------------------------------------------
Under normal market conditions, at least 80% of the Fund's total assets will be
invested in Municipal Obligations. At least 65% of the Fund's assets will
normally be invested in municipal bonds. Pending the investment of Fund assets
in Municipal Obligations and to meet redemption requests, the Fund may invest up
to 20% of its total assets in private activity bonds (the interest on which may
be treated as a tax preference item under the Federal alternative minimum tax)
and in certain taxable money market securities, including: obligations issued or
guaranteed by the U.S. government, its agencies, instrumentalities or
authorities; corporate debt securities; commercial paper; certificates of
deposit of domestic banks with assets of $1 billion or more; and repurchase
agreements secured by U.S. Government securities.
When John Hancock Advisers, Inc. (the "Adviser") determines that unfavorable
investment conditions warrant a temporary defensive position, the Fund may
invest more than 20% of its assets in taxable money market securities rated in
the three highest ratings as determined by Moody's Investors Services, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service
("Fitch") or, if unrated, determined by the Adviser to be of comparable quality.
See the Statement of Additional Information for a description of those ratings.
Municipal bonds generally are classified as either general obligation bonds or
revenue bonds. General obligation bonds are backed by the credit of an issuer
having taxing power and are payable from the issuer's general unrestricted
revenues. Their payment may depend on an appropriation of the issuer's
legislative body. Revenue bonds, by contrast, are payable only from the revenues
derived from a particular project, facility or a specific revenue source. They
are not generally payable from the unrestricted revenues of the issuer.
Municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes and project notes. Municipal commercial paper obligations are
unsecured promissory notes issued by municipalities to meet short-term credit
needs.
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THE FUND'S INVESTMENT IN MUNICIPAL
OBLIGATIONS INCLUDES MUNICIPAL BONDS,
MUNICIPAL NOTES AND MUNICIPAL COMMERCIAL
PAPER.
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The Fund may invest less than 35% of its assets in municipal bonds, including
private activity bonds, and municipal notes rated at the time of purchase Ba or
B by Moody's, BB or B 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
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THE FUND INVESTS IN MUNICIPAL OBLIGATIONS.
- -------------------------------------------------------------------------------
5
<PAGE>
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 and notes 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. Municipal bonds and notes rated BB, B, Ba, or B are
considered speculative and are generally referred to as junk bonds. While
generally providing greater income than investments in higher quality
securities, these instruments involve greater risk of principal and income loss,
including the possibility of default. These instruments 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 instruments
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 instruments. 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, BB or B or Baa, Ba or B
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, BB or B or Baa, Ba or B, 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, BB or B or
Baa, Ba or B includes obligations believed to be consistent with the goal of
preserving capital, such bonds may not provide yields as high as those of other
obligations having such ratings and the differential in yields between such
bonds and obligations with higher quality ratings may not be as significant as
might otherwise be generally available.
Because there is no restriction on the maturities of the Municipal Obligations
in which the Fund may invest, the Fund's average portfolio maturity is not
subject to any limit. Generally, the longer the average portfolio maturity, the
greater will be the impact of fluctuations in interest rates on the values of
the Fund's assets and on the net asset value per share.
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THERE IS NO RESTRICTION ON THE MATURITIES
OF THE FUND'S MUNICIPAL OBLIGATIONS.
- -------------------------------------------------------------------------------
The Fund may write (sell) covered call and put options on debt securities in
which it may invest and on indices composed of debt securities in which it may
invest. The Fund may purchase call and put options on these securities and
indices. The Fund may also write straddles, which are combinations of put and
call options on the same security. The Fund may buy and sell interest rate and
municipal bond index futures contracts and options on such futures contracts to
hedge against changes in securities prices and interest rates.
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THE FUND MAY EMPLOY CERTAIN INVESTMENT
STRATEGIES TO HELP ACHIEVE ITS INVESTMENT
OBJECTIVE.
- -------------------------------------------------------------------------------
6
<PAGE>
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 has adopted certain investment restrictions which are enumerated in
detail in the Statement of Additional Information where they are classified as
fundamental or nonfundamental. Those restrictions designated as fundamental may
not be changed without shareholder approval. The Fund's investment objective
and its policy to invest (under normal market conditions) 80% of its assets in
Municipal Obligations are fundamental and may not be changed without the
approval of the Fund's shareholders. The Fund's other investment policies and
its nonfundamental restrictions, however, may be changed by a vote of the
Trustees without shareholder approval. Notwithstanding the Fund's fundamental
investment restriction prohibiting investments in other investment companies,
the Fund may, pursuant to an order granted by the SEC, invest in other
investment companies in connection with a deferred compensation plan for the
non-interested trustees of the John Hancock Group of Funds. There can be no
assurance that the Fund will achieve its investment objective.
- -------------------------------------------------------------------------------
THE FUND FOLLOWS CERTAIN POLICIES WHICH
MAY HELP TO REDUCE INVESTMENT RISK.
- -------------------------------------------------------------------------------
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."
7
<PAGE>
When choosing brokerage firms to carry out the Fund's transactions, the Adviser
gives primary consideration to 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. These brokers include
Tucker Anthony Incorporated, Sutro & 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.
- -------------------------------------------------------------------------------
BROKERS ARE CHOSEN ON BEST PRICE AND
EXECUTION.
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ORGANIZATION AND MANAGEMENT OF THE FUND
The Fund is a diversified open-end management investment company organized as a
Massachusetts business trust in 1989. The Fund reserves the right to create and
issue a number of series of shares, or funds or classes thereof, which are
separately managed and have different investment objectives. The Trustees have
authorized the issuance of two classes of the Fund, designated as Class A and
Class B. The shares of each class represent an interest in the same portfolio of
investments of the Fund. Each class has equal rights as to voting, redemption,
dividends and liquidation. However, each class bears different distribution and
transfer agent fees and other expenses. Also, Class A and Class B shareholders
have exclusive voting rights with respect to their distribution plans.
- -------------------------------------------------------------------------------
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 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.
The Adviser was organized in 1968 and is a wholly-owned indirect subsidiary of
the Life Company, a financial services company. The Adviser provides the Fund,
and other investment companies in the John Hancock group of funds, with
investment research and portfolio management services. John Hancock Funds
distributes shares for all of the John Hancock mutual funds through Selling
Brokers. Certain Fund officers are also officers of the Adviser and John Hancock
Funds.
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JOHN HANCOCK ADVISERS, INC. ADVISES
INVESTMENT COMPANIES HAVING A TOTAL ASSET
VALUE OF MORE THAN $16 BILLION.
- -------------------------------------------------------------------------------
Thomas C. Goggins is Senior Vice President of the Adviser and is responsible for
the day-to-day management of the Fund. Mr. Goggins heads up John Hancock's team
of municipal portfolio managers and analysts. He joined the Adviser in 1995.
Prior to that date, Mr. Goggins was a municipal bond portfolio manager at Putnam
Investments and Transamerica Investment Services, Inc.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
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.
8
<PAGE>
ALTERNATIVE PURCHASE ARRANGEMENTS
You can purchase shares of the Fund at a price equal to their net asset value
per share plus a sales charge. At your election, this charge may be imposed
either at the time of the purchase (see "Initial Sales Charge Alternative,"
Class A Shares) or on a contingent deferred basis (the "Contingent Deferred
Sales Charge Alternative," Class B Shares). If you do not specify on your
account application the class of shares you are purchasing, it will be assumed
that you are investing in Class A shares.
- -------------------------------------------------------------------------------
AN ALTERNATIVE PURCHASE PLAN ALLOWS YOU TO
CHOOSE THE METHOD OF PAYMENT THAT IS BEST
FOR YOU.
- -------------------------------------------------------------------------------
CLASS A SHARES. If you elect to purchase Class A shares, you will incur an
initial sales charge unless the amount you 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 A SHARES ARE SUBJECT
TO AN INITIAL 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
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
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.
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS B SHARES ARE SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE.
- -------------------------------------------------------------------------------
Class B shares are not available for full-service defined contribution plans
administered by Investor Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
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."
- -------------------------------------------------------------------------------
YOU SHOULD CONSIDER WHICH CLASS OF SHARES
WOULD BE MORE BENEFICIAL TO YOU.
- -------------------------------------------------------------------------------
Class A shares are subject to lower distribution fees and, accordingly, pay
correspondingly higher dividends per share, to the extent any dividends are
paid.
9
<PAGE>
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 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.
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 will also be in the same
amount, except for differences resulting from each class bearing its own
distribution and service fees, shareholder meeting expenses. See "Dividends and
Taxes."
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a fee to the
Adviser which for the 1995 fiscal year was 0.43% of the Fund's average daily net
assets.
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 0.25% (0.15% until December 23, 1996) 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% until December 23, 1996 of average daily net assets. In
each case, up to 0.25% 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;
- -------------------------------------------------------------------------------
THE FUND PAYS DISTRIBUTION AND SERVICE
FEES FOR MARKETING AND SALES-RELATED
SHAREHOLDER SERVICING.
- -------------------------------------------------------------------------------
10
<PAGE>
(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 and others for providing personal and
account maintenance services to shareholders. 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, 1995, an aggregate of $3,009,557 of
distribution expenses or 4.0% of the average net assets of the Fund's Class B
shares was not reimbursed or recommended by John Hancock Funds through receipt
of deferred sales charges or Rule 12b-1 fees in prior periods.
Information on the Fund's total expenses is in the Financial Highlights section
of this Prospectus.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund generally declares dividends daily and distributes
dividends monthly, representing all or substantially all of its net investment
income. The Fund will distribute net realized long-term and short-term capital
gains, if any, annually before the close of the fiscal year (December 31).
- -------------------------------------------------------------------------------
THE FUND GENERALLY DECLARES DIVIDENDS
DAILY AND DISTRIBUTES THEM MONTHLY.
- -------------------------------------------------------------------------------
Dividends are reinvested in additional shares of your class unless you elect the
option to receive 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.
11
<PAGE>
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
back-up 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 these obligations and/or reporting requirements are satisfied. You
will receive tax information each year showing the percentage of the Fund's
exempt-interest dividends attributable to each state. You should consult your
tax adviser for specific advice.
PERFORMANCE
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30 day period by the maximum
offering price per share on the last day of that period. Yield is also
calculated according to accounting methods that are standardized for all stock
and bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the fund's yield may not equal the income paid on
shares or the income reported in the Fund's financial statements. The Fund may
also utilize tax equivalent yields of its Class A and Class B shares computed in
the same manner, with adjustment for assumed Federal income tax rates. For a
comparison of yields on municipal securities and taxable securities, see the
Taxable Equivalent Yield Table in Appendix A.
- -------------------------------------------------------------------------------
THE FUND MAY ADVERTISE ITS YIELD AND TOTAL
RETURN.
- -------------------------------------------------------------------------------
12
<PAGE>
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. The 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."
13
<PAGE>
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The minimum initial investment is $1,000 ($250 for group investments and
retirement plans). Complete the Account Application attached to this Prospectus.
Indicate whether you are purchasing Class A or Class B shares. If you do not
specify which class of shares you are purchasing, Investor Services will assume
that you are investing in Class A shares.
</TABLE>
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
BY CHECK 1. Make your check payable to John Hancock Investor Services
Corporation ("Investor Services"), P.O. Box 9115, Boston, MA
02205-9115.
2. Deliver the completed application and check to your registered
representative, a broker with an agreement with John Hancock
Funds ("Selling Broker") or mail it directly to Investor
Services.
- --------------------------------------------------------------------------------
BY WIRE 1. Obtain an account number by contacting your registered
representative or Selling Broker, or by calling 1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Tax-Free Bond Fund
(Class A or Class B shares)
Your Account Number
Name(s) under which account is registered
3. Deliver the completed application to your registered
representative, Selling Broker or mail it directly to Investor
Services.
- --------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A AND CLASS B
SHARES
- -------------------------------------------------------------------------------
MONTHLY 1. Complete the "Automatic Investing" and "Bank Information"
AUTOMATIC sections on the Account Privileges Application designating a
ACCUMULATION bank account from which funds may be drawn.
PROGRAM
(MAAP) 2. The amount you elect to invest will be withdrawn automatically
from your bank or credit union account.
BY TELEPHONE 1. Complete the "Invest-By-Phone" and "Bank Information" sections
on the Account Privileges Application designating a bank
account from which your funds may be drawn. Note that in order
to invest by phone, your account must be in a bank or credit
union that is a member of the Automated Clearing House system
(ACH).
2. After your authorization form has been processed, you may
purchase additional Class A or Class B shares by calling
Investor Services toll-free 1-800-225-5291.
3. Give the Investor Services representative the name(s) in which
your account is registered, the Fund name, the class of shares
you own, your account number, and the amount you wish to
invest.
4. Your investment normally will be credited to your account the
business day following your phone request.
- --------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
BUYING ADDITIONAL
CLASS A AND CLASS B
SHARES (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
BY CHECK 1. Either complete the detachable stub included on your account
statement or include a note with your investment listing the
name of the Fund, the class of shares you own, your account
number and the name(s) in which the account is registered.
- -------------------------------------------------------------------------------
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.
- ---------------------------------------------------------------------------------
YOU WILL RECEIVE ACCOUNT STATEMENTS THAT
YOU SHOULD KEEP TO HELP WITH YOUR PERSONAL
RECORDKEEPING.
- -------------------------------------------------------------------------------
</TABLE>
You will receive a statement of your account after any transaction that affects
your share balance or registration (statements related to reinvestment of
dividends and automatic investment/withdrawal plans will be sent to you
quarterly). A tax information statement will be mailed to you by January 31 of
each year.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
SHARE PRICE
The net asset value per share ("NAV") is the value of one share. The NAV 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. Securities in the Fund's
portfolio are valued on the basis of market quotations, valuations provided by
independent pricing services or, at fair value as determined in good faith
according to procedures approved by the Trustees. Short-term debt investments
maturing within 60 days are valued at amortized cost which the Board has
determined approximates market value. If quotations are not readily available,
assets are valued by a method that the Trustees believe accurately reflects fair
value.
- -------------------------------------------------------------------------------
The 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
15
<PAGE>
your investment before the close of regular trading on the Exchange and transmit
it to John Hancock Funds before its close of business to receive that day's
offering price.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The offering price you pay
for Class A shares of the Fund equals the NAV plus a sales charge as follows:
<TABLE>
<CAPTION>
COMBINED
SALES CHARGE AS REALLOWANCE REALLOWANCE TO
AMOUNT INVESTED SALES CHARGE AS A PERCENTAGE OF AND SERVICE FEE AS SELLING BROKERS AS
(INCLUDING SALES A PERCENTAGE OF THE AMOUNT A PERCENTAGE OF A PERCENTAGE OF
CHARGE) OFFERING PRICE INVESTED OFFERING PRICE(+) THE OFFERING PRICE(*)
- ------------------------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999 3.00% 3.09% 2.50% 2.26%
$500,000 to $999,999 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over 0.00%(**) 0.00%(**) (***) 0.00%(***)
</TABLE>
(*) Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales
charge. 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.
(**) 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 made 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. Thereafter, it pays
the service fee periodically in arrears in an amount up to 0.25% of the
Fund's average annual net assets. Selling Brokers receive the fee as
compensation for providing personal and account maintenance services to
shareholders.
Sales charges ARE NOT APPLIED to any dividends that are reinvested in additional
Class A shares of the Fund.
John Hancock Funds will pay certain affiliated Selling Brokers at an annual rate
of up to 0.05% of the daily net assets of accounts attributable to these
brokers.
Under certain circumstances described below, investors in Class A shares may be
entitled to pay reduced sales charges. See "Qualifying for a Reduced Sales
Charge."
CONTINGENT DEFERRED SALES CHARGE -- INVESTMENTS OF $1 MILLION OR MORE IN CLASS A
SHARES. Purchases of $1 million or more of Class A shares will be made at net
asset value with no initial sales charge, but if the shares are redeemed within
12 months after the end of the calendar month in which the purchase was made
16
<PAGE>
(the CDSC period), a CDSC will be imposed. The rate of the CDSC will depend on
the amount invested as follows:
<TABLE>
<CAPTION>
AMOUNT INVESTED CDSC RATE
- ---------------------------------------------------------------------------------
<S> <C>
$1 million to $4,999,999................................................ 1.00%
Next $5 million to $9,999,999........................................... 0.50%
Amounts of $10 million and over......................................... 0.25%
</TABLE>
Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994 and participant directed defined
contribution plans with at least 100 eligible employees at the inception of the
Fund Account may purchase Class A shares with no initial sales charge. However,
if the shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the above rate.
The CDSC will be assessed on an amount equal to the lesser of the current market
value or the original purchase cost of the Class A shares that have been
redeemed. Accordingly, no CDSC will be imposed on increases in account value
above the initial purchase price, including any distributions which have been
reinvested in additional Class A shares.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
Therefore, it will be assumed that the redemption is first made from any shares
in your account that are not subject to the CDSC. The CDSC is waived on
redemptions in certain circumstances. See "Waiver of Contingent Deferred Sales
Charge" below.
- -------------------------------------------------------------------------------
YOU MAY QUALIFY FOR A
REDUCED SALES CHARGE ON
YOUR INVESTMENT IN
CLASS A SHARES.
- -------------------------------------------------------------------------------
QUALIFYING FOR A REDUCED SALES CHARGE. If you invest more than $100,000 in
Class A shares of the Fund or a combination of John Hancock funds (except money
market funds), you may qualify for a reduced sales charge on your investments in
Class A shares through a LETTER OF INTENTION. You may also be able to use the
ACCUMULATION PRIVILEGE and the COMBINATION PRIVILEGE to take advantage of the
value of your previous investments in 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
17
<PAGE>
- -------------------------------------------------------------------------------
CLASS A SHARES MAY BE AVAILABLE WITHOUT A
SALES CHARGE TO CERTAIN INDIVIDUALS AND
ORGANIZATIONS.
- -------------------------------------------------------------------------------
is the rate that would otherwise be applicable to investments of less than
$100,000. See "Initial Sales Charge alternative -- Class A Shares."
If you are in one of the following categories, you may purchase Class A shares
of the Fund without paying a sales charge:
- - A Trustee or officer of the Fund; a Director or officer of the Adviser and its
affiliates or Selling Brokers; employees or sales representatives of any of
the foregoing; retired officers, employees or Directors of any of the
foregoing; a member of the immediate family of any of the foregoing; or any
Fund, pension, profit sharing or other benefit plan for the individuals
described above.
- - 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, financial planner, consultant 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 or
services made available to their clients.
- - A former participant in an employee benefit plan with John Hancock funds, when
he or she withdraws from his or her plan and transfers any or all of his/her
plan distributions directly to the Fund.
- - A member of an approved affinity group financial services plan.*
- ------------------
*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 an initial sales charge so that
your entire 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. The 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
18
<PAGE>
beyond the six-year CDSC redemption period or those you acquired through
reinvestment of dividends and next from the shares you have held the longest
during the six-year period. The CDSC is waived on redemptions in certain
circumstances. See the discussion "Waiver of Contingent Deferred Sales Charges"
below.
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time, your CDSC will be calculated as follows:
<TABLE>
<S> <C>
- - Proceeds of 50 shares redeemed at $12 per share $ 600
- - Minus proceeds of 10 shares not subject to CDSC because they were
acquired through dividend reinvestment (10 X $12) -120
- - Minus appreciation on remaining shares, also not subject to CDSC (40 X
$2) - 80
------
- - Amount subject to CDSC $ 400
</TABLE>
Proceeds from the CDSC are paid to John Hancock Funds. John Hancock Funds uses
them to defray its expenses related to providing the Fund with distribution
services connected to the sale of Class B shares, such as compensating Selling
Brokers for selling these shares. The combination of the CDSC and the
distribution and service fees makes it possible for the Fund to sell Class B
shares without an initial sales charge.
The amount of the CDSC, if any, will vary depending on the number of years from
the time you purchase your Class B shares until the time you redeem them. Solely
for the purposes of determining the holding period, any payments you make during
the month will be aggregated and deemed to have been made on the last day of the
month.
<TABLE>
<CAPTION>
YEAR IN WHICH
CLASS B SHARES CONTINGENT DEFERRED SALES
REDEEMED FOLLOWING CHARGE AS A PERCENTAGE OF
PURCHASE DOLLAR AMOUNT SUBJECT TO CDSC
- ------------------------------------------------------------------------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
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.
19
<PAGE>
- -------------------------------------------------------------------------------
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.
- - 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 this Fund from another John Hancock
fund, the
20
<PAGE>
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 your tax basis or tax holding period for the converted shares.
- -------------------------------------------------------------------------------
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION
REQUEST, PLEASE FOLLOW THESE PROCEDURES.
- -------------------------------------------------------------------------------
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services, less any applicable CDSC. The Fund
may hold payment until it is reasonably satisfied that investments recently made
by check or Invest-by-Phone have been collected (which may take up to 10
calendar days).
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 three business
days or longer, as permitted by Federal securities laws.
21
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
BY TELEPHONE All Fund shareholders are eligible automatically 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 according to the telephone
transaction procedures mentioned above.
Telephone redemption is not available for IRAs or other
tax-qualified retirement plans or shares of the Fund that
are in certificated form.
During periods of extreme economic conditions or market
changes, telephone requests may be difficult to implement
due to a large volume of calls. During these times, you
should consider placing redemption requests in writing or
use EASI-Line. EASI-Line's telephone number is
1-800-338-8080.
- ---------------------------------------------------------------------------------
BY WIRE If you have a telephone redemption form on file with the
Fund, redemption proceeds of $1,000 or more can be wired on
the next business day to your designated bank account, and
a fee (currently $4.00) will be deducted. You may also use
electronic funds transfer to your assigned bank account,
and the funds are usually collectible after two business
days. Your bank may or may not charge a fee for this
service. Redemptions of less than $1,000 will be sent by
check or electronic funds transfer.
This feature may be elected by completing the "Telephone
Redemption" section on the Account Privileges Application
included with this Prospectus.
- ---------------------------------------------------------------------------------
IN WRITING Send a stock power or "letter of instruction" specifying
the name of the Fund, the dollar amount or the number of
shares to be redeemed, your name, class of shares, your
account number and the additional requirements listed below
that apply to your particular account.
- ---------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TYPE OF REGISTRATION REQUIREMENTS
-------------------- ------------
<S> <C> <C>
Individual, Joint Tenants, Sole A letter of instruction signed (with
Proprietorship, Custodial titles where applicable) by all
(Uniform Gifts or Transfer to persons authorized to sign for the
Minors Act), General Partners account, exactly as it is registered
with the signature(s) guaranteed.
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>
23
<PAGE>
- -------------------------------------------------------------------------------
YOU MAY EXCHANGE SHARES OF THE FUND ONLY
FOR SHARES OF THE SAME CLASS OF ANOTHER
JOHN HANCOCK FUND.
- -------------------------------------------------------------------------------
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
If your investment objective changes, or if you wish to achieve further
diversification, John Hancock offers other funds with a wide range of investment
goals. Contact your registered representative or Selling Broker and request a
prospectus for the John Hancock funds that interest you. Read the prospectus
carefully before exchanging your shares. You can exchange shares of each class
of the Fund only for shares of the same class of another John Hancock fund. For
this purpose, John Hancock funds with only one class of shares will be treated
as Class A, whether or not they have been so designated.
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 Intermediate
Maturity Government Fund 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 continue to be subject to the CDSC schedule in effect on
your initial purchase date.
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 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 of another for Federal income tax purposes. An exchange may
result in a taxable gain or loss.
When you make an exchange, your account registration in both the existing and
new account must be identical. The exchange privilege is available only in
states where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
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
24
<PAGE>
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 prior notice whenever it is reasonably
able to do so, it may impose these restrictions at any time.
BY TELEPHONE
1. When you complete the application for your initial purchase of Fund shares,
you automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to authorize telephone exchanges.
2. Call 1-800-225-5291. Have the account number of your current fund and the
exact name in which it is registered available to give to the telephone
representative.
3. Investor Services employs the following procedures to confirm that
instructions received by telephone are genuine. Your name, the account
number, taxpayer identification number applicable to the account and other
relevant information may be requested. In addition, telephone instructions
are recorded.
IN WRITING
1. In a letter, request an exchange and list the following:
-- the name and class of the Fund whose shares you currently own
-- your account number
-- the name(s) in which the account is registered
-- the name of the fund in which you wish your exchange to be invested
-- the number of shares, all shares or dollar amount you wish to exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
25
<PAGE>
REINVESTMENT PRIVILEGE
1. You will not be subject to a sales charge on Class A shares that you reinvest
in John Hancock funds that are 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. The holding period of the shares
acquired through reinvestment, for purposes of computing the CDSC payable
upon a subsequent redemption, will include the holding period of the redeemed
shares.
- -------------------------------------------------------------------------------
IF YOU REDEEM SHARES OF THE FUND, YOU MAY
BE ABLE TO REINVEST ALL OR PART OF THE
PROCEEDS IN SHARES OF THIS FUND OR ANOTHER
JOHN HANCOCK FUND WITHOUT PAYING AN
ADDITIONAL SALES CHARGE.
- -------------------------------------------------------------------------------
2. Any portion of your redemption may be reinvested in Fund shares or in shares
of any of the other John Hancock funds, subject to the minimum investment
limit of that fund.
3. To reinvest, you must notify Investor Services in writing. Include the Fund's
name, the account number and class from which your shares were originally
redeemed.
SYSTEMATIC WITHDRAWAL PLAN
1. You can elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
also obtain this application from your registered representative or by
calling 1-800-225-5291.
2. To be eligible, you must have at least $5,000 in your account.
- -------------------------------------------------------------------------------
YOU CAN PAY ROUTINE BILLS FROM YOUR
ACCOUNT, OR MAKE PERIODIC DISBURSEMENTS OF
FUNDS FROM YOUR RETIREMENT ACCOUNT TO
COMPLY WITH IRS REGULATIONS.
- -------------------------------------------------------------------------------
3. Payments from your account can be made monthly, quarterly, semi-annually or
annually or on a selected monthly basis to yourself or any other designated
payee.
4. There is no limit on the number of payees you may authorize, but all payments
must be made at the same time or intervals.
5. It is not advantageous to maintain a Systematic Withdrawal Plan concurrently
with purchases of additional Class A or Class B shares, because you may be
subject to initial sales charges on your purchases of Class A shares or to a
CDSC on your redemptions of Class B shares. In addition, your redemptions are
taxable events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks or if deposits to a bank account are returned for any reason.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP)
1. You can authorize an investment to be withdrawn automatically each month from
your bank, for investment in the Fund shares under the "Automatic Investing"
and "Bank Information" sections of the Account Privileges Application.
- -------------------------------------------------------------------------------
YOU CAN MAKE AUTOMATIC INVESTMENTS AND
SIMPLIFY YOUR INVESTING.
- -------------------------------------------------------------------------------
26
<PAGE>
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 withdrawn from a bank account and we are notified that
the account has been closed, your withdrawals will be discontinued.
GROUP INVESTMENT PROGRAM
1. An individual account will be established for each participant, but the
initial sales charge for Class A shares will be based on the aggregate dollar
amount of all participants' investments. To determine how to qualify for this
program, contact your registered representative or call 1-800-225-5291.
- -------------------------------------------------------------------------------
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS
MAY ESTABLISH ACCOUNTS.
- -------------------------------------------------------------------------------
2. The initial aggregate investment of all participants in the group must be at
least $250.
3. There is no additional charge for this program. There is no obligation to
make investments beyond the minimum, and you may terminate the program at any
time.
INVESTMENTS, TECHNIQUES AND RISK FACTORS
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in illiquid investments, which include repurchase agreements maturing in
more than seven days, restricted securities and securities not readily
marketable. The Fund may also invest up to 10% of its assets in restricted
securities eligible for resale to certain institutional investors pursuant to
Rule 144A under the Securities Act of 1933. To the extent that the Fund's
holdings of participation interests, COPs and inverse floaters are determined to
be illiquid, such holdings will be subject to the 10% restriction on illiquid
investments.
LENDING OF SECURITIES AND REPURCHASE AGREEMENTS. For the purpose of realizing
additional (taxable) income, the Fund may lend to broker-dealers portfolio
securities amounting to not more than 33% of its total assets taken at current
value or may enter into repurchase agreements. In a repurchase agreement, the
Fund buys a security subject to the right and obligation to sell it back to the
issuer at the same price plus accrued interest. These transactions must be fully
collateralized at all times. The Fund may reinvest any cash collateral in
short-term highly liquid debt securities. However, they may involve some credit
risk to the Fund if the other party should default on its obligation and the
Fund is delayed in or prevented from recovering the collateral. Securities
loaned by the Fund will remain subject to fluctuations of market value.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Fund may purchase securities
on a forward or "when-issued" basis and may purchase or sell securities
27
<PAGE>
on a forward commitment basis to hedge against anticipated changes in interest
rates and prices. When the Fund engages in such transactions, it relies on the
seller or the buyer, as the case may be, to consummate the transaction. Failure
to consummate the transaction may result in the Fund's losing the opportunity to
obtain an advantageous price and yield. If the Fund chooses to dispose of the
right to acquire a when-issued security prior to its acquisition or dispose of
its right to deliver or receive against a forward commitment, it can incur a
taxable gain or a loss.
SHORT TERM TRADING AND PORTFOLIO TURNOVER. Short-term trading means the
purchase and subsequent sale of a security after it has been held for a
relatively brief period of time. Short term trading may have the effect of
increasing portfolio turnover and may increase net short-term capital gains,
distributions from which would be taxable to shareholders as ordinary income.
The Fund does not intend to invest for the purpose of seeking short-term
profits. The Fund's portfolio securities may be changed, however, without regard
to the holding period of these securities (subject to certain tax restrictions),
when the Adviser deems that this action will help achieve the Fund's objective
given a change in an issuer's operations or changes in general market
conditions. The Fund's portfolio turnover rate is set forth in the table under
the caption "Financial Highlights."
OPTIONS AND FUTURES TRANSACTIONS. The Fund may buy and sell options contracts
on securities and debt security indices, interest rate and municipal bond index
futures contracts and options on such futures contracts. Options and futures
contracts are bought and sold to manage the Fund's exposure to changing interest
rates and security prices. Some options and futures strategies, including
selling futures, buying puts and writing calls, tend to hedge a Fund's
investment against price fluctuations. Other strategies, including buying
futures, writing puts, and buying calls, tend to increase market exposure.
Options and futures may be combined with each other or with forward contracts in
order to adjust the risk and return characteristics of the overall strategy. The
Fund may invest in options and futures based on debt securities and municipal
bond indices (securities indices).
Options and futures can be volatile investments and involve certain risks. If
the Adviser applies a hedge at an inappropriate time or judges market conditions
incorrectly, options and futures strategies may lower the Fund's return. The
Fund could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. Options and
futures do not pay interest, but may produce taxable capital gains or losses.
The Fund will not engage in a transaction in futures or options on futures if,
immediately thereafter, the sum of initial margin deposits and premiums required
to establish positions in futures contracts and options on futures would exceed
5% of the Fund's net assets. The loss incurred by the Fund investing in futures
contracts and in writing options on futures is potentially unlimited and may
exceed the amount of any premium received. The Fund's transactions in options
and futures contracts may be limited by the requirements of the Code for
qualification as a regulated investment company. See the Statement of Additional
Information
28
<PAGE>
for further discussion of options and futures transactions, including tax
effects and investment risks.
MUNICIPAL LEASE OBLIGATIONS. The Fund may purchase participation interests
which give the Fund an undivided pro rata interest in the tax exempt security.
For certain participation interests, the Fund will have the right to demand
payment, on a specified number of days' notice for all or any part of the Fund's
participation interest in the tax exempt security plus accrued interest.
Participation interests, which are determined to be not readily marketable, will
be considered illiquid for purposes of the Fund's 10% restriction on investment
in securities.
The Fund may also invest in Certificates of Participation ("COP's") which
provide participation interests in lease revenues. Each COP represents a
proportionate interest in or right to the lease-purchase payment made under
municipal lease obligations or installment sales contracts. Municipal lease
obligations are issued by a state or municipal financing authority to provide
funds for the construction of facilities (e.g., schools, dormitories, office
buildings or prisons) or the acquisition of equipment. Certain municipal lease
obligations may trade infrequently. Accordingly, COPs will be purchased and
monitored pursuant to analysis by the Adviser and reviewed according to
procedures by the Board of Trustees which consider various factors in
determining the liquidity risk. COPs will not be considered illiquid for
purposes of the Fund's 10% limitation on illiquid securities provided the
Adviser determines that there is a readily available market for such securities.
An investment in COPs is subject to the risk that a municipality may not
appropriate sufficient funds to meet payments on the underlying lease
obligation. See the Statement of Additional Information for additional
discussion of participation interests and municipal lease obligations.
DERIVATIVE INSTRUMENTS. The Fund may purchase or enter into derivative
instruments to enhance return, to hedge against fluctuations in interest rates
or securities prices, to change the duration of the Fund's fixed income
portfolio or as a substitute for the purchase or sale of securities. The Fund's
investments in derivative securities may include certain floating rate and
indexed securities. The Fund's transactions in derivative contracts may include
the purchase or sale of futures contracts on securities or indices; options on
futures contracts; and options on securities or indices. All of the Funds'
transactions in derivative instruments involve a risk of loss or depreciation
due to unanticipated adverse changes in interest rates or securities prices. The
loss on derivative contracts may exceed the Fund's initial investment in these
contracts. In addition, the Fund may lose the entire premium paid for purchased
options that expire before they can be profitably exercised by the Fund. The
Fund may realize taxable income or gain from its transactions in derivative
contracts, distributions of which will be taxable to shareholders.
INDEXED SECURITIES. The Fund may invest in indexed securities, including
floating rate securities that are subject to a maximum interest rate ("capped
floaters") and leveraged inverse floating rate securities ("inverse floaters")
(up to 10% of the Fund's total assets). The interest rate or, in some cases, the
principal payable at the maturity of an indexed security may change positively
or inversely in relation to
29
<PAGE>
one or more interest rates, financial indices or other financial indicators
("reference prices"). An indexed security may be leveraged to the extent that
the magnitude of any change in the interest rate or principal payable on an
indexed security is a multiple of the change in the reference price. Thus,
indexed securities may decline in value due to adverse market changes in
interest rates or other reference prices.
RISKS ASSOCIATED WITH DERIVATIVE SECURITIES AND CONTRACTS. The risks associated
with the Fund's transactions in derivative securities and contracts may include
some or all of the following:
Market Risk. Investments in floating rate and indexed securities are subject to
the interest rate and other market risks described above. Entering into a
derivative contract involves a risk that the applicable market will move against
the Fund's position and that the Fund will incur a loss. For derivative
contracts other than purchased options, this loss may exceed the amount of the
initial investment made or the premium received by the Fund.
Leverage and Volatility Risk. Derivative instruments may sometimes increase or
leverage the Fund's exposure to a particular market risk. Leverage enhances the
price volatility of derivative instruments held by the Fund. The Fund may
partially offset the leverage inherent in derivative contracts by maintaining a
segregated account consisting of cash and liquid, high grade debt securities, by
holding offsetting portfolio securities or contracts or by covering written
options.
Correlation Risk. A Fund's success in using derivative instruments to hedge
portfolio assets depends on the degree of price correlation between the
derivative instrument and the hedged asset. Imperfect correlation may be caused
by several factors, including temporary price disparities among the trading
markets for the derivative instrument, the assets underlying the derivative
instrument and the Fund's portfolio assets.
Credit Risk. Derivative securities and over-the-counter derivative contracts
involve a risk that the issuer or counterparty will fail to perform its
contractual obligations.
Liquidity and Valuation Risk. Some derivative securities are not readily
marketable or may become illiquid under adverse market conditions. In addition,
during periods of extreme market volatility, a commodity or exchange may suspend
or limit trading in an exchange-traded derivative contract, which may make the
contract temporarily illiquid and difficult to price. The staff of the SEC takes
the position that certain over-the-counter options are subject to the Fund's 10%
limit on illiquid investments. The Fund's ability to terminate over-the-counter
derivative contracts may depend on the cooperation of the counterparties to such
contracts. For thinly traded derivative securities and contracts, the only
source of price quotations may be the selling dealer or counterparty.
30
<PAGE>
APPENDIX A
EQUIVALENT YIELDS:
TAX EXEMPT VS. TAXABLE YIELD
The table below shows the effect of the tax status of municipal obligations on
the yield received by their holders under the regular federal income tax laws
that apply to 1996. It gives the approximate yield a taxable security must earn
at various income brackets to produce after-tax yields.
TAX-FREE YIELDS 1996 TAX TABLE
<TABLE>
<CAPTION>
JOINT RETURN TAX-EXEMPT YIELD
---------------- MARGINAL ----------------------------------------------------------------------
SINGLE RETURN INCOME TAX
- ----------------
RATE
----------
(TAXABLE INCOME) 4% 5% 6% 7% 8% 9% 10%
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------
$ 0-24,000 $ 0-40,100 15.0% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
$ 24,001-58,150 $ 40,101-96,900 28.0% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
$ 58,151-121,300 $ 96,901-147,700 31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
$121,301-263,750 $147,701-263,750 36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
Over $263,750 Over $263,750 39.6% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
</TABLE>
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.
This table is for illustrative purposes only and is not intended to imply or
guarantee any particular yield from the John Hancock High Yield Tax-Free Fund.
While it is expected that a substantial portion of the interest income
distributed to the Fund's shareholders will be exempt from federal income taxes,
portions of such distributions from time to time may be subject to federal
income taxes.
A-1
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS AND FUND'S ASSET COMPOSITION
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various debt instruments
they undertake to rate. It should be emphasized that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments of the same
maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment at some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest level assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
B-1
<PAGE>
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B: Debt rated BB, B is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates the lowest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
QUALITY DISTRIBUTION
The average weighted quality distribution of the securities in the portfolio
for the year ended December 31, 1995:
<TABLE>
<CAPTION>
RATING
% OF ASSIGNED % OF RATING ASSIGNED % OF
SECURITY RATINGS AVERAGE VALUE PORTFOLIO BY ADVISER PORTFOLIO BY SERVICE* PORTFOLIO
- --------------------------------------- ------------- --------- ----------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA.................................... $ 42,664,923 22.6% $ 1,044,059 0.5% $ 41,620,864 22.1%
AA..................................... 9,121,111 4.8 0 0.0 9,121,111 4.8
A...................................... 27,993,235 14.9 0 0.0 27,993,235 14.9
BBB.................................... 96,254,876 51.1 7,931,388 4.2 88,323,488 46.9
BB..................................... 9,932,549 5.3 5,015,317 2.7 4,917,232 2.6
B...................................... 1,647,488 0.9 467,552 0.3 1,179,936 0.6
------------- --------- ----------- --- --------------- ---------
Debt Securities........................ 187,614,182 99.6 $14,458,316 7.7% $ 173,155,866 91.9%
Equity Securities...................... 0 0.0
Short-Term Securities.................. 833,750 0.4
------------- ---------
Total Portfolio........................ 188,447,932 100.0%
Other Assets -- Net.................... 3,098,296
-------------
Net Assets............................. $ 191,546,228
===========
</TABLE>
The ratings are described in the Statement of Additional Information.
*S&P, Moody's and Fitch's
B-2
<PAGE>
JOHN HANCOCK
TAX-FREE BOND FUND
INVESTMENT ADVISER
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 AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For Service Information
For Telephone Exchange call
1-800-225-5291
For Investment-by-Phone
For Telephone Redemption
For TDD call 1-800-554-6713
JHD 5200P 5/96 (RECYCLE LOGO) Printed on
Recycled Paper
JOHN HANCOCK
TAX-FREE BOND
FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1996
A MUTUAL FUND SEEKING
TO OBTAIN AS
HIGH LEVEL OF INTEREST
INCOME EX-
EMPT FROM FEDERAL
INCOME TAXES AS
IN CONSISTENT WITH
PRESERVATION OF
CAPITAL.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
TELEPHONE 1-800-225-5291
<PAGE>
JOHN HANCOCK TAX-FREE BOND FUND
Class A and Class B Shares
Statement of Additional Information
MAY 1, 1996
This Statement of Additional Information provides information about John
Hancock Tax-Free Bond (the "Fund") in addition to the information that is
contained in the Fund's Class A and Class B Prospectus (the "Prospectus"), dated
May 1, 1996.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-5291
1-800-225-5291
TABLE OF CONTENTS
Organization of the Fund................................................. 2
Investment Objective and Policies........................................ 2
Certain Investment Practices............................................. 6
Investment Restrictions.................................................. 11
Those Responsible for Management......................................... 13
Investment Advisory and Other Services................................... 22
Distribution Contract.................................................... 25
Net Asset Value.......................................................... 27
Initial Sales Charge On Class A Shares................................... 28
Deferred Sales Charge on Class B Shares.................................. 30
Special Redemptions...................................................... 30
Additional Services and Programs......................................... 31
Description of the Fund's Shares......................................... 32
Tax Status............................................................... 34
Calculation of Performance............................................... 38
Brokerage Allocation..................................................... 40
Transfer Agent Services.................................................. 42
Custody of Portfolio..................................................... 42
Independent Auditors..................................................... 42
Appendix A............................................................... A-1
Financial Statements..................................................... F-1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a diversified open-end management investment company organized
as a business trust under the laws of The Commonwealth of Massachusetts. Prior
to the approval of John Hancock Advisers, Inc. (the "Investment Adviser") an
indirect wholly-owned subsidiary of John Hancock Mutual Life Insurance Company
(the "Life Company"), a Massachusetts life insurance company chartered in 1862,
with national headquarters at John Hancock Place, Boston, Massachusetts, as the
Fund's adviser effective December 22, 1994, the Fund was known as Transamerica
California Tax-Free Income Fund.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. As discussed under "Investment Objective and
Policies" in the Prospectus, the investment objective of the Fund is to obtain
as high a level of income exempt from federal income taxes as is consistent with
preservation of capital.
Description of Municipal Obligations. In seeking to achieve its investment
objective, the Fund invests in a variety of Municipal Obligations which consist
of Municipal Bonds, Municipal Notes and Municipal Commercial Paper, the interest
on which in the opinion of the bond issuer's counsel (not the Fund's counsel) is
exempt from federal income tax.
Municipal Bonds. Municipal bonds are issued to obtain funds for various
public purposes including the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works. Other public purposes for
which Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses and obtaining funds to lend to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities to
obtain funds for many types of local, privately operated facilities. Such debt
instruments are considered municipal obligations if the interest paid on them is
exempt from federal income tax. The payment of principal and interest by issuers
of certain obligations purchased by the Fund may be guaranteed by a letter of
credit, note repurchase agreement, insurance or other credit facility agreement
offered by a bank or other financial institution. Such guarantees and the
creditworthiness of guarantors will be considered by the Investment Adviser in
determining whether a Municipal Obligation meets the Fund's investment quality
requirements. No assurance can be given that a municipality or guarantor will be
able to satisfy the payment of principal or interest on a municipal obligation.
Municipal Notes. Municipal Notes are short-term obligations of
municipalities, generally with a maturity ranging from six months to three
years. The principal types of such Notes include tax, bond and revenue
anticipation notes and project notes.
Municipal Commercial Paper. Municipal Commercial Paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued to meet seasonal working
capital needs of a municipality or interim
2
<PAGE>
construction financing. Municipal Commercial Paper is backed in many cases by
letters of credit, lending agreements, note repurchase agreements or other
credit facility agreements offered by banks and other institutions.
Federal tax legislation enacted in the 1980's placed substantial new
restrictions on the issuance of the bonds described above and in some cases
eliminated the ability of state or local governments to issue Municipal
Obligations for some of the above purposes. Such restrictions do not affect the
Federal income tax treatment of Municipal Obligations in which the Fund may
invest which were issued prior to the effective dates of the provisions imposing
such restrictions. The effect of these restrictions may be to reduce the volume
of newly issued Municipal Obligations.
Issuers of Municipal Obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Act, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that as a result of
litigation or other conditions the power or ability of any one or more issuers
to pay when due the principal of and interest on their Municipal Obligations may
be affected.
The yields of Municipal Bonds depend upon, among other things, general
money market conditions, general conditions of the Municipal Bond market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P, Moody's and Fitch represent their respective opinions
of the quality of the Municipal Bonds they undertake to rate. It should be
emphasized, however, that ratings are general and not absolute standards of
quality. Consequently, Municipal Bonds with the same maturity, coupon and rating
may have different yields and Municipal Bonds of the same maturity and coupon
with different ratings may have the same yield. See Appendix A for a description
of ratings. Many issuers of securities choose not to have their obligations
rated. Although unrated securities eligible for purchase by the Fund must be
determined to be comparable in quality to securities having certain specified
ratings, the market for unrated securities may not be as broad as for rated
securities since many investors rely on rating organizations for credit
appraisal.
Variable or Floating Rate Obligations. As discussed under "Investment
Objective and Policies" in the Prospectus, certain of the obligations in which
the Fund may invest may be variable or floating rate obligations on which the
interest rate is adjusted at predesignated periodic intervals (variable rate) or
when there is a change in the market rate of interest on which the interest rate
payable on the obligation is met is based (floating rate). Variable or floating
rate obligations may include a demand feature which entitles the purchaser to
demand prepayment of the principal amount prior to stated maturity. Also, the
issuer may have a corresponding right to prepay the principal amount prior to
maturity. As with any other type of debt security, the marketability of variable
or floating rate instruments may vary depending upon a number of factors,
including the type of issuer and the terms of the instruments. The Fund may also
invest in more recently developed floating rate instruments which are created by
dividing a municipal security's interest rate into two or more different
components. Typically, one component
3
<PAGE>
("floating rate component" or "FRC") pays an interest rate that is reset
periodically through an auction process or by reference to an interest rate
index. A second component ("inverse floating rate component" or "IFRC") pays an
interest rate that varies inversely with changes to market rates of interest,
because the interest paid to the IFRC holders is generally determined by
subtracting a variable or floating rate from a predetermined amount (i.e., the
difference between the total interest paid by the municipal security and that
paid by the FRC). The Fund may purchase FRC's without limitation. Up to 10% of
the Fund's total assets may be invested in IFRC's in an attempt to protect
against a reduction in the income earned on the Fund's other investments due to
a decline in interest rates. The extent of increases and decreases in the value
of an IFRC generally will be greater than comparable changes in the value of an
equal principal amount of a fixed-rate municipal security having similar credit
quality, redemption provisions and maturity. To the extent that such instruments
are not readily marketable, as determined by the Investment Adviser pursuant to
guidelines adopted by the Board of Trustees, they will be considered illiquid
for purposes of the Fund's 10% investment restriction on investment in
non-readily marketable securities.
Participation Interests. The Fund may purchase from financial institutions
tax exempt participation interests in tax exempt securities. A participation
interest gives the Fund an undivided interest in the tax exempt security in the
proportion that the Fund's participation interest bears to the total amount of
the tax exempt security. For certain participation interests, the Fund will have
the right to demand payment, on a specified number of days' notice, for all or
any part of the Fund's participation interest in the tax exempt security plus
accrued interest. Participation interests, which are determined to be not
readily marketable, will be considered as such for purposes of the Fund's 10%
investment restriction on investment in non-readily marketable illiquid
securities. The Fund may also invest in Certificates of Participation (COP's)
which provide participation interests in lease revenues. Each Certificate
represents a proportionate interest in or right to the lease-purchase payment
made under municipal lease obligations or installment sales contracts.
Typically, municipal lease obligations are issued by a state or municipal
financing authority to provide funds for the construction of facilities (e.g.,
schools, dormitories, office buildings or prisons) or the acquisition of
equipment. The facilities are typically used by the state or municipality
pursuant to a lease with a financing authority. Certain municipal lease
obligations may trade infrequently. Participation interests in municipal lease
obligations will not be considered illiquid for purposes of the Fund's 10%
limitation on illiquid securities provided the Investment Adviser determines
that there is a readily available market for such securities. In reaching
liquidity decisions, the Investment Adviser will consider, among others, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer.) With respect to municipal
lease obligations, the Investment Adviser also considers: (1) the willingness of
the municipality to continue, annually or biannually, to appropriate funds for
payment of the lease; (2) the general credit quality of the municipality and the
essentiality to the municipality of the property covered by the lease; (3) an
analysis of factors similar to that performed by nationally recognized
statistical rating organizations in evaluating the credit quality of a municipal
lease obligation, including (i) whether
4
<PAGE>
the lease can be canceled; (ii) if applicable, what assurance there is that the
assets represented by the lease can be sold; (iii) the strength of the lessee's
general credit (e.g., its debt, administrative, economic and financial
characteristics); (iv) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an event of nonappropriation); and (v) the legal recourse in the event of
failure to appropriate; and (4) any other factors unique to municipal lease
obligations as determined by the Investment Adviser.
Fund Characteristics and Other Policies. The Fund may engage in short-term
trading consistent with its investment objective. Securities may be sold in
anticipation of a market decline (a rise in interest rates) or purchased in
anticipation of a market rise (a decline in interest rates). In addition, a
security may be sold and another security of comparable quality purchased at
approximately the same time to take advantage of what the Investment Adviser
believes to be a temporary disparity in the normal yield relationship between
the two securities. These yield disparities may occur for reasons not directly
related to the investment quality of particular issues or the general movement
of interest rates, such as changes in the overall demand for, or supply of,
various types of tax-exempt securities.
In general, purchases and sales may also be made to restructure the
portfolio in terms of average maturity, quality, coupon yield or diversification
for any one or more of the following purposes: (a) to increase income, (b) to
improve portfolio quality, (c) to minimize capital depreciation, (d) to realize
gains or losses, or (e) for such other reasons as the Investment Adviser deems
relevant in light of economic market conditions.
The Fund is a "diversified" management investment company under the
Investment Company Act of 1940 (the "Act"). This means that with respect to 75%
of its total assets: (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer other than U.S. government securities
and securities of other investment companies and (2) the Fund may not own more
than 10% of the outstanding voting securities of any one issuer. In applying
these limitations, a guarantee of a security will not be considered a security
of the guarantor, provided that the value of all securities issued or guaranteed
by that guarantor, and owned by the Fund, does not exceed 10% of Fund's total
assets. Since Municipal Obligations ordinarily purchased by the Fund are not
voting securities (notwithstanding the 75% limitation described above), there is
generally no limit on the percentage of a single issuer's obligations which the
Fund may own so long as it does not invest more than 5% of its total assets in
the securities of that issuer. Consequently, the Fund may invest in a greater
percentage of the outstanding securities of a single issuer than would an
investment company which invests in voting securities. In determining the issuer
of a security, each state and each political subdivision agency, and
instrumentality of each state and each multi-state agency of which such state is
a member is a separate issuer. Where securities are backed only by assets and
revenues of a particular instrumentality, facility or subdivision, such entity
is considered the issuer.
5
<PAGE>
CERTAIN INVESTMENT PRACTICES
When-Issued and Forward Commitment Securities. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions,
it relies on the seller to consummate the transaction. The failure of the issuer
or seller to consummate the transaction may result in the Fund losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash or
securities will be segregated in a separate account to the extent that the total
value of the assets in the account declines below the amount of the when-issued
commitments. Alternatively, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
Repurchase Agreements. The Fund may enter into repurchase agreements. A
repurchase agreement is a contract under which the Fund would acquire a security
for a relatively short period (generally not more than 7 days) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). The Fund will
enter into repurchase agreements only with member banks of the Federal Reserve
System and with securities dealers. The Investment Adviser will continuously
monitor the creditworthiness of the parties with whom the Fund enters into
repurchase agreements. The Fund has established a procedure providing that the
securities serving as collateral for each repurchase agreement must be delivered
to the Fund's custodian either physically or in book-entry form and that the
collateral must be marked to market daily to ensure that each repurchase
agreement is fully collateralized at all times. In the event of bankruptcy or
other default by a seller of a repurchase agreement, the Fund could experience
delays in liquidating the underlying securities and could experience losses,
including the possible decline in the value of the underlying securities during
the period which the Fund seeks to enforce its rights thereto, possible
subnormal levels of income and lack of access to income during this period, and
the expense of enforcing its rights.
6
<PAGE>
The Fund is permitted to engage in certain hedging techniques involving
options and futures transactions in order to reduce the effect of interest rate
movements affecting the market values of the investments held, or intended to be
purchased, by the Fund.
Options On Debt Securities. The Fund may purchase and write put and call
options on debt securities which are traded on a national securities exchange
(an "Exchange") to protect its holdings in municipal bonds against a substantial
decline in market value. Securities are considered related if their price
movements generally correlate to one another. The purchase of put options on
debt securities which are related to securities held in its portfolio will
enable the Fund to protect, at least partially, unrealized gains in an
appreciated security in its portfolio without actually selling the security. In
addition, the Fund may continue to receive tax-exempt interest income on the
security. However, under certain circumstances the Fund may not be treated as
the tax owner of a security held subject to a put option, in which case interest
with respect to such security would not be tax-exempt for the Fund. The purchase
of call options on debt securities may help to protect against substantial
increases in prices of securities the Fund intends to purchase pending its
ability to invest in such securities in an orderly manner.
The Fund may sell put and call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid in
connection with the option which is sold.
In order to protect partially against declines in the value of its
portfolio securities, the Fund may sell (write) call options on debt securities.
A call option gives the purchaser of such option in return for a premium paid,
the right to buy, and the seller has the obligation to sell, the underlying
security at the exercise price if the option is exercised during the option
period. The writer of the call option who receives the premium has the
obligation to sell the underlying security to the purchaser at the exercise
price during the option period if assigned an exercise notice. The Fund will
write call options only on a covered basis, which means that it will own the
underlying security subject to a call option at all times during the option
period. The exercise price of a call option may be below, equal to or above the
current market value of the underlying security at the time the option is
written.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier point in time when the writer effects a closing
purchase transaction.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, in conjunction with the sale of the underlying security or to
enable the Fund to write another call option on the underlying security with a
different exercise price or different expiration date or both.
The Fund will write cash secured put options in order to facilitate its
ability to purchase a security at a price lower than the current market price of
such security. The Fund will write put
7
<PAGE>
options only on a "cash secured" basis which means that if the Fund writes a
"put" it will segregate cash obligations in the event the "put" is exercised.
"Puts" will only be written in furtherance of the basic investment objectives of
the Fund relating to the acquisition of tax exempt securities and will not be
written with the primary intent of generating income from premiums paid to the
Fund in connection with the sale of the "put".
The purchase and writing of put and call options involves certain risks.
During the option period, the covered call writer has, in return for the premium
on the option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss in the event the price of
the underlying security declines. A secured put writer assumes the risk that the
underlying security will fall below the exercise price in which case the writer
could be required to purchase the security at a higher price than the then
current market price of the security. In either instance, the writer has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities, in the
case of a call, or acquire the contract securities, in the case of a put, at the
exercise price. If a put or call option purchased by the Fund is not sold when
it has remaining value, and if the market price of the underlying security
remains equal to or greater than the exercise price, in the case of a put, or
equal to or less than the exercise price, in the case of a call, the Fund will
lose its entire investment in the option. Also, where a put or a call option on
a particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security.
The Fund will not invest in a put or a call option if as a result the amount of
premiums paid for such options then outstanding, when added to the premiums paid
for financial and index futures and put and call options on such futures, would
exceed 10% of the Fund's total assets.
Futures Contracts and Related Options. The Fund may engage in the purchase
and sale of interest rate futures contracts ("financial futures") and tax-exempt
bond index futures contracts ("index futures") and the purchase and writing of
put and call options thereon, as well as put and call options on tax-exempt bond
indexes (if and when they are traded) only as a hedge against changes in the
general level of interest rates in accordance with strategies more specifically
described below.
The purchase of a financial futures contract obligates the buyer to accept
and pay for the specific type of debt security called for in the contract at a
specified future time and at a specified price. The Fund would purchase a
financial futures contract when it is not fully invested in long-term debt
securities but wishes to defer its purchases for a time until it can invest in
such securities in an orderly manner or because short-term yields are higher
than long-term yields. Such purchases would enable the Fund to earn the income
on a short-term security while at the same time minimizing the effect of all or
part of an increase in the market price of the long-term debt security which the
Fund intends to purchase in the future. A rise in the price of the long-term
debt security prior to its purchase either would generally be offset by an
increase in the value
8
<PAGE>
of the futures contract purchased by the Fund or avoids by taking delivery of
the debt securities under the futures contract.
The sale of a financial futures contract obligates the seller to deliver
the specific type of debt security called for in the contract at a specified
future time and at a specified price. The Fund would sell a financial futures
contract in order to continue to receive the income from a long-term debt
security, while endeavoring to avoid part or all of the decline in market value
of that security which would accompany an increase in interest rates. If
interest rates did rise, a decline in the value of the debt security held by the
Fund would be substantially offset by an increase in the value of the futures
contract sold by the Fund. While the Fund could sell a long-term debt security
and invest in a short-term security, ordinarily the Fund would give up income on
its investment, since long-term rates normally exceed short-term rates.
In addition, the Fund may purchase and write put and call options on
financial futures contracts which are traded on an Exchange or a Board of Trade
and enter into closing transactions with respect to such options to terminate an
existing position. Options on financial futures contracts are similar to options
on securities except that a put option on a financial futures contract gives the
purchaser the right in return for the premium paid to assume a short position in
a financial futures contract and a call option on a financial futures contract
gives the purchaser the right in return for the premium paid to assume a long
position in a financial futures contract.
The Fund anticipates purchasing and selling tax-exempt bond index futures as a
hedge against changes in the market value of the tax exempt bonds which it
holds. A tax-exempt bond index fluctuates with changes in the market values of
the tax-exempt bonds included in the index. An index future has similar
characteristics to a financial future except that settlement is made through
delivery of cash rather than the underlying securities. The sale of an index
future obligates the seller to deliver at settlement an amount of cash equal to
a specified dollar amount multiplied by the difference between the value of the
index at the close of the last trading day of the contract and the price at
which the future was originally written.
The Fund may also purchase and write put and call options on tax-exempt
bond indexes (if and when such options are traded) and enter into closing
transactions with respect to such options. An option on an index future is
similar to an option on a debt security except that an option on an index future
gives the holder the right to assume a position in an index future. The Fund
will use options on futures contracts and options on tax-exempt bond indexes (if
and when they are traded) in connection with hedging strategies. Generally,
these strategies would be employed under the same market conditions in which the
Fund would use put and call options on debt securities.
The Fund may hedge up to the full value of its portfolio through the use of
options and futures. At the time the Fund purchases a futures contract, an
amount of cash or U.S. Government securities at least equal to the market value
of the futures contract will be deposited in a segregated account with the
Fund's Custodian to collateralize the position and thereby insure that such
futures contract is unleveraged. The Fund may not purchase or sell futures
contracts or purchase or write related put or call options if immediately
thereafter the sum of the amount of
9
<PAGE>
margin deposits on the Fund's existing futures and related options positions and
the amount of premiums paid for related options (measured at the time of
investment) would exceed 5% of the Fund's total assets.
While the Fund's hedging transactions may protect the Fund against adverse
movements in the general level of interest rates, such transactions could also
preclude the opportunity to benefit from favorable movements in the level of
interest rates. Due to the imperfect correlation between movements in the prices
of futures contracts and movements in the prices of the related securities being
hedged, the price of a futures contract may move more than or less than the
price of the securities being hedged. There is an increased likelihood that this
will occur when a tax-exempt security is hedged by a futures contract on a
taxable security. Options on futures contracts are generally subject to the same
risks applicable to all option transactions. In addition, the Fund's ability to
use this technique will depend in part on the development and maintenance of a
liquid secondary market for such options. For a discussion of the inherent risks
involved with futures contracts and options thereon, see "Risks Relating to
Transactions in Futures Contracts and Related Options" below.
The Fund's policies permitting the purchase and sale of futures contracts
and the purchase and writing of related put or call options for hedging purposes
only may not be changed without the approval of shareholders holding a majority
of the Fund's outstanding voting securities. The Board of Directors may
authorize procedures, including numerical limitations, with regard to such
transactions in furtherance of the Fund investment objectives. Such procedures
are not deemed to be fundamental and may be changed by the Board of Trustees
without the vote of the Fund's shareholders.
Risks Relating to Transactions in Futures Contracts and Related Options.
Positions in futures contracts may be closed out only on an exchange or board of
trade which provides a market for such futures. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract or at
any particular time. In the event a liquid market does not exist, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
maintenance margin. In addition, limitations imposed by an exchange or board of
trade on which futures contracts are traded may compel or prevent the Fund from
closing out a contract which may result in reduced gain or increased loss to the
Fund. The absence of a liquid market in futures contracts might cause the Fund
to make or take delivery of the underlying securities at a time when it may be
disadvantageous to do so. The purchase of put options on futures contracts
involves less potential dollar risk to the Fund than an investment of equal
amount in futures contracts, since the premium is the maximum amount of risk the
purchaser of the option assumes. The entire amount of the premium paid for an
option can be lost by the purchaser, but no more than that amount.
10
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions upon its
investments as set forth below which may not be changed without the approval of
the holders of a majority of the outstanding shares of the Fund. A majority for
this purpose means: (a) more than 50% of the outstanding shares of the Fund or
(b) 67% or more of the shares represented at a meeting where more than 50% of
the outstanding shares of the Fund are represented, whichever is less. Under
these restrictions, the Fund may not:
1. Borrow money except from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
that might otherwise require the untimely disposition of securities,
in an amount up to 15% of the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the borrowings was made.
While borrowing exceed 5% of the value of the Fund's total assets, the
Fund will not purchase any additional securities. Interest paid on
borrowing will reduce the Fund's net investment income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 10% of the value of its total assets but only to
secure borrowing for temporary or emergency purposes or as may be
necessary in connection with maintaining collateral in connection with
writing put and call options or making initial margin deposits in
connection with the purchase or sale of financial futures, index
futures contracts and related options.
3. With respect to 75% of its total assets, purchase securities (other
than obligations issued or guaranteed by the United States government,
its agencies of instrumentalities and shares of other investment
companies) of any issuer if the purchase would cause immediately
thereafter more than 5% of the value of the Fund's total assets
invested in the securities of such issuer or the Fund would own more
than 10% of the outstanding voting securities of such issuer.
4. Make loans to others, except through the purchase of obligations in
which the Fund is authorized to invest, entering in repurchase
agreements and lending portfolio securities in an amount not exceeding
one third of its total assets.
5. Purchase illiquid securities, including securities subject to
restrictions on disposition under the Securities Act of 1933,
repurchase agreements maturing in more than seven days, and securities
which do not have readily available market quotations, if such
purchase would cause the Fund to have more than 10% of its net assets
invested in such types of securities.
6. Purchase or retain the securities of any issuer, if those officers and
Trustees of the Fund or the Investment Adviser who own beneficially
more than of 1% of
11
<PAGE>
the securities of such issuer, together own more than 5% of the
securities of such issuer.
7. Write, purchase or sell puts, calls or combinations thereof, except
put and call options on debt securities, futures contracts based on
debt securities, indices of debt securities and futures contracts
based on indices of debt securities, sell securities on margin or make
short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and unless not
more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.
8. Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
9. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, except commodities and commodities
contracts which are necessary to enable the Fund to engage in
permitted futures and options transactions necessary to implement
hedging strategies, or oil and gas interests. This limitation shall
not prevent the Fund from investing in municipal securities secured by
real estate or interests in real estate or holding real estate
acquired as a result of owning such municipal securities.
10. Invest in common stock or in securities of other investment companies,
except that securities of investment companies may be acquired as part
of a merger, consolidation or acquisition of assets and units of
registered unit investment trusts whose assets consist substantially
of tax-exempt securities may be acquired to the extent permitted by
Section 12 of the Act or applicable rules.
11. Invest more than 25% of its assets in the securities of "issuers" in
any single industry; provided that there shall be no limitation on the
purchase of obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities or by any state or
political subdivision thereof. For purposes of this limitation when
the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government
creating the issuing entity and a security is backed only by the
assets and revenues of the entity, the entity would be deemed to be
the sole issuer of the security. Similarly, in the case of an
industrial development or pollution control bond, if that bond is
backed only by the assets and revenues of the nongovernmental user,
then such nongovernmental user would be deemed to be the sole issuer.
If, however, in either case, the creating government or some other
entity guarantees a security, such a guarantee would be considered a
separate security and would be treated as an issue of such government
or other entity unless
12
<PAGE>
all securities issued or guaranteed by the government or other entity
owned by the Fund does not exceed 10% of the Fund's total assets.
12. Invest more than 5% of its total assets in securities of any issuers
if the party responsible for payment, together with any predecessor,
has been in operation for less than three years (except U.S.
government and agency obligations and obligations backed by the faith,
credit and taxing power of any person authorized to issue tax exempt
securities).
13. Issue any senior securities, except insofar as the Fund may be deemed
to have issued a senior security by: entering into a repurchase
agreement; purchasing securities in a when-issued or delayed delivery
basis; purchasing or selling any options or financial futures
contract; borrowing money or lending securities in accordance with
applicable investment restrictions.
In order to comply with certain state regulatory policies, the Fund has
adopted a non- fundamental policy prohibiting the purchase of warrants. The
Fund's Board of Trustees has approved the following non-fundamental investment
policy pursuant to an order of the SEC: Notwithstanding any investment
restriction to the contrary, the Fund may, in connection with the John Hancock
Group of Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John Hancock Group
of Funds provided that, as a result, (i) no more than 10% of the Fund's assets
would be invested in securities of all other investment companies, (ii) such
purchase would not result in more than 3% of the total outstanding voting
securities of any one such investment company being held by the Fund and (iii)
no more than 5% of the Fund's assets would be invested in any one such
investment company.
13
<PAGE>
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees' who elect officers who
are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Fund are also officers and Directors of the Adviser or officers and directors of
John Hancock Funds, Inc. (" John Hancock Funds") .
Set forth below is the principal occupation or employment of the Trustees
and principal officers of the Fund during the past five years.
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr.* Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1,2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
Group"); Chairman, NM Capital
Management, Inc. ("NM Capital");
John Hancock Advisers International
Limited ("Advisers International");
John Hancock Funds, Inc., ("John
Hancock Funds"), John Hancock
Investor Services Corporation
("Investor Services") and Sovereign
Asset Management Corporation
("SAMCorp") (herein after the
Adviser, The Berkeley Group, NM
Capital, Advisers International,
John Hancock Funds, Investor
Services and SAMCorp collectively
referred to as the "Affiliated
Companies"); Chairman, First
Signature Bank & Trust; Director,
John Hancock Freedom Securities
Corp., John Hancock Capital Corp.,
New England/Canada Business
Council; Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; President, the Adviser
(until July 1992); Chairman, John
Hancock Distributors, Inc.
("Distributors") (until April
1994).
</TABLE>
- ----------
* An "interested person" of the Company as such term is defined in the
Investment Company Act of 1940, as amended ("The Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Trustees.
(2) A member of the Investment Committee of the Adviser. (3) Member of the
Audit Committee and the Committee on Administration.
14
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James F. Carlin Trustee(3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May,
1995) and Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education; Receiver, the
City of Chelsea (until August,
1992).
William H. Cunningham Trustee(3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
Regents Chair for Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company); LBJ Foundation
Board (education foundation); and
Advisory Director, Texas Commerce
Bank - Austin.
Charles F. Fretz Trustee (3) Retired; Former Vice President and
RD #5, Box 300B Director, Towers, Perrin, Foster &
Clothier Springs Road Crosby, Inc. (international
Malvern, PA 19355 management consultants) (1952-1985).
</TABLE>
- ----------
* An "interested person" of the Company as such term is defined in the
Investment Company Act of 1940, as amended ("The Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Trustees.
(2) A member of the Investment Committee of the Adviser. (3) Member of the
Audit Committee and the Committee on Administration.
15
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hills, NJ 07078 (pharmaceuticals)(until 1996);
Director, ReCapital Corporation
(reinsurance)(until 1995).
Anne C. Hodsdon* Trustee and President and Chief Operating
101 Huntington Avenue President (1)(2) Officer, the Adviser; Executive
Boston, MA 02199 Vice President, the Adviser (until
December 1994); Senior Vice
President; the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
Charles L. Ladner Trustee (3) Director, Energy North, Inc.
UGI Corporation (public utility holding company)
P.O. Box 858 (until 1992); Senior Vice President
Valley Forge, PA 19482 and Chief Financial Officer of UGI
Corp. Holding Company: public
utilities, LPGAS
Leo E. Linbeck, Jr. Trustee(3) Chairman, President, Chief
3810 W. Alabama Executive Officer and Director,
Houston, TX 77027 Linbeck Corporation (a holding
company engaged in various phases
of the construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company); Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment); GeoQuest International
Holdings Inc. (a geophysical
consulting firm)(1980-1995).
</TABLE>
- ----------
* An "interested person" of the Company as such term is defined in the
Investment Company Act of 1940, as amended ("The Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Trustees.
(2) A member of the Investment Committee of the Adviser. (3) Member of the
Audit Committee and the Committee on Administration.
16
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Patricia P. McCarter Trustee (3) Director and Secretary of The
1230 Brentford Road McCarter Corp. (machine
Malvern, PA 19355 manufacturer).
Steven R. Pruchansky Trustee (1,3) Director and President, Mast
6920 Daniel Road Holdings, Inc.; (since 1991);
Naples, FL 33942 Director, First Signature Bank &
Trust Company (until August 1991);
Director, Mast Realty Trust (1982-
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione* Trustee (1) General Counsel, the Life Company;
John Hancock Place Director, the Adviser, the
P.O. Box 111 Affiliated Companies, John Hancock
Boston, Massachusetts Distributors, Inc., JH Networking
Insurance Agency, Inc., John
Hancock Subsidiaries, Inc.,
SAMCorp, NM Capital and John
Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993); Trustee, The
Berkeley Group.
Norman H. Smith Trustee (3) Retired. Lieutenant General, United
243 Mt. Oriole Lane States Marine Corps; Deputy Chief
Linden, VA 22642 of Staff for Manpower and Reserve
Affairs, Headquarters Marine Corps;
Commanding General, III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
</TABLE>
- ----------
* An "interested person" of the Company as such term is defined in the
Investment Company Act of 1940, as amended ("The Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Trustees.
(2) A member of the Investment Committee of the Adviser. (3) Member of the
Audit Committee and the Committee on Administration.
17
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John P. Toolan Trustee (3) Director, The Muni Bond Funds,
13 Chadwell Place National Liquid Reserves, Inc., The
Morristown, NJ 07960 Tax Free Money Fund, Inc. and
Vantage Money Market Funds (mutual
funds), and The Inefficient-Market
Fund, Inc. (closed-end investment
company; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (until
December 1991).
Robert G. Freedman* Vice Chairman and Chief Vice Chairman and Chief Investment
101 Huntington Avenue Investment Officer (2) Officer, the Adviser; President,
Boston, MA 02199 the Adviser (until December 1994).
Thomas H. Drohan* Senior Vice President and Senior Vice President and Secretary
101 Huntington Avenue Secretary of the Adviser.
Boston, MA 02199
James B. Little* Senior Vice President and Senior Vice President, the Adviser.
101 Huntington Avenue Chief Financial Officer
Boston, MA 02199
Susan S. Newton* Vice President, Assistant Vice President and Assistant Secretary,
101 Huntington Avenue Secretary and Compliance the Adviser.
Boston, MA 02199 Officer
</TABLE>
- ----------
* An "interested person" of the Company as such term is defined in the
Investment Company Act of 1940, as amended ("The Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Trustees.
(2) A member of the Investment Committee of the Adviser. (3) Member of the
Audit Committee and the Committee on Administration.
18
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John A. Morin* Vice President Vice President, the Adviser;
101 Huntington Avenue Counsel, the Life Company (until
Boston, MA 02199 1995)
James J. Stokowski* Vice President and Vice President, the Adviser.
101 Huntington Avenue Treasurer
Boston, MA 02199
</TABLE>
- ----------
* An "interested person" of the Company as such term is defined in the
Investment Company Act of 1940, as amended ("The Investment Company Act").
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Trustees.
(2) A member of the Investment Committee of the Adviser. (3) Member of the
Audit Committee and the Committee on Administration.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which the
Investment Adviser serves as investment adviser.
As of March 13, 1996, the officers and Trustees of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund. As of
March 13, 1996, Merrill Lynch Pierce Fenner & Smith Inc., Trade House Account
Team B, 4800 Deerlake Drive East, Jacksonville, FL. held 863,345 shares
representing 12.15% of the Funds Class B shares. At such date, no person owned
of record or was known by the Fund to own beneficially as much as 5% of the
outstanding shares of the Fund.
As of December 22, 1994, the Trustees have established an Advisory Board
which acts to facilitate a smooth transition of management over a two-year
period (between Transamerica Fund Management Company ("TFMC"), the prior
investment adviser, and the Investment Adviser). The members of the Advisory
Board are distinct from the Board of Trustees, do not serve the Fund in any
other capacity and are persons who have no power to determine what securities
are purchased or sold and behalf of the Fund. Each member of the Advisory Board
may be contacted at 101 Huntington Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal occupations during
the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management services);
former Chairman of the Board, Mosher Steel Company.
19
<PAGE>
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from Texas;
co-founder, Houston Parents' League; former board member of various civic
and cultural organizations in Houston, including the Houston Symphony,
Museum of Fine Arts and YWCA. Mrs. Bentsen is presently active in various
civic and cultural activities in the Washington, D.C. area, including
membership on the Area Board for The March of Dimes and is a National
Trustee for the Botanic Gardens of Washington, D. C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief Executive
Officer, TFMC; Director, West Central Advisory Board, Texas Commerce Bank;
Trustee, Memorial Hospital System; Chairman of the Board of Regents of
Baylor University; Member, Board of Governors, National Association of
Securities Dealers, Inc.; Formerly, Chairman, Investment Company Institute;
formerly, President, Houston Chapter of Financial Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company; Director,
Houston Industries and Houston Lighting and Power Company; Director,
TransAmerican Companies (natural gas producer and transportation); Member,
Board of Managers, Harris County Hospital District; Advisory Director,
Commercial State Bank, El Campo; Advisory Director, First National Bank of
Bryan; Advisory Director, Sterling Bancshares; Former Director and Vice
Chairman, Texas Commerce Bancshares; and Vice Chairman, Texas Commerce
Bank.
Compensation of the Board of Trustees and Advisory Board. The following
table provides information regarding the compensation paid by the Fund and the
other investment companies in the John Hancock Fund Complex to the Independent
Trustees and the Advisory Board members for their services. The three a
non-Independent Trustees, Ms. Hodsdon, Messrs Boudreau and Scipione, and each of
the officers of the Funds are interested persons of the Investment Adviser, are
compensated by the Investment Adviser or affiliated companies and received no
compensation from the Funds for their services.
20
<PAGE>
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits from all Funds in
Compensation Accrued as Part of John Hancock Fund
Trustees from the Fund the Fund's Expenses Complex to Trustees**
- -------- ------------- ------------------- ---------------------
<S> <C> <C> <C>
James F. Carlin $ 1,572 $ 0 $ 60,700
William H. Cunningham 704 2,950 69,700
Charles F. Fretz 245 0 56,200
Harold R. Hiser, Jr. 0 121 60,200
Charles L. Ladner 1,967 0 60,700
Leo E. Linbeck, Jr. 3,654 0 73,200
Patricia P. McCarter 1,967 0 60,700
Steven R. Pruchansky 2,033 0 62,700
Norman H. Smith 2,033 0 62,700
John P. Toolan 0 1,967 60,700
------- ------ --------
Total $14,175 $5,038 $627,500
</TABLE>
* Compensation made pursuant to different compensation arrangements then in
effect for the fiscal year ended December 31,1995.
** The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is $627,500 as of the calendar year ended December 31,
1995. All Trustees/Directors except Messrs. Cunningham and Linbeck are
Trustees/Directors of 33 funds in the John Hancock Fund Complex. Messrs.
Cunningham and Linbeck are Trustees/Directors of 31 funds
<TABLE>
<CAPTION>
Pension or Total Compensation from
Aggregate Retirement Benefits all Funds in John Hancock
Compensation Accrued as Part of Fund Complex to Advisory
Advisory Board*** from the Fund the Fund's Expenses Board***
- ----------------- ------------- ------------------- --------
<S> <C> <C> <C>
R. Trent Campbell $ 3,672 $ 0 $ 70,000
Mrs. Lloyd Bentsen 3,783 0 63,000
Thomas R. Powers 3,672 0 63,000
Thomas B. McDade 3,672 0 63,000
------- ------ --------
TOTAL $14,799 $ 0 $259,000
</TABLE>
*** As of December 31, 1995
21
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Fund receives its investment advice from the
Investment Adviser. Investors should refer to the Prospectus for a description
of certain information concerning the investment management contract. Each of
the Trustees and principal officers of the Fund who is also an affiliated person
of the Investment Adviser is named above, together with the capacity in which
such person is affiliated with the Fund and the Investment Adviser.
The Investment Adviser, located at 101 Huntington Avenue, Boston,
Massachusetts 02199-7603, was organized in 1968 and has more than $16 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,080,000 shareholders.
The Investment Adviser is a wholly-owned subsidiary of The Berkeley Financial
Group, which is in turn a wholly-owned subsidiary of John Hancock Subsidiaries,
Inc., which is in turn a wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), one of the nation's oldest and largest
financial services companies. With total assets under management of over $80
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries Standard & Poor's and A.M. Best's highest
ratings. Founded in 1862, the Life Company has been serving clients for over 130
years.
As described in the Prospectus under the caption, "Organization and
Management of the Fund," the Fund has entered into an investment management
contract with the Investment Adviser. Under the investment management contract,
the Investment Adviser provides the Fund with (i) a continuous investment
program, consistent with the Fund's stated investment objective and policies,
(ii) supervision of all aspects of the Fund's operations except those that are
delegated to a custodian, transfer agent or other agent and (iii) such
executive, administrative and clerical personnel, officers and equipment as are
necessary for the conduct of its business. The Investment Advisor is responsible
for the management of the Fund's portfolio assets.
No person other than the Investment Adviser, its directors and employees
regularly furnishes advice to the Fund with respect to the desirability of the
Fund investing in, purchasing or selling securities. The Investment Adviser may
from time to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life Company
and its affiliates.
Under the terms of the investment management contract with the Fund, the
Investment Adviser provides the Fund with office space, equipment and supplies
and other facilities and personnel required for the business of the Fund. The
Investment Adviser pays the compensation of all officers and employees of the
Fund and Trustees of the Fund affiliated with the Investment Adviser, the office
expenses of the Fund, including those of the Fund's Treasurer and Secretary, and
other expenses incurred by the Investment Adviser in connection with the
performance of its duties. All expenses which are not specifically paid by the
Investment Adviser and which are incurred in the operation of the Fund
including, but not limited to, (i) the fees of the Trustees of the Fund who are
not "interested persons," as such term is defined in the 1940 Act (the
22
<PAGE>
"Independent Trustees"), (ii) the fees of the members of the Fund's Advisory
Board (described above) and (iii) the continuous public offering of the shares
of the Fund are borne by the Fund.
As provided by the investment management contract, the Fund pays the
Investment Adviser an investment management fee, which is accrued daily and paid
monthly in arrears, equal on an annual basis to a 0.55% of the Fund's average
daily net asset value.
The Investment Adviser may voluntarily and temporarily reduce its advisory
fee or make other arrangements to limit the Fund's expenses to a specified
percentage of average daily net assets. The Investment Adviser retains the right
to re-impose the advisory fee and recover any other payments to the extent that,
at the end of any fiscal year, the Fund's annual expenses fall below this limit.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of any state limit where the
Fund is registered to sell shares of beneficial interest, the fee payable to the
Investment Adviser will be reduced to the extent required by law. At this time,
the most restrictive limit on expenses imposed by a state requires that expenses
charged to the Fund in any fiscal year not exceed 2.5% of the first $30,000,000
of the Fund's average daily net asset value, 2% of the next $70,000,000 and 1.5%
of the remaining average daily net asset value. When calculating the limit
above, the Fund may exclude interest, brokerage commissions and extraordinary
expenses.
Pursuant to the investment management contract, the Investment Adviser is
not liable to the Fund or its shareholders for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the matters to
which its contract relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Investment Adviser in the
performance of its duties or from its reckless disregard of the obligations and
duties under the contract.
The investment management contract initially expires on December 22, 1996,
and will continue in effect from year to year thereafter if approved annually by
a vote of a majority of the Trustees of the Fund who are not interested persons
of one or more of the parties to the contract, cast in person at a meeting
called for the purpose of voting on such approval, and by either a majority of
the Trustees or the holders of a majority of the Fund's outstanding voting
securities. The management contract may, on 60 days' written notice, be
terminated at any time without the payment of any penalty by the Fund by vote of
a majority of the outstanding voting securities of the Fund, by the Trustees or
by the Investment Adviser. The management contract terminates automatically in
the event of its assignment.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Investment Adviser or its affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Investment Adviser or for other funds or clients for which the
Investment Adviser renders investment advice arise for consideration at or about
the same time, transactions
23
<PAGE>
in such securities will be made, insofar as feasible, for the respective funds
or clients in a manner deemed equitable to all of them. To the extent that
transactions on behalf of more than one client of the Investment Adviser or its
respective affiliates may increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse effect on price.
Under the investment management contract, the Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If the Fund's investment management contract is no longer in
effect, the Fund (to the extent that it lawfully can) will cease to use such
name or any other name indicating that it is advised by or otherwise connected
with the Investment Adviser. In addition, the Investment Adviser or the Life
Company may grant the non-exclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
For the fiscal years ended December 31, 1993 and 1994 advisory fees payable
by the Fund to TFMC, the Fund's former investment adviser, amounted to $888,791
and $1,136,532, respectively. For the fiscal year ended December 31, 1995,
advisory fees payable to the Fund's Adviser amounted to $1,048,120. However, a
portion of such fees were not imposed pursuant to the voluntary fee and expense
assumption and fee waiver then in effect (see "The Fund's Expenses" in the
Prospectus).
Administrative Services Agreement. The Fund was a party to an
administrative services agreement with TFMC (the "Services Agreement"), pursuant
to which TFMC performed bookkeeping and accounting services and functions,
including preparing and maintaining various accounting books, records and other
documents and keeping such general ledgers and portfolio accounts as are
reasonably necessary for the operation of the Fund. Other administrative
services included communications in response to shareholder inquiries and
certain printing expenses of various financial reports. In addition, such staff
and office space, facilities and equipment was provided as necessary to provide
administrative services to the Fund. The Services Agreement was amended in
connection with the appointment of the Investment Adviser as adviser to the Fund
to permit services under the Agreement to be provided to the Fund by the
Investment Adviser and its affiliates. The Services Agreement was terminated
during the fiscal year 1995.
For the fiscal years ended December 31, 1993 and 1994 the Fund paid to TFMC
(pursuant to the Services Agreement) $94,272 and $116,742, respectively, of
which $62,855 and $81,515, respectively, was paid to TFMC and $31,417 and
$35,227, respectively, were paid for certain data processing and pricing
information services. No fees relating to the Services Agreement was paid or
incurred during the fiscal year 1995.
24
<PAGE>
DISTRIBUTION CONTRACT
As discussed in the Prospectus, the Fund's shares are sold on a continuous
basis at the public offering price. The Distributor, a wholly-owned subsidiary
of the Investment Adviser, has the exclusive right, pursuant to the Distribution
Agreement dated December 22, 1994 (the "Distribution Agreement"), to purchase
shares from the Fund at net asset value for resale to the public or to
broker-dealers at the public offering price. Upon notice to all broker-dealers
("Selling Brokers") with whom it has sales agreements, the Distributor may allow
such Selling Brokers up to the full applicable sales charge during periods
specified in such notice. During these periods, such Selling Brokers may be
deemed to be underwriters as that term is defined in the Securities Act of 1933.
The Distribution Agreement was initially adopted by the affirmative vote of
the Fund's Board of Trustees including the vote a majority of Trustees who are
not parties to the agreement or interested persons of any such party, cast in
person at a meeting called for such purpose. The Distribution Agreement shall
continue in effect until December 22, 1994 and from year to year if approved by
either the vote of the Fund's shareholders or the Board of Trustees including
the vote of a majority of Trustees who are not parties to the agreement or
interest persons of any such party, cast in person at a meeting called for such
purpose. The Distribution Agreement may be terminated at any time, without
penalty, by either party upon sixty (60) days' written notice or by a vote of a
majority of the outstanding voting securities of the Fund and terminates
automatically in the case of an assignment by the Distributor.
Total underwriting commissions for sales of the Fund's Class A Shares for
the fiscal years ended December 31, 1993, 1994 and 1995, were $1,224,810,
$149,847 and $158,248, respectively. Of such amounts $108,653 and $47,967 were
retained by the Fund's former distributor, Transamerica Fund Distributors, Inc.
For the fiscal year end December 31, 1995, underwriting commissions of $74,621
were retained by the Fund's current distributor, John Hancock Funds.
Distribution Plan. The Board of Trustees, including the Independent
Trustees of the Fund, approved new distribution plans pursuant to Rule 12b-1
under the 1940 Act for Class A Shares ("Class A Plan") and Class B Shares
("Class B Plan"). Such Plans were approved by a majority of the outstanding
shares of each respective class on December 16, 1994 and became effective on
December 22, 1994.
Under the Class A Plan, the distribution or services fee will not exceed an
annual rate of 0.15% of the average daily net asset value of the Class A Shares
of the Fund (determined in accordance with such Fund's Prospectus as from time
to time in effect). The Board of Trustees has voted to recommend to the
shareholders that the distribution and service fee on Class A Shares be
increased to 0.25% of the average daily net asset value effective after December
22, 1996. Any expenses under the Class A Plan not reimbursed within 12 months of
being presented to the Fund for repayment are forfeited and not carried over to
future years. Under the Class B Plan, the distribution or services fee to be
paid by the Fund will not exceed an annual rate of
25
<PAGE>
1.00% of the average daily net assets of the Class B Shares of the Fund
(determined in accordance with such Fund's prospectus as from time to time in
effect); provided that the portion of such fee used to cover Service Expenses
(described below) shall not exceed an annual rate of 0.25% of the average daily
net asset value of the Class B Shares of the Fund. The Distributor has agreed to
limit the payment of expenses pursuant to the Class B Plan to 0.90% of the
average daily net assets of the Class B Shares of the Fund until December 23,
1996. Under the Class B Plan, the fee covers the Distribution and Service
Expenses (described below) and interest expenses on unreimbursed distribution
expenses. In accordance with generally accepted accounting principles, the Fund
does not treat distribution fees in excess of 0.75% of the Fund's net assets
attributable to Class B shares as a liability of the Fund and does not reduce
the current net assets of Class B by such amount although the amount may be
payable in the future.
Under the Plans, expenditures shall be calculated and accrued daily and
paid monthly or at such other intervals as the Trustees shall determine. The fee
may be spent by the Distributor on Distribution Expenses or Service Expenses.
"Distribution Expenses" include any activities or expenses primarily intended to
result in the sale of shares of the relevant class of the Fund, including, but
not limited to: (i) initial and ongoing sales compensation payable out of such
fee as such compensation is received by the Distributor or by Selling Brokers,
(ii) direct out-of-pocket expenses incurred in connection with the distribution
of shares, including expenses related to printing of prospectuses and reports;
(iii) preparation, printing and distribution of sales literature and advertising
material; (iv) an allocation of overhead and other branch office expenses of the
Distributor related to the distribution of Fund Shares (v) distribution expenses
that were incurred by the Fund's former distributor and not recovered through
payments under the Class A or Class B former plans or through receipt of
contingent deferred sales charges; and (vi) in the event that any other
investment company (the "Acquired Fund") sells all or substantially all of its
assets, merges or otherwise engages in a combination with the Fund, distribution
expenses originally incurred in connection with the distribution of the Acquired
Fund's shares. Service Expenses under the Plans include payments made to, or on
account of, account executives of selected broker-dealers (including affiliates
of the Distributor) and others who furnish personal and shareholder account
maintenance services to shareholders of the relevant class of the Fund.
During the fiscal year ended December 31, 1995, the Funds paid John Hancock
Funds the following amounts of expenses with respect to the Class A and Class B
shares of the Fund:
<TABLE>
<CAPTION>
Interest,
Printing and Mailing of Carrying or Other
Prospectuses to New Compensation to Finance Charges
Advertising Shareholders Selling Brokers Other
----------- ------------ --------------- -----
<S> <C> <C> <C> <C>
Class A shares $13,395 $518 $116,514 $ 0
Class B shares $17,054 $707 $247,449 $338,251
</TABLE>
26
<PAGE>
Each of the Plans provides that it will continue in effect only so long as
its continuance is approved at least annually by a majority of both the Trustees
and the Independent Trustees. Each of the Plans provides that it may be
terminated (a) at any time by vote of a majority of the Trustees, a majority of
the Independent Trustees, or a majority of the respective Class' outstanding
voting securities or (b) by the Distributor on 60 days' notice in writing to the
Fund. Each of the Plans further provides that it may not be amended to increase
the maximum amount of the fees for the services described therein without the
approval of a majority of the outstanding shares of the class of the Fund which
has voting rights with respect to the Plan. Each of the Plans provides that no
material amendment to the Plan will, in any event, be effective unless it is
approved by a majority vote of the Trustees and the Independent Trustees of the
Fund. The holders of Class A Shares and Class B Shares have exclusive voting
rights with respect to the Plan applicable to their respective class of shares.
The Board of Trustees, including the Trustees who are not interested in the Fund
and have no direct or indirect interest in the Plans, has determined that, in
their judgment, there is a reasonable likelihood that the Plans will benefit the
holders of the applicable class of shares of the Fund.
Information regarding the services rendered under the Plans and the
Distribution Agreement and the amounts paid therefore by the respective Class of
the Fund are provided to, and reviewed by, the Board of Trustees on a quarterly
basis. In its quarterly review, the Board of Trustees considers the continued
appropriateness of the Plans and the Distribution Agreement and the level of
compensation provided therein.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's shares,
the following procedures are utilized wherever applicable. Debt investment
securities are valued on the basis of valuations furnished by a principal market
maker or a pricing service, both of which generally utilize electronic data
processing techniques to determine valuations for normal institutional size
trading units of debt securities without exclusive reliance upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or
less are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the
Investment Adviser any quotation or price is not representative of true market
value, the fair value of the security may be determined in good faith in
accordance with procedures approved by the Trustees. The Fund will not price its
securities on the following national holidays: New Year's Day; President's Day;
Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and
Christmas Day.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value
plus a sales charge which, at the option of the purchaser, may be imposed either
at the time of purchase (the "initial sales charge alternative") or on a
contingent deferred basis (the "deferred sales charge
27
<PAGE>
alternative"). Share certificates will not be issued unless requested by the
shareholder in writing, and then only will be issued for full shares. The Board
of Trustees reserves the right to change or waive the minimum investment
requirements and to reject any order to purchase shares (including purchase by
exchange) when in the judgment of the Investment Adviser such rejection is in
the Fund's best interest.
Initial Sales charge on Class A Shares. The sales charges applicable to
purchases of Class A Shares of the Fund are described in the Fund's Class A and
Class B Prospectus. Methods of obtaining reduced sales charges referred to
generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A Shares, the investor is
entitled to cumulate current purchases with the greater of the current value (at
offering price) of the Class A Shares of the Fund, or if Investor Services is
notified by the investor's dealer or the investor at the time of the purchase,
the cost of the Class A Shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases
of Class A Shares made at one time, the purchases will be combined if made by
(a) an individual, his or her spouse and their children under the age of 21
purchasing securities for his or her own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
Without Sales Charge. As described in the Class A and Class B Prospectus,
Class A shares of the Fund may be sold without a sales charge to certain persons
described in the prospectus.
Accumulation Privilege. Investors (including investors combining purchases)
who are already Class A Shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or value of the Class A Shares already held by such
person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Class A and Class B Prospectus) also are available to an investor
based on the aggregate amount of his concurrent and prior investments in Class A
Shares of the Fund and shares of all other John Hancock funds which carry a
sales charge.
Letter of Intention. The reduced sales loads are also applicable to
investments made over a specified period pursuant to a Letter of Intention
(LOI), which should be read carefully prior to its execution by an investor. The
Fund offers two options regarding the specified period for making investments
under the LOI. All investors have the option of making their investments over a
period of thirteen (13) months. Investors who are using the Fund as a funding
medium for a qualified retirement plan, however, may not opt to make the
necessary investments called for by the LOI over a forty-eight (48) month
period. These qualified retirement plans include IRA'S, SEP, SARSEP, TSA, 401(k)
plans, TSA plans and 457 plans. Such an investment (including
28
<PAGE>
accumulations and combinations) must aggregate $50,000 or more invested during
the specified period from the date of the LOI or from a date within ninety (90)
days prior thereto, upon written request to Investor Services. The sales charge
applicable to all amounts invested under the LOI is computed as if the aggregate
amount intended to be invested had been invested immediately. If such aggregate
amount is not actually invested, the difference in the sales charge actually
paid and the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made with the specified period
(either 13 or 48 months), the sales charge applicable will not be higher than
that which would have been applied (including accumulations and combinations)
had the LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class A
shares (approximately 5%) of the aggregate to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charges as may be due. By signing
the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrowed shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by the Fund to sell, any additional shares and may be terminated at
any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Contingent Deferred Sales Charge. Investments in Class B shares are
purchased at net asset value per share without the imposition of a sales charge
so that the Fund will receive the full amount of the purchase payment. Class B
Shares which are redeemed within six years of purchase will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the Class A
and Class B Prospectus as a percentage of the dollar amount subject to the CDSC.
The charge will be assessed on an amount equal to the lesser of the current
market value or the original purchase cost of the Class B Shares being redeemed.
Accordingly, no CDSC will be imposed on increases in account value above the
initial purchase prices, including Class B Shares derived from reinvestment of
dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B Shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
Proceeds from the CDSC are paid to the Distributor and are used in whole or
in part by the Distributor to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B Shares, such as the payment of compensation to select Selling Brokers
for selling Class B Shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B Shares
without a sales charge
29
<PAGE>
being deducted at the time of the purchase. See the Class A and Class B
Prospectus for additional information regarding the CDSC.
SPECIAL REDEMPTIONS
Although it is the Fund's present policy to make payment of redemption
proceeds in cash, if the Board of Trustees determines that a material adverse
effect would otherwise be experienced by remaining investors, redemption
proceeds may be paid in whole or in part by a distribution in kind of securities
from the Fund in conformity with rules of the Securities and Exchange
Commission, valuing such securities in the same manner they are valued in
determining NAV, and selecting the securities in such manner as the Board may
deem fair and equitable. If such a distribution occurs, investors receiving
securities and selling them before their maturity could receive less than the
redemption value of such securities and, in addition, could incur certain
transaction costs. Such a redemption is not as liquid as a redemption paid in
cash or federal funds. The Fund has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which the Fund is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90 day period for any one account.
ADDITIONAL SERVICES AND PROGRAM
Exchange Privilege. As described more fully in the Class A and Class B
Prospectus, the Fund permits exchanges of shares of any class of the Fund for
shares of the same class in any other John Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Class A and Class B
Prospectus, the Fund permits the establishment of a Systematic Withdrawal Plan.
Payments under this plan represent proceeds arising from the redemption of Fund
shares. Since the redemption price of Fund shares may be more or less than the
shareholder's cost, depending upon the market value of the securities owned by
the Fund at the time of redemption, the distribution of cash pursuant to this
plan may result in realization of gain or loss for purposes of Federal, state
and local income taxes. The maintenance of a Systematic Withdrawal Plan
concurrently with purchases of additional Class A or Class B Shares of the Fund
could be disadvantageous to a shareholder because of the initial sales charge
payable on such purchases of Class A Shares and the CDSC imposed on redemptions
of Class B Shares and because redemptions are taxable events. Therefore, a
shareholder should not purchase Fund shares at the same time as a Systematic
Withdrawal Plan is in effect. The Fund reserves the right to modify or
discontinue the Systematic Withdrawal Plan of any shareholder on 30 days' prior
written notice to such shareholder, or to discontinue the availability of such
plan in the future. The shareholder may terminate the plan at any time by giving
proper notice to Fund Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is explained
fully in the Fund's Class A and Class B Prospectus and the Account Privileges
Application. The program, as it relates to automatic investment checks, is
subject to the following conditions;
30
<PAGE>
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non-payment of any check.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the due date of any investment.
Reinvestment Privilege. A shareholder who has redeemed Fund shares may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
the Fund or another John Hancock mutual fund, subject to the minimum investment
limit in that fund. The proceeds from the redemption of Class A Shares may be
reinvested at net asset value without paying a sales charge in Class A Shares of
the Fund or in Class A Shares of another John Hancock mutual fund. If a CDSC was
paid upon a redemption, a shareholder may reinvest the proceeds from that
redemption at net asset value in additional shares of the class from which the
redemption was made. The shareholder's account will be credited with the amount
of any CDSC charged upon the prior redemption and the new shares will continue
to be subject to the CDSC. The holding period of the shares acquired through
reinvestment will, for purposes of computing the CDSC payable upon a subsequent
redemption, include the holding period of the redeemed shares. The Fund may
modify or terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for
Federal income tax purposes. Even if the reinvestment privilege is exercised,
and any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Tax Status."
DESCRIPTION OF THE FUND'S SHARES
Shares of the Fund. Ownership of the Fund is represented by transferable
shares of beneficial interest. The Declaration of Trust permits the Trustees to
create an unlimited number of series and classes of shares of the Fund and, with
respect to each series and class, to issue an unlimited number of full or
fractional shares and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
of the Fund.
Each share of each series or class of the Fund represents an equal
proportionate interest with each other in that series or class, none having
priority or preference over other shares of the same series or class. The
interest of investors in the various series or classes of the Fund is separate
and distinct. All consideration received for the sales of shares of a particular
series or
31
<PAGE>
class of the Fund, all assets in which such consideration is invested and all
income, earnings and profits derived from such investments will be allocated to
and belong to that series or class. As such, each such share is entitled to
dividends and distributions out of the net income belonging to that series or
class as declared by the Board of Trustees. Shares of the Fund have a par value
of $0.01 per share. The assets of each series are segregated on the Fund's books
and are charged with the liabilities of that series and with a share of the
Fund's general liabilities. The Board of Trustees determines those assets and
liabilities deemed to be general assets or liabilities of the Fund, and these
items are allocated among each series in proportion to the relative total net
assets of each series. In the unlikely event that the liabilities allocable to a
series exceed the assets of that series, all or a portion of such liabilities
may have to be borne by the other series.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional classes within any
series (which would be used to distinguish among the rights of different
categories of shareholders, as might be required by future regulations or other
unforeseen circumstances). As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Fund designated as Class A and Class B. Class A and Class B Shares of the
Fund represent an equal proportionate interest in the aggregate net asset values
attributable to that class of the Fund. Holders of Class A Shares and Class B
Shares each have certain exclusive voting rights on matters relating to the
Class A Plan and the Class B Plan, respectively. The different classes of the
Fund may bear different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares
will be calculated in the same manner, at the same time and on the same day and
will be in the same amount, except for differences caused by the fact that (i)
Class B Shares will pay higher distribution and service fees than Class A Shares
and (ii) each of Class A Shares and Class B Shares will bear any class expenses
properly allocable to such class of shares, subject to the conditions set forth
in a private letter ruling that the Fund has received from the Internal Revenue
Service relating to its multiple- class structure. Similarly, the net asset
value per share may vary depending whether Class A Shares or Class B Shares are
purchased.
Voting Rights. Shareholders are entitled to a full vote for each full share
held. The Trustees themselves have the power to alter the number and the terms
of office of Trustees, and they may at any time lengthen their own terms or make
their terms of unlimited duration (subject to certain removal procedures) and
appoint their own successors, provided that at all times at least a majority of
the Trustees have been elected by shareholders. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees. Although
the Fund need not hold annual meetings of shareholders, the trustees may call
special meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust. Also, a shareholder's
meeting must be called if so requested in writing by the holders of record of
10% or more of the
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outstanding shares of the Fund. In addition, the Trustees may be removed by the
action of the holders of record of two-thirds or more of the outstanding shares.
Shareholder Liability. The Declaration of Trust provides that no Trustee,
officer, employee or agent of the Fund is liable to the Fund or to a
shareholder, nor is any Trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the Fund, except as such liability may
arise from his or its own bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties. It also provides that all third persons shall
look solely to the Fund's property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.
As a Massachusetts business trust, the Fund is not required to issue share
certificates. The Fund shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders.
Reports to Shareholders. Shareholders of the Fund will receive annual and
semi-annual reports showing diversification of investments, securities owned and
other information regarding the Fund's activities. The financial statements of
the Fund are audited at least once a year by the Fund's independent auditors.
Registration Statement. This Statement of Additional Information and the
Prospectus do not contain all of the information set forth in the Fund's
Registration Statement filed with the Securities and Exchange Commission. The
complete Registration Statement may be obtained from the Securities and Exchange
Commission upon payment of the fee prescribed by the rules and regulations of
the Commission.
TAX STATUS
The Fund has qualified and elected to be treated as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), and intends to continue to so qualify in the future. As such and
by complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on taxable income
(including net short-term and long-term capital gains from the disposition of
portfolio securities or the right to when-issued securities prior to issuance,
or from the lapse, exercise, delivery under or closing out of options or futures
contracts, income from repurchase agreements and other taxable securities,
income attributable to accrued market discount, income from securities lending,
and a portion of the discount from certain stripped tax-exempt obligations or
their coupons) which is distributed to shareholders at least annually in
accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with
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annual minimum distribution requirements. The Fund intends under normal
circumstances to avoid liability for such tax by satisfying such distribution
requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in Fund shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
The Fund's distributions of tax-exempt interest ("exempt-interest
dividends") timely designated as such will be treated as tax-exempt interest
under the Code, provided that the Fund qualifies as a regulated investment
company and at least 50% of the value of its assets at the end of each quarter
of its taxable year is invested in tax-exempt obligations. Shareholders are
required to report their receipt of tax-exempt interest, including such
distributions, on their Federal income tax returns. The portion of the Fund's
distributions designated as exempt-interest dividends may differ from the actual
percentage that its tax-exempt income comprised of its total income during the
period of any particular shareholder's investment. The Fund will report to
shareholders the amount designated as exempt-interest dividends for each year.
Interest income from certain types of tax-exempt bonds that are private
activity bonds in which the Fund may invest is treated as an item of tax
preference for purposes of the Federal alternative minimum tax. To the extent
that the Fund invests in these types of tax-exempt bonds, shareholders will be
required to treat as an item of tax preference for Federal alternative minimum
purposes that part of the Fund's exempt-interest dividends which is derived from
interest on these tax-exempt bonds. Exempt-interest dividends derived from
interest income from all tax-exempt bonds may be included in corporate "adjusted
current earnings" for purposes of computing the alternative minimum tax
liability, if any, of corporate shareholders of the Fund.
The amount of the Fund's net short-term and long-term capital gains, if
any, in any given year will vary depending upon the Adviser's current investment
strategy and whether the Adviser believes it to be in the best interest of the
Fund to dispose of portfolio securities or enter into options or futures
transactions that will generate capital gains. At the time of an investor's
purchase of Fund shares, a portion of the purchase price is often attributable
to realized or unrealized appreciation in the Fund's portfolio or, less
frequently, to undistributed taxable income of the Fund. Consequently,
subsequent distributions from such appreciation or income may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
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Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon his basis in his shares. Such gain or loss will be treated as capital gain
or loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon the shareholder's tax holding period for
the shares. A sales charge paid in purchasing Class A shares of the Fund cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
shares of the Fund or another John Hancock Fund are subsequently acquired
without payment of a sales charge pursuant to the reinvestment or exchange
privilege. Such disregarded load will result in an increase in the shareholder's
tax basis in the shares subsequently acquired. Also, any loss realized on a
redemption or exchange will be disallowed to the extent the shares disposed of
are replaced with identical or substantially identical securities within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to an election to reinvest dividends in
additional shares. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be disallowed to
the extent of all exempt-interest dividends paid with respect to such shares
and, if not thus disallowed, will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gain with
respect to such shares.
Although its present intention is to distribute all net short-term and
long-term capital gains, if any, the Fund reserves the right to retain and
reinvest all or any portion of its "net capital gain," which is the excess, as
computed for Federal income tax purposes, of net long-term capital gain over net
short-term capital loss in any year. The Fund will not in any event distribute
net capital gain realized in any year to the extent that a capital loss is
carried forward from prior years against such gain. To the extent such excess
was retained and not exhausted by the carry forward of prior years' capital
losses, it would be subject to Federal income tax in the hands of the Fund. Each
shareholder would be treated for Federal income tax purposes as if the Fund had
distributed to him on the last day of its taxable year his pro rata share of
such excess, and he had paid his pro rata share of the taxes paid by the Fund
and reinvested the remainder in the Fund. Accordingly, each shareholder would
(a) include his pro rata share of such excess as long-term capital gain income
in his return for his taxable year in which the last day of the Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled
to increase the adjusted tax basis for his shares in the Fund by the difference
between his pro rata share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is generally permitted to carry
forward a net capital loss in any year to offset its net capital gains, if any,
during the eight years following the year of the loss. To the extent subsequent
net capital gains are offset by such losses, they would not result in Federal
income tax liability to the Fund and, as noted above, would not be distributed
as such to shareholders. The Fund has $12,505,428 of capital loss carry
forwards, $7,349,795 expires in 2002 and $5,155,633 expires in 2003 which are
available to offset future net capital gains.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for Federal income tax purposes to the
extent it is deemed related to
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<PAGE>
exempt-interest dividends paid by the Fund. Pursuant to published guidelines,
the Internal Revenue Service may deem indebtedness to have been incurred for the
purpose of purchasing or carrying shares of the Fund even though the borrowed
funds may not be directly traceable to the purchase of shares.
Dividends paid by the Fund to its corporate shareholders will not qualify
for the corporate dividends received deduction in their hands.
If the Fund invests in zero coupon securities or, in general, any other
securities with original issue discount (or with market discount if the Fund
elects to include accrued market discount in income currently), the Fund must
accrue income on such investments prior to the receipt of the corresponding cash
payments. However, the Fund must distribute, at least annually, all or
substantially all of its net income, including such accrued income, to
shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, the Fund may have to dispose
of its portfolio securities under disadvantageous circumstances to generate
cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting portfolio positions may be deferred rather
than being taken into account currently in calculating the Fund's gains. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. Certain of the applicable tax rules may be
modified if the Fund is eligible and chooses to make one or more of certain tax
elections that may be available. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options and
futures contracts in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is
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different from that described above. These investors may be subject to
nonresident alien withholding tax at the rate of 30% (or a lower rate under an
applicable tax treaty) on amounts treated as ordinary dividends from the Fund
and, unless an effective IRS Form W-8 or authorized substitute is on file, to
31% backup withholding on certain other payments from the Fund. Non- U.S.
investors should consult their tax advisers regarding such treatment and the
application of foreign taxes to an investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1995, the annualized yields of the
Fund's Class A Shares and Class B Shares were 5.11% and 4.61%, respectively.
As of December 31, 1995, the average annual total returns of the Class A
Shares of the Fund for the one year period and since inception on January 5,
1990 were 14.79% and 8.39%, respectively 14.67% and 8.06%, respectively, without
taking into account the expense limitation arrangements). As of December 31,
1995, the average annual returns for the Fund's Class B Shares for the one year
period and since inception on December 31, 1991 were 14.20% and 7.24%,
respectively 14.30% and 7.07%, respectively, without taking into account the
expense limitation arrangements).
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
Yield = 2 [ (a-b + 1 )6 -1]
---
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the
period (NAV where applicable).
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The Fund may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Fund which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt. The tax equivalent yields for the
Fund's Class A and Class B Shares at the maximum 36% tax rate for the 30-day
period ended December 31, 1995 were 7.98% and 7.20%, respectively.
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
n ________
T= \ / ERV/P -1
Where:
P= a hypothetical initial investment of $1,000.
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 investment made
at the beginning of the 1-year and life-of-fund periods.
In the case of Class A Shares or Class B Shares, this calculation assumes
the maximum sales charge is included in the initial investment or the CDSC is
applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period.
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's maximum sales
charge on Class A Shares or the CDSC on Class B Shares into account. Excluding
the Fund's sales charge on Class A Shares and the CDSC on Class B Shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States.
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Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used for
comparison purposes, as well a the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will
also be utilized. The Fund's promotional and sales literature may make reference
to the Fund's "beta." Beta is a reflection of the market-related risk of the
Fund by showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Investment Adviser pursuant
to recommendations made by its investment committee, which consists of officers
and directors of the Investment Adviser and affiliates and officers and Trustees
who are interested persons of the Fund. Orders for purchases and sales of
securities are placed in a manner which, in the opinion of the Investment
Adviser, will offer the best price and market for the execution of each such
transaction. Purchases from underwriters of portfolio securities may include a
commission or commissions paid by the issuer and transactions with dealers
serving as market makers reflect a "spread." Investments in debt securities are
generally traded on a net basis through dealers acting for their own account as
principals and not as brokers; no brokerage commissions are payable on such
transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the NASD and other policies that the
Trustees may determine, the Investment Adviser may consider sales of shares of
the Fund as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in
the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Investment
Adviser of the
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Fund, and their value and expected contribution to the performance of the Fund.
It is not possible to place a dollar value on information and services to be
received from brokers and dealers, since it is only supplementary to the
research efforts of the Investment Adviser. The receipt of research information
is not expected to reduce significantly the expenses of the Investment Adviser.
The research information and statistical assistance furnished by brokers and
dealers may benefit the Life Company or other advisory clients of the Investment
Adviser, and conversely, brokerage commissions and spreads paid by other
advisory clients of the Investment Adviser may result in research information
and statistical assistance beneficial to the Fund. The Fund will make no
commitments to allocate portfolio transactions upon any prescribed basis. While
the Fund's officers will be primarily responsible for the allocation of the
Fund's brokerage business, their policies and practices in this regard must be
consistent with the foregoing and will at all times be subject to review by the
Trustees. For the fiscal years ended December 31, 1995, 1994 and 1993, no
negotiated brokerage commissions were paid on portfolio transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Fund may pay to a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. During the fiscal year ended December 31, 1995, the
Fund did not pay commissions as compensation to any brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
The Investment Adviser's indirect parent, the Life Company, is the indirect
sole shareholder of Tucker Anthony Incorporated ("Tucker Anthony") John Hancock
Distributors, Inc. ("John Hancock Distributors") and Sutro & Company, Inc.
("Sutro"), which are broker-dealers ("Affiliated Brokers"). Pursuant to
procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through Tucker Anthony, Sutro or John Hancock Distributors. During the year
ended December 31, 1995, the Fund did not execute any portfolio transactions
with then affiliated brokers.
Any of the Affiliated Brokers may act as broker for the Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the 1940 Act.
Commissions paid to an Affiliated Broker must be at least as favorable as those
which the Trustees believe to be contemporaneously charged by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold. A transaction would not be placed with an Affiliated Broker
if the Fund would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions for its
other most favored, but unaffiliated, customers, except for accounts for which
the Affiliated Broker acts as a clearing broker for another brokerage firm, and
any customers of the Affiliated Broker not comparable to the Fund as determined
by a majority of the Trustees who are not interested persons (as defined in the
1940 Act) of the Fund, the Investment Adviser or the Affiliated Brokers. Because
the Investment Adviser, which is affiliated with the Affiliated Brokers, has, as
an investment adviser to the Fund, the obligation to provide
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investment management services, which includes elements of research and related
investment skills, such research and related skills will not be used by the
Affiliated Brokers as a basis for negotiating commissions at a rate higher than
that determined in accordance with the above criteria. The Fund will not effect
principal transactions with Affiliated Brokers.
The Fund's portfolio turnover rates for the fiscal years ended December 31,
1994 and 1995 were 107% and 113%, respectively.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205-9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Investor Services
a monthly transfer agent fee of $19 per account for the Class A Shares and
$22.50 per account for the Class B Shares, plus out-of-pocket expenses. These
expenses are aggregated and charged to the fund and allocated to each class on
the basis of the relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and Investors Bank & Trust Company, 24 Federal Street, Boston,
Massachusetts 02110. Under the custodian agreement, Investors Bank & Trust
Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has
been selected as the independent auditors of the Fund. The financial statements
of the Fund included in the Prospectus and this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods indicated in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
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APPENDIX A
TAX EXEMPT BOND RATINGS
Below is a description of the six ratings that may apply to the Fund's
investments in Tax-Exempt Bonds.
Tax-Exempt Bond Ratings
Moody's describes its six highest ratings for Tax-Exempt Bonds as follows:
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as 'gilt
edge'. Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
A-1
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The six highest ratings of Standard & Poor's for Tax-Exempt Bonds are AAA
(Prime), AA (High Grade), A (Good Grade), BBB (Medium Grade), BB and B:
AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal
and interest.
AA Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and
interest for bonds in this category than for bonds in the A category.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
B Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB- rating.
Fitch describes its ratings for Tax-Exempt Bonds as follows:
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
A-2
<PAGE>
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA".
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foresee future developments, short-term
debt of these issuers is generally rated F-1+.
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds and, therefore, impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified that could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short-term run. Symbols
used will be as follows:
MIG 1 Loans bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG 2 Loans bearing this designation are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3 Loans bearing this designation are of favorable quality, with
all securities elements accounted for but lacking the undeniable
strength of the preceding grades. Market access for refinancing, in
particular, is likely to be less well established.
A-3
<PAGE>
Standard & Poor's ratings for state and municipal notes and other
short-term loans are designated Standard & Poor's Grade (SP).
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
Fitch Ratings for short-term debt obligations that are payable on demand or
have original maturities of up to three years including commercial paper,
certificates of deposits, medium term notes and municipal and investment notes
are designated by the following ratings:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin
for safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
A-4
<PAGE>
PART C.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements listed below are included in and incorporated
by reference into Part B of the Registration Statement from the 1995 Annual
Report to Shareholders for the year ended December 31, 1995 (filed
electronically on February 13, 1996; file nos. 811-5968 and 33-32246; accession
numbers 0000950135-96-000988):
John Hancock Tax-Free Bond Fund
Statement of Assets and Liabilities as of December 31, 1995.
Statement of Operations for the year ended December 31, 1995.
Statement of Changes in Net Assets for each of the two years in
the period ended December 31.
Financial Highlights for each of periods indicated therein.
Notes to Financial Statements.
Schedule of Investments as of December 31, 1995.
(b) Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant
No person is directly or indirectly controlled by or under common control
with Registrant.
Item 26. Number of Holders of Securities
As of March 29, 1996, the number of record holders of shares of the
Registrant was as follows:
Title of Class Number of Record Holders
Class A Shares - 2,737
Class B Shares - 1,914
Item 27. Indemnification
(a) Indemnification provisions relating to the Registrant's Trustees,
officers, employees and agents is set forth in Article VII of the Registrant's
By Laws included as Exhibit 2 herein.
C-1
<PAGE>
(b) Under Section 12 of the Distribution Agreement, John Hancock Funds,
Inc. ("John Hancock Funds" ) has agreed to indemnify the Registrant and its
Trustees, officers and controlling persons against claims arising out of certain
acts and statements of John Hancock Funds.
Section 9(a) of the By-Laws of John Hancock Mutual Life Insurance Company
"Insurance Company" provides, in effect, that the Insurance Company will,
subject to limitations of law, indemnify each present and former director,
officer and employee of the of the Insurance Company who serves as a Trustee or
officer of the Registrant at the direction or request of the Insurance Company
against litigation expenses and liabilities incurred while acting as such,
except that such indemnification does not cover any expense or liability
incurred or imposed in connection with any matter as to which such person shall
be finally adjudicated not to have acted in good faith in the reasonable belief
that his action was in the best interests of the Insurance Company. In addition,
no such person will be indemnified by the Insurance Company in respect of any
liability or expense incurred in connection with any matter settled without
final adjudication unless such settlement shall have been approved as in the
best interests of the Insurance Company either by vote of the Board of Directors
at a meeting composed of directors who have no interest in the outcome of such
vote, or by vote of the policyholders. The Insurance Company may pay expenses
incurred in defending an action or claim in advance of its final disposition,
but only upon receipt of an undertaking by the person indemnified to repay such
payment if he should be determined not to be entitled to indemnification.
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc.("the Adviser") provide as follows:
"Section 9.01. Indemnity: Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a director, officer, employee or agent of the
corporation, or is or was at any time since the inception of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and the liability was not incurred by reason of gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and expenses in connection therewith may be advanced by the Corporation,
all to the full extent authorized by the law."
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Declaration of Trust and By-Laws, the
Distribution Agreement, the By-Laws of John Hancock Funds, the Adviser, or the
Insurance Company or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
C-2
<PAGE>
against policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Investment
Adviser, reference is made to Forms ADV (801-8124) filed under the Investment
Advisers Act of 1940, which is incorporated herein by reference.
Item 29. Principal Underwriters
(a) John Hancock Funds acts as principal underwriter for the Registrant and
also serves as principal underwriter or distributor of shares for John Hancock
Cash Reserve, Inc., John Hancock Bond Fund, John Hancock Current Interest, John
Hancock Series, Inc., John Hancock Tax-Free Bond Fund, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Limited Term
Government Fund, John Hancock Tax-Exempt Income Fund, John Hancock Sovereign
Investors Fund, Inc., John Hancock Special Equities Fund, John Hancock Sovereign
Bond Fund, John Hancock Tax-Exempt Series, John Hancock Strategic Series, John
Hancock Technology Series, Inc., John Hancock World Fund, John Hancock
Investment Trust, John Hancock Institutional Series Trust, Freedom Investment
Trust, Freedom Investment Trust II and Freedom Investment Trust III.
(b) The following table lists, for each director and officer of John
Hancock Funds, the information indicated.
C-3
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. President, Chief Executive Chairman
101 Huntington Avenue Officer and Director
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Compliance Officer
P.O. Box 111
Boston, Massachusetts
Robert G. Freedman Director Vice Chairman, Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Stephen M. Blair Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Thomas H. Drohan Senior Vice President Senior Vice President and
101 Huntington Avenue Secretary
Boston, Massachusetts
James W. McLaughlin Senior Vice President None
101 Huntington Avenue and
Boston, Massachusetts Chief Financial Officer
David A. King Senior Vice President and Director None
101 Huntington Avenue
Boston, Massachusetts
Michael T. Capenter Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
C-4
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
William S. Nichols Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Anthony P. Petrucci Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Albuquerque, New Mexico
John A. Morin Vice President Vice President
101 Huntington Avenue
Boston, Massachusetts
Susan S. Newton Vice President and Secretary Vice President,
101 Huntington Avenue Assistant Secretary
Boston, Massachusetts and Compliance Officer
Keith Harstein Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
Christopher M. Meyer Treasurer None
101 Huntington Avenue
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-5
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Underwriter
- ---------------- ---------------- ----------------
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John Goldsmith Director None
One Beacon Street
Boston, Massachusetts
Richard O. Hansen Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David F. D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Foster Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-6
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Underwriter
- ---------------- ---------------- ----------------
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
</TABLE>
(c) None.
Item 30. Location of Accounts and Records
Registrant maintains the records required to be maintained by it under
Rules 31a-1 (a), 31a-1(b), and 31a-2(a) under the Investment Company Act of
1940 at its principal executive offices at 101 Huntington Avenue, Boston
Massachusetts 02199-7603. Certain records, including records relating to
the Registrant's shareholders and the physical possession of its
securities, may be maintained pursuant to Rule 31a-3 at the main offices of
the Registrant's Transfer Agent and Custodian.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not Applicable
(b) Not Applicable
(c) The Registrant hereby undertakes to furnish each person to whom a
prospectus with respect to a series of the Registrant is delivered with a copy
of the latest annual report to shareholders with respect to that series upon
request and without charge.
(d) The Registrant undertakes to comply with Section 16(c) of the
Investment Company Act of 1940, as amended which relates to the assistance to be
rendered to shareholders by the Trustees of the Registrant in calling a meeting
of shareholders for the purpose of voting upon the question of the removal of a
trustee.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) unless the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boston, and the Commonwealth of Massachusetts on the
24th day of April, 1996.
JOHN HANCOCK TAX-FREE BOND FUND
By: *
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman and Chief Executive
Edward J. Boudreau, Jr. Officer (Principal Executive Officer)
/s/James B. Little
James B. Little Senior Vice President and Chief April 24, 1996
Financial Officer (Principal
Financial and Accounting Officer)
* Trustee
James F. Carlin
* Trustee
William H. Cunningham
* Trustee
Charles F. Fretz
* Trustee
Harold R. Hiser, Jr.
C-8
<PAGE>
Signature Title Date
--------- ----- ----
________________________ Trustee
Anne C. Hodsdon
* Trustee
Charles L. Ladner
* Trustee
Leo E. Linbeck, Jr.
* Trustee
Patricia P. McCarter
* Trustee
Steven R. Pruchansky
* Trustee
Norman H. Smith
________________________ Trustee
Richard S. Scipione
* Trustee
John P. Toolan
*By: /s/ Thomas H. Drohan April 24, 1996
--------------------
Thomas H. Drohan,
Attorney-in-Fact
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
99.B1 Amended and Restated Declaration of Trust dated November 9, 1989;
Amendment to Declaration of Trust dated October 22, 1991;
Amendment to Declaration of Trust dated December 16, 1994;
Amendment to Declaration of Trust dated September 11, 1995.**
99.B2 By-Laws.*
99.B3 None
99.B4.1 Specimen share certificate for Registrant (Classes A and B).*
99.B5 Investment Advisory Agreement between John Hancock Advisers,
Inc. and the Registrant.*
99.B6 Distribution Agreement between John Hancock Funds, Inc. and the
Registrant.*
99.B6.1 Form of Financial Institution Sales and Service Agreement.*
99.B6.2 Form of Soliciting Dealer Agreement between John Hancock Broker
Distribution Services, Inc. and Selected Dealers.*
99.B7 None
99.B8 Master Custodian Agreement with Investors Bank and Trust Company
Bank.*
99.B9 Transfer Agency and Service Agreement with John Hancock Fund
Services, Inc.*
99.B10 24e legal opinion+
99.B11 Consent of Independent Auditors +
99.B12 None
99.B13 None
C-10
<PAGE>
99.B15 Class A Distribution Plan between Registrant and John Hancock
Funds, Inc.*
99.B15.1 Class B Distribution Plan between Registrant and John Hancock
Funds, Inc.*
99.B16 Working papers showing yield calculation for yield and total
return.**
27.1A John Hancock Tax-Free Bond Fund
27.1B John Hancock Tax-Free Bond Fund
* Previously filed electronically with post-effective amendment number 7
(file nos. 33-32246 and 811-5968) on February 24, 1995, accession number
00009500129-95-000095.
** Previously filed electronically with post-effective amendment number 8
(file nos. 33-32246 and 811-5968) on February 29, 1996, accession number
0000950135-96-001238.
+ Filed herewith
C-11
April 26, 1996
John Hancock Tax Free Bond Fund
101 Huntington Avenue
Boston, MA 02199
RE: John Hancock Tax Free Bond Fund
File Nos. 33-32246; 811-5968 (0000857769)
Ladies and Gentlemen:
In connection with the filing of Amendment No. 13 pursuant to Rule 24e-2 under
the Investment Company Act of 1940, as amended, registering by Post-Effective
Amendment No. 9 under the Securities Act of 1933, as amended, 27,077 shares of
the John Hancock Tax Free Bond Fund (the "Fund") sold in reliance upon Rule
24e-2 during the fiscal year ending December 31, 1995, it is the opinion of the
undersigned that such shares will be legally issued, fully paid and
nonassessable.
In connection with this opinion it should be noted that the Fund is an entity of
the type generally known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of a Massachusetts business trust may be held
personally liable for the obligations of the Fund. However, the Fund's
Declaration of Trust disclaims shareholder liability for obligations of the Fund
and indemnifies any shareholder of the Fund, with this indemnification to be
paid solely out of the assets of the Fund. Therefore, the shareholder's risk is
limited to circumstances in which the assets of the Fund are insufficient to
meet the obligations asserted against Fund assets.
Sincerely,
/s/ Alfred P. Ouellette
Alfred P.Ouellette
Assistant Secretary
Member of Massachusetts Bar
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "The Fund's Financial
Highlights" in the Class A and Class B Shares prospectus and "Independent
Auditors" in the Class A and Class B Shares Statement of Additional Information
and to the use of our report dated February 9, 1996, on the financial statements
and financial highlights of the John Hancock Tax-Free Fund in this
Post-Effective Amendment Number 9 to Registration Statement (Form N-1A No.
33-32246) dated May 1, 1996.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
April 23, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> JOHN HANCOCK TAX-FREE BOND FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 190,204,887
<INVESTMENTS-AT-VALUE> 205,442,483
<RECEIVABLES> 15,661,893
<ASSETS-OTHER> 27,437
<OTHER-ITEMS-ASSETS> 15,237,596
<TOTAL-ASSETS> 221,131,813
<PAYABLE-FOR-SECURITIES> 21,760,596
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,750,146
<TOTAL-LIABILITIES> 25,510,742
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 195,035,479
<SHARES-COMMON-STOCK> 11,137,117
<SHARES-COMMON-PRIOR> 12,203,457
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,389,504)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,975,096
<NET-ASSETS> 195,621,071
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,440,385
<OTHER-INCOME> 0
<EXPENSES-NET> 2,177,307
<NET-INVESTMENT-INCOME> 10,263,078
<REALIZED-GAINS-CURRENT> (7,036,534)
<APPREC-INCREASE-CURRENT> 31,417,068
<NET-CHANGE-FROM-OPS> 34,643,612
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,647,931
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 990,678
<NUMBER-OF-SHARES-REDEEMED> 2,422,945
<SHARES-REINVESTED> 365,927
<NET-CHANGE-IN-ASSETS> 10,839,429
<ACCUMULATED-NII-PRIOR> 84,996
<ACCUMULATED-GAINS-PRIOR> (7,289,006)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,048,120
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,201,726
<AVERAGE-NET-ASSETS> 117,215,738
<PER-SHARE-NAV-BEGIN> 9.39
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> 1.28
<PER-SHARE-DIVIDEND> 0.57
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.67
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> JOHN HANCOCK TAX-FREE BOND FUND - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 190,204,887
<INVESTMENTS-AT-VALUE> 205,442,483
<RECEIVABLES> 15,661,893
<ASSETS-OTHER> 27,437
<OTHER-ITEMS-ASSETS> 15,237,596
<TOTAL-ASSETS> 221,131,813
<PAYABLE-FOR-SECURITIES> 21,760,596
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,750,146
<TOTAL-LIABILITIES> 25,510,742
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 195,035,479
<SHARES-COMMON-STOCK> 7,202,812
<SHARES-COMMON-PRIOR> 7,485,326
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,389,504)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,975,096
<NET-ASSETS> 195,621,071
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,440,385
<OTHER-INCOME> 0
<EXPENSES-NET> 2,177,307
<NET-INVESTMENT-INCOME> 10,263,078
<REALIZED-GAINS-CURRENT> (7,036,534)
<APPREC-INCREASE-CURRENT> 31,417,068
<NET-CHANGE-FROM-OPS> 34,643,612
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,620,138
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 722,057
<NUMBER-OF-SHARES-REDEEMED> 1,207,168
<SHARES-REINVESTED> 202,597
<NET-CHANGE-IN-ASSETS> 10,839,429
<ACCUMULATED-NII-PRIOR> 84,996
<ACCUMULATED-GAINS-PRIOR> (7,289,006)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,048,120
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,201,726
<AVERAGE-NET-ASSETS> 73,875,115
<PER-SHARE-NAV-BEGIN> 9.38
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> 1.28
<PER-SHARE-DIVIDEND> 0.49
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.67
<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
