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. 11 [X]
AND/OR
REGISTRATION STATEMENT UNDER [X]
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 15
(check appropriate boxes)
-------------------------
JOHN HANCOCK TAX-FREE BOND TRUST
(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
--------------
Susan S. Newton
Vice President and Secretary
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
(Name and Address of Agent for Service)
---------------------------------------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on September 30, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (DATE) pursuant to paragraph (a) of Rule (485 or 486)
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 THE MOST RECENT
FISCAL YEAR OF JOHN HANCOCK TAX-FREE BOND TRUST ON OR ABOUT FEBRUARY 26, 1996.
THE REGISTRANT HAS FILED THE NOTICE REQUIRED BY RULE 24F-2 FOR THE MOST RECENT
FISCAL YEAR OF JOHN HANCOCK HIGH YIELD TAX-FREE INCOME FUND ON OR ABOUT DECEMBER
26, 1995.
<PAGE>
<TABLE>
<CAPTION>
Item Number Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------ ------------------ -------------------
<S> <C> <C>
1 Front Cover Page *
2 Overview; Investor Expenses; *
3 Financial Highlights *
4 Overview; Goal and Strategy; Portfolio *
Securities; Risk Factors; Business
Structure; More About Risk
5 Overview; Business Structure; *
Manager/Subadviser; Investor Expenses
6 Choosing a Share Class; Buying Shares; *
Selling Shares; Transaction Policies;
Dividends and Account Policies;
Additional Investor Services
7 Choosing a Share Class; How Sales Charges *
are Calculated; Sales Charge Deductions
and Waivers; Opening an Account; Buying
Shares; Transaction Policies; Additional
Investor Services
8 Selling Shares; Transaction Policies; *
Dividends and Account Policies
9 Not Applicable *
10 * Front Cover Page
11 * Table of Contents
12 * Organization of the Fund
13 * Investment Objectives and Policies;
Certain Investment Practices;
Investment Restrictions
14 * Those Responsible for Management
15 * Those Responsible for Management
16 * Investment Advisory; Subadvisory
and Other Services; Distribution
Contract; Transfer Agent Services;
Custody of Portfolio; Independent
Auditors
17 * Brokerage Allocation
18 * Description of Fund's Shares
19 * Net Asset Value; Additional
Services and Programs
20 * Tax Status
21 * Distribution Contract
22 * Calculation of Performance
23 * Financial Statements
</TABLE>
<PAGE>
JOHN HANCOCK
TAX-FREE INCOME FUNDS
PROSPECTUS
SEPTEMBER 30, 1996
This prospectus gives vital information about these funds. For your own benefit
and protection, please read it before you invest and keep it on hand for future
reference.
Please note that these funds:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank or government agency
o are not guaranteed to achieve their goal(s)
High Yield Tax-Free Fund may invest up to 85% in junk bonds; read risk
information carefully.
Like all mutual fund shares, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
[JOHN HANCOCK LOGO]
CALIFORNIA TAX-FREE INCOME FUND
HIGH YIELD TAX-FREE FUND
MASSACHUSETTS TAX-FREE
INCOME FUND
NEW YORK TAX-FREE INCOME FUND
TAX-FREE BOND FUND
[JOHN HANCOCK LOGO]
JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
A fund-by-fund look at goals, strategies, risks, expenses and financial history.
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
CALIFORNIA TAX-FREE INCOME FUND 4
HIGH YIELD TAX-FREE FUND 6
MASSACHUSETTS TAX-FREE INCOME FUND 8
NEW YORK TAX-FREE INCOME FUND 10
TAX-FREE BOND FUND 12
Policies and instructions for opening, maintaining and closing an account in any
tax-free income fund.
YOUR ACCOUNT
Choosing a share class 14
How sales charges are calculated 14
Sales charge reductions and waivers 15
Opening an account 15
Buying shares 16
Selling shares 17
Transaction policies 19
Dividends and account policies 19
Additional investor services 20
Details that apply to the tax-free income funds as a group.
FUND DETAILS
Business structure 21
Sales compensation 22
More about risk 24
FOR MORE INFORMATION BACK COVER
</TABLE>
<PAGE>
OVERVIEW
GOAL OF THE TAX-FREE INCOME FUNDS
John Hancock tax-free income funds seek to offer income that is exempt from
federal and, in some cases, state and local income tax. Each fund has its own
strategy and its own risk/reward profile. Each fund invests at least 80% of
assets in municipal securities exempt from federal (and in some funds, state)
income tax as well as the federal alternative minimum tax. However, a portion of
a tax-free fund's income may be subject to these taxes. Because you could lose
money by investing in these funds, be sure to read all risk disclosure carefully
before investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are in higher income brackets
o want regular monthly income
o are interested in lowering their income tax burden
o pay California, Massachusetts or New York income tax (state-specific funds)
Tax-free income funds may NOT be appropriate if you:
o are not subject to a high level of state or federal income tax
o are seeking an investment for a tax-deferred retirement account
o are investing for maximum return over a long time horizon
o require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock tax-free income funds are managed by John Hancock Advisers,
Inc. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John
Hancock Mutual Life Insurance Company and manages more than $19 billion in
assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[TARGET ICON]
GOAL AND STRATEGY The fund's particular investment goals and the strategies it
intends to use in pursuing those goals.
[FOLDER ICON]
PORTFOLIO SECURITIES The primary types of securities in which the fund invests.
Secondary investments are described in "More about risk" at the end of the
prospectus.
[RISK ICON]
RISK FACTORS The major risk factors associated with the fund.
[INDIVIDUAL ICON]
PORTFOLIO MANAGEMENT The individual or group designated by the investment
adviser to handle the fund's day-to-day management.
[PERCENT ICON]
EXPENSES The overall costs borne by an investor in the fund, including sales
charges and annual expenses.
[DOLLAR SIGN ICON]
FINANCIAL HIGHLIGHTS A table showing the fund's financial performance for up to
ten years, by share class. A bar chart showing total return allows you to
compare the fund's historical risk level to those of other funds.
<PAGE>
CALIFORNIA TAX-FREE INCOME FUND
REGISTRANT NAME: JOHN HANCOCK CALIFORNIA TAX-FREE INCOME FUND
TICKER SYMBOL CLASS A: TACAX CLASS B: TSCAX
[TARGET ICON]
GOAL AND STRATEGY
The fund seeks income that is exempt from federal and California personal income
taxes. The fund seeks to provide the maximum current income that is consistent
with preservation of capital. To pursue this goal, the fund invests primarily in
municipal securities exempt from these taxes.
[FOLDER ICON]
PORTFOLIO SECURITIES
The fund's municipal securities may include bonds, notes and commercial paper of
any maturity. Under normal circumstances, the fund invests at least 80% of
assets in California municipal securities, particularly bonds. These are
primarily investment grade, although up to 20% of assets may be invested in junk
bonds rated BB/Ba and their unrated equivalents. No more than 25% of assets may
be invested in unrated securities.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
investment-grade short-term securities. For defensive purposes, it may invest
more assets in these securities. The fund also may invest in private activity
bonds and certain higher-risk investments, and may engage in other investment
practices.
[RISK ICON]
RISK FACTORS
As with most income funds, the value of your investment will fluctuate with
changes in interest rates. Typically, a rise in interest rates causes a decline
in the market value of debt securities (including municipal securities).
Although the fund is diversified, it concentrates in securities of California
issuers and its performance is largely dependent on factors that may
disproportionately affect these issuers. Factors may include:
o local economic or policy changes
o tax base erosion
o state constitutional limits on tax increases
o changes in the ratings assigned to the state's municipal issuers
o the possibility of credit problems, such as the 1994 bankruptcy of Orange
County
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
[INDIVIDUAL ICON]
PORTFOLIO MANAGEMENT
Dianne Sales-Singer, CFA, leader of the fund's portfolio management team since
April 1995, is a senior portfolio officer of the adviser. Ms. Sales-Singer
joined John Hancock Funds in 1989 and has been in the investment business since
1984.
INVESTOR EXPENSES
[PERCENT ICON]
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
<S> <C> <C>
Management fee (after expense limitation)(3) 0.38% 0.38%
12b-1 fee (net of reduction)(4) 0.15% 0.90%
Other expenses 0.22% 0.22%
Total fund operating expenses (after limitation)(3) 0.75% 1.50%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
<S> <C> <C> <C> <C>
Class A shares $52 $68 $85 $134
Class B shares
Assuming redemption
at end of period $65 $77 $102 $159
Assuming no redemption $15 $47 $82 $159
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.55% for each class and total fund
operating expenses would be 0.92% for Class A and 1.77% for Class B.
(4) Without the reduction, 12b-1 fees would be 1.00% for Class B shares. Because
of the 12b-1 fee, long-term shareholders may indirectly pay more than the
equivalent of the maximum permitted front-end sales charge.
4 CALIFORNIA TAX-FREE INCOME FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[DOLLAR SIGN ICON]
The figures below have been audited by the fund's independent auditors, Ernst &
Young LLP.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
VOLATILITY, AS INDICATED BY CLASS A 6.13 12.26 9.15 13.60 (9.31) 21.88 (0.82)
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED DECEMBER 31, 1990 1991 1992 1993 1994(1)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.00 $9.91 $10.32 $10.41 $10.85
Net investment income 0.74 0.69 0.66 0.62 0.58
Net realized and unrealized gain (loss) on investments (0.16) 0.47 0.25 0.76 (1.57)
Total from investment operations 0.58 1.16 0.91 1.38 (0.99)
Less distributions:
Dividends from net investment income (0.67) (0.70) (0.67) (0.62) (0.58)
Distributions from net realized gain on investments sold -- (0.05) (0.15) (0.32) --
Total distributions (0.67) (0.75) (0.82) (0.94) (0.58)
Net asset value, end of period $9.91 $10.32 $10.41 $10.85 $9.28
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 6.13 12.26 9.15 13.60 (9.31)
Total adjusted investment return at net asset value(4,6) (%) 5.29 11.86 8.90 13.42 (9.45)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 80,200 163,693 217,014 279,692 241,583
Ratio of expenses to average net assets (%) 0.00 0.40 0.58 0.69 0.75
Ratio of adjusted expenses to average net assets(8) (%) 0.84 0.80 0.83 0.87 0.89
Ratio of net investment income (loss) to average net assets (%) 7.11 6.75 6.36 5.69 5.85
Ratio of adjusted net investment income (loss) to average net assets(8)(%) 6.27 6.35 6.11 5.51 5.71
Portfolio turnover rate (%) 62 45 34 51 62
Fee reduction per share ($) 0.09 0.04 0.03(3) 0.02 0.01
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED DECEMBER 31, 1995 1996(2)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $9.28 $10.69
Net investment income 0.57(3) 0.29
Net realized and unrealized gain (loss) on investments 1.41 (0.38)
Total from investment operations 1.98 (0.09)
Less distributions:
Dividends from net investment income (0.57) (0.29)
Distributions from net realized gain on investments sold -- --
Total distributions (0.57) (0.29)
Net asset value, end of period $10.69 $10.31
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 21.88 (0.82)(5)
Total adjusted investment return at net asset value(4,6) (%) 21.73 (0.92)(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 309,305 290,996
Ratio of expenses to average net assets (%) 0.75 0.75(7)
Ratio of adjusted expenses to average net assets(8) (%) 0.90 0.85(7)
Ratio of net investment income (loss) to average net assets (%) 5.76 5.57(7)
Ratio of adjusted net investment income (loss) to average net assets(8)(%) 5.61 5.47(7)
Portfolio turnover rate (%) 37(9) 25
Fee reduction per share ($) 0.01(3) 0.01
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED DECEMBER 31, 1992 1993 1994(1) 1995 1996(2)
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.32 $10.41 $10.85 $9.28 $10.68
Net investment income 0.58(3) 0.54 0.51 0.50(3) 0.25
Net realized and unrealized gain (loss) on investments 0.25 0.76 (1.57) 1.40 (0.37)
Total from investment operations 0.83 1.30 (1.06) 1.90 (0.12)
Less distributions:
Dividends from net investment income (0.59) (0.54) (0.51) (0.50) (0.25)
Distributions from net realized gain on investments sold (0.15) (0.32) -- -- --
Total distributions (0.74) (0.86) (0.51) (0.50) (0.25)
Net asset value, end of period $10.41 $10.85 $9.28 $10.68 $10.31
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 8.35 12.76 (9.99) 20.87 (1.09)(5)
Total adjusted investment return at net asset value(4,6) (%) 8.10 12.58 (10.13) 20.72 (1.19)(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 26,595 65,437 77,365 84,673 81,906
Ratio of expenses to average net assets (%) 1.35 1.44 1.50 1.50 1.50(7)
Ratio of adjusted expenses to average net assets(8) (%) 1.60 1.62 1.64 1.65 1.60(7)
Ratio of net investment income (loss) to average net assets (%) 5.43 4.82 5.10 4.97 4.82(7)
Ratio of adjusted net investment income (loss) to average net assets(8)(%) 5.18 4.64 4.96 4.82 4.72(7)
Portfolio turnover rate (%) 34 51 62 37(9) 25
Fee reduction per share ($) 0.03(3) 0.02 0.01 0.01(3) 0.01
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Six months ended June 30, 1996. (Unaudited.)
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
(9) Portfolio turnover excludes merger activity.
CALIFORNIA TAX-FREE INCOME FUND 5
<PAGE>
HIGH YIELD TAX-FREE FUND
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST
TICKER SYMBOL CLASS A: JHTFX CLASS B: TSHTX
[TARGET ICON]
GOAL AND STRATEGY
The fund seeks a high level of current income that is largely exempt from
federal income tax and is consistent with preservation of capital. To pursue
this goal, the fund invests primarily in a diversified portfolio of tax-exempt
municipal debt securities.
[FOLDER ICON]
PORTFOLIO SECURITIES
The fund's municipal securities may include bonds, notes and commercial paper of
any maturity. Under normal circumstances, the fund invests at least 80% of
assets in municipal bonds rated A, BBB/Baa or BB/Ba and their unrated
equivalents. Up to 5% of assets may be invested in bonds rated B, CCC/Caa or
CC/Ca. Bonds rated BB/Ba or lower are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
investment-grade short-term securities. For defensive purposes, it may invest
more assets in these securities. The fund also may invest in private activity
bonds and certain higher-risk investments, including various derivative
securities primarily used in the fund's capital preservation strategies, and may
engage in other investment practices.
[RISK ICON]
RISK FACTORS
As with most income funds, the value of your investment will fluctuate with
changes in interest rates. Typically, a rise in interest rates causes a decline
in the market value of debt securities (including municipal securities).
Investors should expect greater fluctuations in share price, yield and total
return compared to less aggressive tax-free income funds. These fluctuations,
whether positive or negative, may be sharp and unanticipated. Issuers of BBB/Baa
rated bonds and junk bonds are typically in weaker financial health than issuers
of high quality bonds, and their ability to pay interest and principal is less
certain. These issuers are more likely to encounter financial difficulties and
to be materially affected by these difficulties when they do encounter them.
Junk bond markets may react strongly to adverse news about an issuer or the
economy, or to the perception of adverse news. Before you invest, please read
"More about risk" starting on page 24.
[INDIVIDUAL ICON]
PORTFOLIO MANAGEMENT
Frank A. Lucibella, CFA, leader of the fund's portfolio management team since
April 1995, is a second vice president of the adviser. Mr. Lucibella joined John
Hancock Funds in 1988 and has been in the investment business since 1982.
INVESTOR EXPENSES
[PERCENT ICON]
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
<S> <C> <C>
Management fee 0.58% 0.58%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.25% 0.25%
Total fund operating expenses 1.08% 1.83%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
<S> <C> <C> <C> <C>
Class A shares $56 $78 $102 $171
Class B shares
Assuming redemption
at end of period $69 $88 $119 $195
Assuming no redemption $19 $58 $99 $195
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6 HIGH YIELD TAX-FREE FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[DOLLAR SIGN ICON]
The figures below have been audited by the fund's independent auditors, Ernst &
Young LLP.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VOLATILITY, AS INDICATED BY CLASS B 0.12(6) (5.13)(6) 15.88 7.54 4.60 10.07 7.89 13.69 (4.44) 13.99 (.22(6)
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED OCTOBER 31, 1994(1) 1995(2) 1996(3)
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.85 $8.82 $9.47
Net investment income 0.48(4) 0.57 0.30
Net realized and unrealized gain (loss) on investments
sold and financial futures contracts (0.94) 0.70 (0.24)
Total from investment operations (0.46) 1.27 0.06
Less distributions:
Dividends from net investment income (0.48) (0.58) (0.30)
Distributions in excess of net investment income (0.09) (0.04) --
Total distributions (0.57) (0.62) (0.30)
Net asset value, end of period $8.82 $9.47 $9.23
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) 4.96(6) 14.85 0.56(6)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 15,401 14,225 20,896
Ratio of expenses to average net assets (%) 1.15(7) 1.06 1.09(7)
Ratio of net investment income (loss) to average net assets (%) 6.08(7) 6.36 6.27(7)
Portfolio turnover rate (%) 62 64 25
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1987(8) 1987(9) 1988 1989 1990 1991 1992
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $9.49 $8.62 $9.25 $9.29 $9.07 $9.31
Net investment income 0.53 0.37 0.62 0.55 0.55 0.54 0.55
Net realized and unrealized gain (loss) on
investments sold and financial futures contracts (0.51) (0.87) 0.70 0.13 (0.14) 0.34 0.17
Total from investment operations 0.02 (0.50) 1.32 0.68 0.41 0.88 0.72
Less distributions:
Dividends from net investment income (0.53) (0.37) (0.66) (0.51) (0.55) (0.54) (0.55)
Distributions in excess of net investment income -- -- -- -- -- -- --
Distributions from net realized gain on investments sold -- -- (0.03) -- -- -- (0.09)
Distributions from capital paid-in -- -- -- (0.13) (0.08) (0.10) --
Total distributions (0.53) (0.37) (0.69) (0.64) (0.63) (0.64) (0.64)
Net asset value, end of period $9.49 $8.62 $9.25 $9.29 $9.07 $9.31 $9.39
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) 0.12(6) (5.13)(6) 15.88 7.54 4.60 10.07 7.89
Total adjusted investment return at net asset value(5,10)(%) (0.39)(6) (5.34)(6) -- -- -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 15,753 15,026 24,278 29,841 35,820 51,467 65,933
Ratio of expenses to average net assets (%) 0.56(6) 0.61(6) 2.05 2.32 2.20 2.36 2.17
Ratio of adjusted expenses to average net assets(11) (%) 1.07(6) 0.82(6) -- -- -- -- --
Ratio of net investment income to
average net assets (%) 4.96(6) 4.05(6) 6.66 5.79 5.96 5.61 5.78
Ratio of adjusted net investment income (loss)
to average net assets(11) (%) 4.45(6) 3.84(6) -- -- -- -- --
Portfolio turnover rate (%) 153 42 82 29 41 83 40
Fee reduction per share ($) 0.05 0.02 -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1993 1994 1995(2) 1996(3)
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C>
Net asset value, beginning of period $9.39 $9.98 $8.82 $9.47
Net investment income 0.53 0.48 0.51 0.27
Net realized and unrealized gain (loss) on
investments sold and financial futures contracts 0.72 (0.90) 0.69 (0.24)
Total from investment operations 1.25 (0.42) 1.20 0.03
Less distributions:
Dividends from net investment income (0.56) (0.48) (0.51) (0.27)
Distributions in excess of net investment income -- (0.07) (0.04) --
Distributions from net realized gain on investments sold (0.10) (0.19) -- --
Distributions from capital paid-in -- -- -- --
Total distributions (0.66) (0.74) (0.55) (0.27)
Net asset value, end of period $9.98 $8.82 $9.47 $9.23
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) 13.69 (4.44) 13.99 0.22(6)
Total adjusted investment return at net asset value(5,10)(%) -- -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 113,442 151,069 155,234 151,312
Ratio of expenses to average net assets (%) 2.06 1.85 1.79 1.78(7)
Ratio of adjusted expenses to average net assets(11) (%) -- -- -- --
Ratio of net investment income to
average net assets (%) 5.23 5.36 5.61 5.57(7)
Ratio of adjusted net investment income (loss)
to average net assets(11) (%) -- -- -- --
Portfolio turnover rate (%) 100 62 64 25
Fee reduction per share ($) -- -- -- --
</TABLE>
(1) Class A shares commenced operations on December 31, 1993.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Six months ended April 30, 1996. (Unaudited).
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Annualized.
(8) For the period August 25, 1986 to April 30, 1987.
(9) For the period May 1, 1987 to October 31, 1987.
(10) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(11) Unreimbursed, without fee reduction.
HIGH YIELD TAX-FREE FUND 7
<PAGE>
MASSACHUSETTS TAX-FREE INCOME FUND
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: JHMAX CLASS B: N/A
GOAL AND STRATEGY
[TARGET ICON]
The fund seeks income that is exempt from federal and Massachusetts personal
income taxes. The fund seeks to provide the maximum current income that is
consistent with preservation of capital. To pursue this goal, the fund invests
primarily in municipal securities exempt from these taxes.
PORTFOLIO SECURITIES
[FOLDER ICON]
The fund's municipal securities may include bonds, notes and commercial paper
of any maturity. Under normal circumstances, the fund invests at least 80% of
net assets in Massachusetts municipal securities. Up to 33.3% of assets may be
invested in municipal securities rated BBB/Baa or BB/Ba and their unrated
equivalents. The balance of the fund's investments must be rated at least A or
be of equivalent quality. Bonds rated BB/Ba are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of net assets in
taxable investment-grade short-term securities. For defensive purposes, it may
invest more assets in these securities. The fund also may invest in private
activity bonds and certain higher-risk investments, and may engage in other
investment practices.
RISK FACTORS
[RISK ICON]
As with most income funds, the value of your investment will fluctuate with
changes in interest rates. Typically, a rise in interest rates causes a decline
in the market value of debt securities (including municipal securities).
Because the fund is not diversified and because it concentrates in
securities of Massachusetts issuers, its performance is largely dependent on
factors that may disproportionately affect its investments.
These factors may include:
o local economic or policy changes
o tax base erosion
o state constitutional limits on tax increases
o changes in the ratings assigned to the state's municipal issuers
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[INDIVIDUAL ICON]
Dianne Sales-Singer, CFA, leader of the fund's portfolio management team since
July 1993, is a senior portfolio officer of the adviser. Ms. Sales-Singer joined
John Hancock Funds in 1989 and has been in the investment business since 1984.
INVESTOR EXPENSES
[PERCENT ICON]
Fund investors pay various expenses, either directly or indirectly. The figures
below are based on Class A expenses for the past year, adjusted to reflect any
changes. There were no Class B shares issued or outstanding during the last
fiscal year. Future expenses may be greater or less.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
<S> <C> <C>
Management fee (after expense limitation)(3) 0.00% 0.00%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.40% 0.40%
Total fund operating expenses (after limitation)(3) 0.70% 1.40%
</TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
<S> <C> <C> <C> <C>
Class A shares $52 $66 $82 $128
Class B shares
Assuming redemption
at end of period $64 $74 $97 $149
Assuming no redemption $14 $44 $77 $149
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.50% for each class and total fund
operating expenses would be 1.20% for Class A and 1.90% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
8 MASSACHUSETTS TAX-FREE INCOME FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[DOLLAR ICON]
The figures below have been audited by the fund's
independent auditors, Price Waterhouse LLP.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VOLATILITY, AS INDICATED BY CLASS A 13.13(4) 9.67 3.49 12.10 12.11 13.29 (0.97) 7.66 4.76(3)
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CLASS A -- YEAR ENDED AUGUST 31, 1988(1) 1989 1990 1991 1992
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.00 $10.63 $10.94 $10.63 $11.15
Net investment income 0.65 0.70 0.69 0.73 0.71
Net realized and unrealized gain (loss) on investments 0.63 0.31 (0.31) 0.53 0.60
Total from investment operations 1.28 1.01 0.38 1.26 1.31
Less distributions:
Dividends from net investment income (0.65) (0.70) (0.69) (0.73) (0.71)
Distributions from net realized gain on investments sold -- -- -- (0.01) --
Total distributions (0.65) (0.70) (0.69) (0.74) (0.71)
Net asset value, end of period $10.63 $10.94 $10.63 $11.15 $11.75
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 13.13(4) 9.67 3.49 12.10 12.11
Total adjusted investment return at net asset value(3,6) (%) 10.38(4) 9.16 2.72 10.66 10.93
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 4,757 9,138 9,968 15,015 29,113
Ratio of expenses to average net assets (%) 1.00(4) 1.00 1.00 0.60 0.60
Ratio of adjusted expenses to average net assets(7) (%) 3.75(4) 1.51 1.77 2.04 1.78
Ratio of net investment income (loss) to average net assets (%) 6.28(4) 6.35 6.31 6.64 6.18
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.53(4) 5.84 5.54 5.20 5.00
Portfolio turnover rate (%) 20 2 2 29 56
Fee reduction per share ($) 0.28 0.11 0.08 0.16 0.14
</TABLE>
<TABLE>
<CAPTION>
CLASS A -- YEAR ENDED AUGUST 31, 1993 1994 1995 1996(2)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $11.75 $12.43 $11.56 $11.76
Net investment income 0.67 0.63 0.65 0.32
Net realized and unrealized gain (loss) on investments 0.82 (0.75) 0.20 0.23
Total from investment operations 1.49 (0.12) 0.85 0.55
Less distributions:
Dividends from net investment income (0.67) (0.63) (0.65) (0.32)
Distributions from net realized gain on investments sold (0.14) (0.12) -- --
Total distributions (0.81) (0.75) (0.65) (0.32)
Net asset value, end of period $12.43 $11.56 $11.76 $11.99
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 13.29 (0.97) 7.66 4.76(5)
Total adjusted investment return at net asset value(3,6) (%) 12.38 (1.50) 7.21 4.38(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 50,019 54,122 54,416 56,852
Ratio of expenses to average net assets (%) 0.67 0.70 0.70 0.76(4)
Ratio of adjusted expenses to average net assets(7) (%) 1.58 1.23 1.15 1.15(4)
Ratio of net investment income (loss) to average net assets (%) 5.61 5.28 5.67 5.42(4)
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 4.70 4.75 5.22 5.04(4)
Portfolio turnover rate (%) 79 29 24 24
Fee reduction per share ($) 0.11 0.06 0.05 0.04
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
CLASS B -- YEAR ENDED AUGUST 31, 1996(1)
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period --
Net investment income --
Net realized and unrealized gain (loss) on investments --
Total from investment operations --
Less distributions:
Dividends from net investment income --
Distributions from net realized gain on investments sold --
Total distributions --
Net asset value, end of period --
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) --
Total adjusted investment return at net asset value(3,6) (%) --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) --
Ratio of expenses to average net assets (%) --
Ratio of adjusted expenses to average net assets(7) (%) --
Ratio of net investment income (loss) to average net assets (%) --
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) --
Portfolio turnover rate (%) --
Fee reduction per share ($) --
</TABLE>
(1) Class A shares commenced operations on September 3, 1987. Class B shares
commenced operations on September 30, 1996.
(2) Six months ended February 29, 1996. (Unaudited.)
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Annualized.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Unreimbursed, without fee reduction.
MASSACHUSETTS TAX-FREE INCOME FUND 9
<PAGE>
NEW YORK TAX-FREE INCOME FUND
REGISTRANT NAME: JOHN HANCOCK TAX-EXEMPT SERIES FUND
TICKER SYMBOL CLASS A: JHNYX CLASS B: N/A
GOAL AND STRATEGY
[TARGET ICON]
The fund seeks income that is exempt from federal income taxes as well as New
York State and New York City personal income taxes. The fund seeks to provide
the maximum current income that is consistent with preservation of capital. To
pursue this goal, the fund invests primarily in municipal securities exempt from
these taxes.
PORTFOLIO SECURITIES
[FOLDER ICON]
The fund's municipal securities may include bonds, notes and commercial paper of
any maturity. Under normal circumstances, the fund invests at least 80% of net
assets in New York municipal securities. Up to 33.3% of assets may be invested
in municipal securities rated BBB/Baa or BB/Ba and their unrated equivalents.
The balance of the fund's investments must be rated at least A or be of
equivalent quality. Bonds rated BB/Ba are considered junk bonds.
For liquidity and flexibility, the fund may place up to 20% of net assets in
taxable investment-grade short-term securities. For defensive purposes, it may
invest more assets in these securities. The fund also may invest in private
activity bonds and certain higher-risk investments, and may engage in other
investment practices.
RISK FACTORS
[RISK ICON]
As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including municipal
securities).
Because the fund is not diversified and because it concentrates in securities of
New York issuers, certain factors may disproportionately affect the fund's
investments. These factors may include:
- - local economic or policy changes
- - tax base erosion
- - limited flexibility to raise taxes
- - changes in the ratings assigned to the state's municipal issuers - the legacy
of past credit problems of New York City and other issuers
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[INDIVIDUAL ICON]
Frank A. Lucibella, CFA, leader of the fund's portfolio management team since
April 1995, is a second vice president of the adviser. He joined John Hancock
Funds in 1988 and has been in the investment business since 1982.
INVESTOR EXPENSES
[PERCENT ICON]
Fund investors pay various expenses, either directly or indirectly. The figures
below are based on Class A expenses for the past year, adjusted to reflect any
changes. There were no Class B shares issued or outstanding during the last
fiscal year. Future expenses may be greater or less.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
Management fee (after expense limitation)(3) 0.00% 0.00%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.40% 0.40%
Total fund operating expenses (after limitation)(3) 0.70% 1.40%
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
Class A shares $52 $66 $82 $128
Class B shares
Assuming redemption
at end of period $64 $74 $97 $149
Assuming no redemption $14 $44 $77 $149
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fees would be 0.50% for each class and total fund
operating expenses would be 1.20% for Class A and 1.90% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10 NEW YORK TAX-FREE INCOME FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[DOLLAR ICON]
The figures below have been audited by the fund's independent auditors, Price
Waterhouse LLP.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VOLATILITY, AS INDICATED BY CLASS A 11.40(4) 11.87 3.74 12.24 12.17 13.70 (1.05) 7.19 5.37(5)
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CLASS A -- YEAR ENDED AUGUST 31, 1988(1) 1989 1990 1991 1992
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.00 $10.48 $11.01 $10.74 $11.29
Net investment income 0.61 0.68 0.67 0.72 0.72
Net realized and unrealized gain (loss) on investments 0.48 0.55 (0.25) 0.55 0.63
Total from investment operations 1.09 1.23 0.42 1.27 1.35
Less distributions:
Dividends from net investment income (0.61) (0.68) (0.67) (0.72) (0.72)
Distributions from net realized gain on investments sold -- (0.02) (0.02) -- (0.02)
Total distributions (0.61) (0.70) (0.69) (0.72) (0.74)
Net asset value, end of period $10.48 $11.01 $10.74 $11.29 $11.90
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 11.40(4) 11.87 3.74 12.24 12.17
Total adjusted investment return at net asset value(3,6) (%) 7.56(4) 11.22 3.05 11.02 11.09
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 4,306 8,795 13,357 20,878 33,806
Ratio of expenses to average net assets (%) 1.00(4) 1.00 1.00 0.60 0.60
Ratio of adjusted expenses to average net assets(7) (%) 4.84(4) 1.65 1.69 1.82 1.68
Ratio of net investment income (loss) to average net assets (%) 6.11(4) 6.30 6.17 6.57 6.22
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 2.27(4) 5.65 5.48 5.35 5.14
Portfolio turnover rate (%) 16 10 10 12 48
Fee reduction per share ($) 0.38 0.13 0.08 0.13 0.13
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
CLASS A -- YEAR ENDED AUGUST 31, 1993 1994 1995 1996(2)
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $11.90 $12.63 $11.73 $11.88
Net investment income 0.68 0.64 0.65 0.33
Net realized and unrealized gain (loss) on investments 0.87 (0.77) 0.15 0.30
Total from investment operations 1.55 (0.13) 0.80 0.63
Less distributions:
Dividends from net investment income (0.68) (0.64) (0.65) (0.33)
Distributions from net realized gain on investments sold (0.14) (0.13) -- --
Total distributions (0.82) (0.77) (0.65) (0.33)
Net asset value, end of period $12.63 $11.73 $11.88 $12.18
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 13.70 (1.05) 7.19 5.37(5)
Total adjusted investment return at net asset value(3,6) (%) 12.83 (1.58) 6.74 4.97(5)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 52,444 55,690 55,753 57,770
Ratio of expenses to average net assets (%) 0.67 0.70 0.70 0.73(4)
Ratio of adjusted expenses to average net assets(7) (%) 1.54 1.23 1.15
1.13(4)
Ratio of net investment income (loss) to average net assets (%) 5.63 5.28 5.67 5.47(4)
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 4.76 4.75 5.22 5.07(4)
Portfolio turnover rate (%) 56 23 70 30
Fee reduction per share ($) 0.11 0.06 0.05 0.05
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
CLASS B -- YEAR ENDED AUGUST 31, 1996(1)
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period --
Net investment income --
Net realized and unrealized gain (loss) on investments --
Total from investment operations --
Less distributions:
Dividends from net investment income --
Distributions from net realized gain on investments sold
Total distributions --
Net asset value, end of period --
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) --
Total adjusted investment return at net asset value(3,6) (%) --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) --
Ratio of expenses to average net assets (%) --
Ratio of adjusted expenses to average net assets(7) (%) --
Ratio of net investment income (loss) to average net assets (%) --
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) --
Portfolio turnover rate (%) --
Fee reduction per share ($) --
</TABLE>
(1) Class A shares commenced operations on September 11, 1987. Class B shares
commenced operations on September 30, 1996.
(2) Six months ended February 29, 1996. (Unaudited.)
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Annualized.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Unreimbursed, without fee reduction.
NEW YORK TAX-FREE INCOME FUND 11
<PAGE>
TAX-FREE BOND FUND
REGISTRANT NAME: JOHN HANCOCK TAX-FREE BOND TRUST
TICKER SYMBOL CLASS A: TAMBX CLASS B: TSMBX
GOAL AND STRATEGY
[TARGET ICON]
The fund seeks as high a level of interest income exempt from federal income tax
as is consistent with preservation of capital. To pursue this goal, the fund
invests in a diversified portfolio of municipal securities. Under normal
circumstances, the fund will place at least 80% of assets in municipal bonds.
PORTFOLIO SECURITIES
[FOLDER ICON]
The fund's municipal bonds may include investment-grade bonds, notes and
commercial paper of any maturity. Less than 35% of assets may be invested in
municipal bonds rated BB/Ba or B (junk bonds) and their unrated equivalents. The
fund may not invest more than 25% of assets in private activity bonds of issuers
in any one industry. There is no limit on the fund's investments in issuers
located in any one state.
For liquidity and flexibility, the fund may place up to 20% of assets in taxable
investment-grade short-term securities. For defensive purposes, it may invest
more assets in these securities. The fund also may invest in private activity
bonds and certain higher-risk investments, and may engage in other investment
practices.
RISK FACTORS
[RISK ICON]
As with most income investments, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of fixed income securities (including municipal
securities). Bonds with longer maturities are especially sensitive to interest
rate movements.
To the extent that the fund invests in bonds rated BBB/Baa or lower, it takes on
higher risks of volatility and default. Issuers of these bonds are typically in
weaker financial health and their ability to pay interest and principal is less
certain. Before you invest, please read "More about risk" starting on page 24.
PORTFOLIO MANAGEMENT
[INDIVIDUAL ICON]
Thomas C. Goggins has been the leader of the fund's portfolio management team
since joining John Hancock Funds in April 1995. A senior vice president of the
adviser, Mr. Goggins has been in the investment business since 1986.
INVESTOR EXPENSES
[PERCENT ICON]
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
Management fee 0.55% 0.55%
12b-1 fee(3,4) 0.25% 1.00%
Other expenses 0.29% 0.29%
Total fund operating expenses(4) 1.09% 1.84%
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
Class A shares $56 $78 $102 $172
Class B shares
Assuming redemption
at end of period $69 $88 $120 $196
Assuming no redemption $19 $58 $100 $196
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
(4) Until December 23, 1996, the adviser has agreed to limit total fund
operating expenses to 0.85% for Class A and 1.60% for Class B. Effective
December 23, 1996 the 12b-1 fee will be increased from 0.15% to 0.25% for
Class A and from 0.90% to 1.00% for Class B. Prior to the increase, total
fund operating expenses would be 0.99% for Class A and 1.74% for Class B.
12 TAX-FREE BOND FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[Dollar Sign Icon]
The figures below have been audited by the fund's
independent auditors, Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) 6.04(6) 14.78 10.97 15.15 (9.28) 20.20 (1.27)(6)
(scale varies from fund to fund)
</TABLE>
<TABLE>
CLASS A - YEAR ENDED DECEMBER 31, 1990(1) 1991 1992 1993
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.00 $ 9.90 $ 10.24 $ 10.47
Net investment income 0.71 0.69 0.67 0.62
Net realized and unrealized gain (loss) on investments (0.13) 0.72 0.42 0.93
Total from investment operations 0.58 1.41 1.09 1.55
Less distributions:
Dividends from net investment income (0.68) (0.68) (0.68) (0.62)
Distributions from net realized gain on investments sold -- (0.39) (0.18) (0.44)
Total distributions (0.68) (1.07) (0.86) (1.06)
Net asset value, end of period $ 9.90 $ 10.24 $ 10.47 $ 10.96
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) 6.04(6) 14.78 10.97 15.15
Total adjusted investment return at net asset value(5,7)(%) 5.19(6) 14.40 10.67 14.98
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 45,437 73,393 99,523 136,521
Ratio of expenses to average net assets (%) 0.40(6) 0.60 0.66 0.78
Ratio of adjusted expenses to average net assets(9) (%) 1.25(6) 0.98 0.96 0.95
Ratio of net investment income (loss) to average net assets(%) 7.09(6) 6.86 6.46 5.57
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 6.24(6) 6.48 6.16 5.40
Portfolio turnover rate (%) 64 123 79 116
Fee reduction per share ($) 0.08 0.04 0.03 0.02
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED DECEMBER 31, 1994 1995 1996(3)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.96 $ 9.39 $ 10.67
Net investment income 0.58 0.57(4) 0.31(4)
Net realized and unrealized gain (loss) on investments (1.58) 1.28 (0.45)
Total from investment operations (1.00) 1.85 (0.14)
Less distributions:
Dividends from net investment income (0.57) (0.57) (0.29)
Distributions from net realized gain on investments sold -- -- --
Total distributions (0.57) (0.57) (0.29)
Net asset value, end of period $ 9.39 $ 10.67 $ 10.24
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) (9.28) 20.20 (1.27)(6)
Total adjusted investment return at net asset value(5,7)(%) (9.39) 20.08 (1.37)(6)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 114,539 118,797 569,367
Ratio of expenses to average net assets (%) 0.85 0.85 0.85(8)
Ratio of adjusted expenses to average net assets(9) (%) 0.96 0.97 1.05(8)
Ratio of net investment income (loss) to average net assets(%) 5.72 5.67 5.81(8)
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 5.61 5.55 5.61(8)
Portfolio turnover rate (%) 107 113 80
Fee reduction per share ($) 0.01 0.01(4) 0.01(4)
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED DECEMBER 31, 1992 1993 1994(2) 1995 1996(3)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.24 $ 10.47 $ 10.96 $ 9.38 $ 10.67
Net investment income 0.59(4) 0.54 0.50 0.50(4) 0.25(4)
Net realized and unrealized gain (loss) on investments 0.42 0.93 (1.58) 1.28 (0.43)
Total from investment operations 1.01 1.47 (1.08) 1.78 (0.18)
Less distributions:
Dividends from net investment income (0.60) (0.54) (0.50) (0.49) (0.25)
Distributions from net realized gain on investments sold (0.18) (0.44) -- -- --
Total distributions (0.78) (0.98) (0.50) (0.49) (0.25)
Net asset value, end of period $ 10.47 $ 10.96 $9.38 $ 10.67 $ 10.24
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) 10.15 14.30 (10.05) 19.41 (1.63)(6)
Total adjusted investment return at net asset value(5,7) (%) 9.85 14.13 (10.16) 19.29 (1.73)(6)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 18,272 56,384 70,243 76,824 81,123
Ratio of expenses to average net assets (%) 1.43 1.53 1.60 1.60 1.60(8)
Ratio of adjusted expenses to average net assets(9) (%) 1.73 1.70 1.71 1.72 1.80(8)
Ratio of net investment income (loss) to average net assets (%) 5.57 4.66 4.97 4.90 4.94(8)
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) 5.27 4.49 4.86 4.78 4.74(8)
Portfolio turnover rate (%) 79 116 107 113 80
Fee reduction per share ($) 0.03(4) 0.02 0.01 0.01(4) 0.01(4)
</TABLE>
(1) Class A shares commenced operations on January 5, 1990.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Six months ended June 30, 1996 (unaudited)
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
TAX-FREE BOND FUND 13
<PAGE>
YOUR ACCOUNT
CHOOSING A SHARE CLASS
All John Hancock tax-free income funds offer two classes of shares, Class A and
Class B. Each class has its own cost structure, allowing you to choose the one
that best meets your requirements. Your financial representative can help you
decide.
Class A Class B
- - Front-end sales charges, - No front-end sales charge;
as described below. There are all your money goes to
several ways to reduce these work for you right away.
charges, also described below.
- Higher annual expenses
- - Lower annual expenses than Class A shares.
than Class B shares.
- A deferred sales charge on
shares you sell within six
years of purchase, as
described below.
- Automatic conversion to
Class A shares after eight
years, thus reducing future
annual expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
HOW SALES CHARGES ARE CALCULATED
CLASS A Sales charges are as follows:
CLASS A SALES CHARGES
<TABLE>
<CAPTION>
AS A % OF AS A % OF YOUR
YOUR INVESTMENT OFFERING PRICE INVESTMENT
<S> <C> <C>
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 3.00% 3.09%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
CDSC ON $1 MILLION+ INVESTMENTS
<TABLE>
<CAPTION>
YOUR INVESTMENT CDSC ON SHARES BEING SOLD
<S> <C>
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
</TABLE>
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the LAST day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
CLASS B Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a contingent deferred sales charge
(CDSC) on shares you sell within six years of buying them. There is no CDSC on
shares acquired through reinvestment of dividends. The CDSC is based on the
original purchase cost or the current market value of the shares being sold,
whichever is less. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
CLASS B DEFERRED CHARGES
<TABLE>
<CAPTION>
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
<S> <C>
1st year 5.00%
2nd year 4.00%
3rd or 4th year 3.00%
5th year 2.00%
6th year 1.00%
After 6 years None
</TABLE>
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the FIRST day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
14 YOUR ACCOUNT
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCING YOUR CLASS A SALES CHARGES There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
- - Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge.
- - Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
- - Combination Privilege -- lets you combine Class A shares of multiple funds for
purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Investor Services to add these options (see the
back cover of this prospectus).
GROUP INVESTMENT PROGRAM Allows established groups of four or more investors to
invest as a group. Each has an individual account, but for sales charge
purposes, their investments are lumped together, making the investors
potentially eligible for reduced sales charges. There is no charge, no
obligation to invest (although initial aggregate investments must be at least
$250) and you may terminate the program at any time.
To utilize: contact your financial representative or Investor Services to find
out how to qualify.
CDSC WAIVERS As long as Investor Services is notified at the time you sell, the
CDSC for either share class will generally be waived in the following cases:
- - to make payments through certain systematic withdrawal plans
- - to make certain distributions from a retirement plan
- - because of shareholder death or disability
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Investor Services, or consult the SAI (see the back
cover of this prospectus).
REINSTATEMENT PRIVILEGE If you sell shares of a John Hancock fund, you may
invest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge. If you paid a CDSC when you sold
your shares, you will be credited with the amount of the CDSC. All accounts
involved must have the same registration.
To utilize: contact your financial representative or Investor Services.
WAIVERS FOR CERTAIN INVESTORS Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
- - government entities that are prohibited from paying mutual fund sales charges
- - financial institutions or common trust funds investing $1 million or more for
non-discretionary accounts
- - selling brokers and their employees and sales representatives
- - financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
- - fund trustees and other individuals who are affiliated with these or other
John Hancock funds
- - individuals transferring assets to a John Hancock tax-free fund from an
employee benefit plan that has John Hancock funds
- - members of an approved affinity group financial services program
- - certain insurance company contract holders (one-year CDSC usually applies)
- - participants in certain retirement plans with at least 100 members (one-year
CDSC applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
your financial representative or Investor Services, or consult the SAI.
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The
minimum initial investments for the John Hancock funds are as follows:
- non-retirement account: $1,000
- group investments: $250
- Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest at
least $25 a month
3 Complete the appropriate parts of the account application, carefully following
the instructions. If you have questions, please contact your financial
representative or call Investor Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges section of the
application. By applying for privileges now, you can avoid the delay and
inconvenience of having to file an additional application if you want to add
privileges later.
5 Make your initial investment using the table on the next page. You can
initiate any purchase, exchange or sale of shares through your financial
representative.
YOUR ACCOUNT 15
<PAGE>
BUYING SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
BY CHECK
[CHECK ICON]
- - Make out a check for the - Make out a check for the
investment amount, payable to investment amount payable to
"John Hancock Investor Services "John Hancock Investor Services
Corporation." Corporation."
- - Deliver the check and your - Fill out the detachable
completed application to your investment slip from an account
financial representative, or mail statement. If no slip is
them to Investor Services available, include a note
(address on next page). specifying the fund name, your
share class, your account number
and the name(s) in which the
account is registered.
- Deliver the check and your
investment slip or note to your
financial representative, or mail
them to Investor Services
(address on next page).
BY EXCHANGE
[EXCHANGE ICON]
- - Call your financial - Call Investor Services to request
representative or Investor an exchange.
Services to request an exchange.
BY WIRE
[WIRE ICON]
- - Deliver your completed - Instruct your bank to wire the
application to your financial amount of your investment to:
representative, or mail it to First Signature Bank & Trust
Investor Services. Account # 900000260
Routing # 211475000
- - Obtain your account number by Specify the fund name, your share
calling your financial class, your account number and
representative or Investor the name(s) in which the account
Services. is registered. Your bank may
charge a fee to wire funds.
- - Instruct your bank to wire the
amount of your investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the new
account number and the name(s) in
which the account is registered.
Your bank may charge a fee to
wire funds.
BY PHONE
[PHONE ICON]
See "By wire" and "By exchange." - Verify that your bank or credit
union is a member of the
Automated Clearing House (ACH)
system.
- Complete the "Invest-By-Phone"
and "Bank Information" sections
on your account application.
- Call Investor Services to verify
that these features are in place
on your account.
- Tell the Investor Services
representative the fund name,
your share class, your account
number, the name(s) in which the
account is registered and the
amount of your investment.
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
16 YOUR ACCOUNT
<PAGE>
SELLING SHARES
DESIGNED FOR TO SELL SOME OR ALL OF YOUR SHARES
BY LETTER
[LETTER ICON]
- - Accounts of any type. - Write a letter of instruction or
complete a stock power indicating
- - Sales of any amount. the fund name, your share class,
your account number, the name(s)
in which the account is
registered and the dollar value
or number of shares you wish to
sell.
- Include all signatures and any
additional documents that may be
required (see next page).
- Mail the materials to Investor
Services.
- A check will be mailed to the
name(s) and address in which the
account is registered, or
otherwise according to your
letter of instruction.
BY PHONE
[PHONE ICON]
- - Most accounts. - For automated service 24 hours a
day using your touch-tone phone,
- - Sales of up to $100,000. call the EASI-Line at
1-800-338-8080.
- To place your order with a
representative at John Hancock
Funds, call Investor Services
between 8 A.M. and 4 P.M. on most
business days.
BY WIRE OR ELECTRONIC FUNDS
TRANSFER (EFT)
[WIRE ICON]
- - Requests by letter to sell any - Fill out the "Telephone
amount (accounts of any type). Redemption" section of your new
account application.
- - Requests by phone to sell up to
$100,000 (accounts with telephone - To verify that the telephone
redemption privileges). redemption privilege is in place
on an account, or to request the
forms to add it to an existing
account, call Investor Services.
- Amounts of $1,000 or more will be
wired on the next business day. A
$4 fee will be deducted from your
account.
- Amounts of less than $1,000 may
be sent by EFT or by check. Funds
from EFT transactions are
generally available by the second
business day. Your bank may
charge a fee for this service.
BY EXCHANGE
[EXCHANGE ICON]
- - Accounts of any type. - Obtain a current prospectus for
the fund into which you are
- - Sales of any amount. exchanging by calling your
financial representative or
Investor Services.
- Call Investor Services to request
an exchange.
ADDRESS
John Hancock Investor Services Corporation
P.O. Box 9116 Boston, MA 02205-9116
PHONE
1-800-225-5291
Or contact your financial representative for instructions and assistance.
To sell shares through a systematic withdrawal plan, see "Additional investor
services."
YOUR ACCOUNT 17
<PAGE>
SELLING SHARES IN WRITING In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
- - your address of record has changed within the past 30 days
- - you are selling more than $100,000 worth of shares
- - you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
- - a broker or securities dealer
- - a federal savings, cooperative or other type of bank
- - a savings and loan or other thrift institution
- - a credit union
- - a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
SELLER REQUIREMENTS FOR WRITTEN REQUESTS
[LETTER ICON]
Owners of individual, joint, sole - Letter of instruction.
proprietorship, UGMA/UTMA
(custodial accounts for minors) or - On the letter, the signatures and
general partner accounts. titles of all persons authorized
to sign for the account, exactly
as the account is registered.
- Signature guarantee if applicable
(see above).
Owners of corporate or association - Letter of instruction.
accounts.
- Corporate resolution, certified
within the past 90 days.
- On the letter and the resolution,
the signature of the person(s)
authorized to sign for the
account.
- Signature guarantee if applicable
(see above).
Owners or trustees of trust - Letter of instruction.
accounts.
- On the letter, the signature(s)
of the trustee(s).
- If the names of all trustees are
not registered on the account,
please also provide a copy of the
trust document certified within
the past 60 days.
- Signature guarantee if applicable
(see above).
Joint tenancy shareholders whose - Letter of instruction signed by
co-tenants are deceased. surviving tenant.
- Copy of death certificate.
- Signature guarantee if applicable
(see above).
Executors of shareholder estates. - Letter of instruction signed by
executor.
- Copy of order appointing
executor.
- Signature guarantee if applicable
(see above).
Administrators, conservators, - Call 1-800-225-5291 for
guardians and other sellers or instructions.
account types not listed above.
18 YOUR ACCOUNT
<PAGE>
TRANSACTION POLICIES
VALUATION OF SHARES The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time) by dividing a class's net assets
by the number of its shares outstanding.
BUY AND SELL PRICES When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
EXECUTION OF REQUESTS Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Investor Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
TELEPHONE TRANSACTIONS For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, Investor Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are not taken, Investor Services is
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone transactions are not
permitted on accounts whose names or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
EXCHANGES You may exchange shares of your John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
Class B shares will continue to age from the original date and will retain the
same CDSC rate as they had before the exchange, except that the rate will change
to that of the new fund if the new fund's rate is higher. A CDSC rate that has
increased will drop again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may change or cancel its exchange
privilege at any time, upon 60 days' notice to its shareholders. A fund may also
refuse any exchange order.
CERTIFICATED SHARES Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Investor Services. Certificated
shares can only be sold by returning the certificates to Investor Services,
along with a letter of instruction or a stock power and a signature guarantee.
SALES IN ADVANCE OF PURCHASE PAYMENTS When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten calendar days after
the purchase.
ELIGIBILITY BY STATE You may only invest in, or exchange into, fund shares
legally available in your state.
DIVIDENDS AND ACCOUNT POLICIES
ACCOUNT STATEMENTS In general, you will receive account statements as follows:
- - After every transaction (except a dividend reinvestment) that affects your
account balance.
- - After any changes of name or address of the registered owner(s).
- - In all other circumstances, every quarter.
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS The funds generally declare dividends daily and pay them monthly.
Short- and long-term capital gains, if any, are distributed annually, typically
after the end of a fund's fiscal year. Your dividends begin accruing the day
after payment is received by the fund and continue through the day your shares
are actually sold.
YOUR ACCOUNT 19
<PAGE>
DIVIDEND REINVESTMENTS Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
TAXABILITY OF DIVIDENDS As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
The fund intends to meet certain federal tax requirements so that distributions
of the tax-exempt interest it earns may be treated as "exempt-interest
dividends." However, any portion of exempt-interest dividends attributable to
interest on private activity bonds may increase certain shareholders'
alternative minimum tax.
Dividends from a fund's short- and long-term capital gains are taxable. Taxable
dividends paid in January may be taxable as if they had been paid the previous
December.
The state tax-free income funds intend to comply with certain state tax
requirements so that their income dividends will be exempt from state and local
personal income taxes in the applicable state. Dividends of the other tax-free
income funds are not exempt from state and local income taxes.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
TAXABILITY OF TRANSACTIONS Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
SMALL ACCOUNTS (NON-RETIREMENT ONLY) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Investor Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
ADDITIONAL INVESTOR SERVICES
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
- - Complete the appropriate parts of your account application.
- - If you are using MAAP to open an account, make out a check ($25 minimum) for
your first investment amount payable to "John Hancock Investor Services
Corporation." Deliver your check and application to your financial
representative or Investor Services.
SYSTEMATIC WITHDRAWAL PLAN This plan may be used for routine bill payment or
periodic withdrawals from your account. To establish:
- - Make sure you have at least $5,000 worth of shares in your account.
- - Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
- - Specify the payee(s). The payee may be yourself or any other party, and there
is no limit to the number of payees you may have, as long as they are all on
the same payment schedule.
- - Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
- - Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial representative
or Investor Services.
RETIREMENT PLANS John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SEPs, 401(k) plans, 403(b) plans (including TSAs) and
other pension and profit-sharing plans. Using these plans, you can invest in any
John Hancock fund (except tax-free income funds) with a low minimum investment
of $250 or, for some group plans, no minimum investment at all. To find out
more, call Investor Services at 1-800-225-5291.
20 YOUR ACCOUNT
<PAGE>
FUND DETAILS
BUSINESS STRUCTURE
HOW THE FUNDS ARE ORGANIZED Each John Hancock tax-free income fund is an
open-end management investment company or a series of such a company.
Each fund is supervised by a board of trustees, an independent body that has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others (see diagram). The board has the right, and
the obligation, to terminate the fund's relationship with any of these companies
and to retain a different company if the board believes it is in the
shareholders' best interests.
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock tax-free income funds may
include individuals who are affiliated with the investment adviser. However, the
majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
[THE FOLLOWING CHART IS SET IN PYRAMID STYLE]
SHAREHOLDERS
Distribution and FINANCIAL SERVICES FIRMS AND
shareholder services THEIR REPRESENTATIVES
Advise current and prospective share-
holders on their fund investments, often
in the context of an overall financial plan.
PRINCIPAL DISTRIBUTOR TRANSFER AGENT
John Hancock Funds, Inc. John Hancock Investor Services Corporation
101 Huntington Avenue P.O. Box 9116
Boston, MA 02199-7603 Boston, MA 02205-9116
Markets the funds and distributes Handles shareholder services, including
shares through selling brokers, record-keeping and statements,
financial planners and other distribution of dividends and
financial representatives. processing of buy and sell requests.
INVESTMENT ADVISER CUSTODIAN
John Hancock Advisers, Inc. Investors Bank & Trust Co. Asset
101 Huntington Avenue 89 South Street management
Boston, MA 02199-7603 Boston, MA 02111
Manages the funds' business and Holds the funds' assets, settles all
investment activities. portfolio trades and collects most
of the valuation data required for
calculating each fund's NAV.
TRUSTEES
Supervise the funds' activities.
YOUR ACCOUNT 21
<PAGE>
ACCOUNTING COMPENSATION The funds compensate the adviser for performing tax and
financial management services. Annual compensation for 1996 will not exceed
0.02% of each fund's average net assets.
PORTFOLIO TRADES In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock Mutual
Life Insurance Company, but only when the adviser believes no other firm offers
a better combination of quality execution (i.e., timeliness and completeness)
and favorable price.
INVESTMENT GOALS AND POLICIES Except for Massachusetts and New York Tax-Free
Income Funds, each fund's investment goal is fundamental and may only be changed
with shareholder approval. Each fund's policy of investing at least 80% in
municipal securities is fundamental and may not be changed without shareholder
approval. The High Yield Tax-Free Fund's 80% credit policy is also fundamental.
DIVERSIFICATION Except for the Massachusetts and New York Tax-Free Income Funds,
all of the tax-free income funds are diversified.
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock Funds,
pay compensation to financial services firms that sell the funds' shares. These
firms typically pass along a portion of this compensation to your financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets ("12b-1" refers to the federal
securities regulation authorizing annual fees of this type). The 12b-1 fee rates
vary by fund and by share class, according to Rule 12b-1 plans adopted by the
funds. The sales charges and 12b-1 fees paid by investors are detailed in the
fund-by-fund information. The portions of these expenses that are reallowed to
financial services firms are shown on the next page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
CLASS B UNREIMBURSED DISTRIBUTION EXPENSES (1)
<TABLE>
<CAPTION>
UNREIMBURSED AS A % OF
FUND EXPENSES NET ASSETS
<S> <C> <C>
California Tax-Free Income $3,275,187 3.99%
High Yield Tax-Free $5,853,826 3.77%
Massachusetts Tax-Free Income N/A N/A
New York Tax-Free Income N/A N/A
Tax-Free Bond $3,009,557 4.07%
</TABLE>
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
INITIAL COMPENSATION Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
ANNUAL COMPENSATION Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears. Firms affiliated
with John Hancock, which include Tucker Anthony, Sutro & Company and John
Hancock Distributors, may receive an additional fee of up to 0.05% a year of
their total eligible net assets.
To compensate for continuing services, John Hancock Funds will pay Merrill
Lynch, Pierce, Fenner & Smith, Inc. an annual fee equal to 0.15% the value of
Class A shares held by its customers for more than four years.
22 FUND DETAILS
<PAGE>
CLASS A INVESTMENTS
<TABLE>
<CAPTION>
MAXIMUM
SALES CHARGE REALLOWANCE FIRST YEAR MAXIMUM
PAID BY INVESTORS OR COMMISSION SERVICE FEE TOTAL COMPENSATION(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 3.00% 2.26% 0.25% 2.50%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
REGULAR INVESTMENTS OF
$1 MILLION OR MORE
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50%
Next $1 and more above that -- 0.00% 0.25% 0.25%
WAIVER INVESTMENTS(2) -- 0.00% 0.25% 0.25%
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM
REALLOWANCE FIRST YEAR MAXIMUM
OR COMMISSION SERVICE FEE TOTAL COMPENSATION
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
All amounts 3.75% 0.25% 4.00%
</TABLE>
(1)Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
(2)Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
FUND DETAILS 23
<PAGE>
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following page are brief descriptions of these
securities and practices, along with the risks associated with them. The funds
follow certain policies that may reduce these risks.
As with any bond fund, there is no guarantee that a John Hancock tax-free income
fund will earn income or show a positive return over any period of time -- days,
months or years.
TYPES OF INVESTMENT RISK
CORRELATION RISK The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks.
CREDIT RISK The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. Common to all debt securities.
INFORMATION RISK The risk that key information about a security or market is
inaccurate or unavailable. Common to all municipal securities.
INTEREST RATE RISK The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
LEVERAGE RISK Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
- - HEDGED When a derivative (a security whose value is based on another security
or index) is used as a hedge against an opposite position that the fund also
holds, any loss generated by the derivative should be substantially offset by
gains on the hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains.
- - SPECULATIVE To the extent that a derivative is not used as a hedge, the fund
is directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost.
LIQUIDITY RISK The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
MANAGEMENT RISK The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
MARKET RISK The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industry, sector of
the economy or the market as a whole. Common to all stocks and bonds and the
mutual funds that invest in them.
NATURAL EVENT RISK The risk of losses attributable to natural disasters, such as
earthquakes and similar events.
OPPORTUNITY RISK The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
POLITICAL RISK The risk of losses attributable to government or political
actions of any sort.
VALUATION RISK The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
FUND DETAILS 24
<PAGE>
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semi-annual reports.
Z Percent of total assets (italic type)
10 Percent of net assets (roman type)
l No policy limitation on usage; fund may be using currently
0 Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
CALIFORNIA HIGH MASSACHUSETTS NEW YORK
TAX-FREE YIELD TAX-FREE TAX-FREE TAX-FREE
INCOME TAX-FREE INCOME INCOME BOND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENTS The
borrowing of money from banks or through reverse
repurchase agreements. Leverage, credit risks. 15 33.3(1) 33.3 33.3 15
REPURCHASE AGREEMENTS The purchase of a security that
must later be sold back to the issuer at the same
price plus interest. Credit risk. l l l l l
SECURITIES LENDING The lending of securities to
financial institutions, which provide cash or
government securities as collateral. Credit risk. 33.3 -- 33.3 33.3 33.3
SHORT-TERM TRADING Selling a security soon after
purchase. A portfolio engaging in short-term trading
will have higher turnover and transaction expenses
Market risk. l l l l l
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The
purchase or sale of securities for delivery at a
future date; market value may change before delivery
Market, opportunity, leverage risks. l l l l l
- ------------------------------------------------------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities
rated below BBB/Baa are considered junk bonds. Credit,
market, interest rate, liquidity, valuation,
information risks. 20 85 33.3 33.3 35
PRIVATE ACTIVITY BONDS Municipal debt obligations
that are backed primarily by revenues from
non-governmental entities. Credit, information,
interest rate, political, natural event risks. l l l l l
RESTRICTED AND ILLIQUID SECURITIES Securities not
traded on the open market. May include illiquid Rule
144A securities. Liquidity, valuation, market risks. 10 10 15 15 10
- ------------------------------------------------------------------------------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
PARTICIPATION INTERESTS Securities representing an
interest in another security, often a municipal lease
obligation (MLO). MLOs are not backed by the full
faith and credit of the issuing municipality. Credit,
information, interest rate, liquidity, valuation risks. l l l l l
- ------------------------------------------------------------------------------------------------------------------------------
LEVERAGED DERIVATIVE SECURITIES
FINANCIAL FUTURES AND OPTIONS; SECURITIES AND INDEX
OPTIONS Contracts involving the right or obligation to
deliver or receive assets or money depending on the
performance of one or more assets or an economic index.
- - Futures and related options. Interest rate, market,
hedged or speculative leverage, correlation,
liquidity, opportunity risks. l l l l l
- - Options on securities and indices. Interest rate,
market, hedged or speculative leverage, correlation,
liquidity, credit, opportunity risks. 0 0 0 0 0
STRUCTURED SECURITIES Leveraged and/or indexed debt
securities, including principal-only and interest-only
securities, leveraged floating rate securities and
others. These securities tend to be highly sensitive
to interest rate movements and their performance may
not correlate to such movements in a conventional
fashion. Credit, interest rate, market, speculative
leverage, liquidity, valuation risks. l l l l l
SWAPS, CAPS, FLOORS, COLLARS OTC contracts involving
the right or obligation to receive or make payments
based on two different income streams. Correlation,
credit, currency, interest rate, hedged or speculative
leverage, liquidity, valuation risks. 0 0 0 0 0
</TABLE>
(1) Applies to reverse repurchase agreements. Other borrowings are limited to
15% of total assets.
FUND DETAILS 25
<PAGE>
ANALYSIS OF FUNDS WITH 5% OR MORE IN JUNK BONDS(1)
<TABLE>
<CAPTION>
QUALITY RATING
(S&P/MOODY'S)(2) HIGH YIELD TAX-FREE FUND TAX-FREE BOND FUND
<S> <C> <C>
INVESTMENT-GRADE BONDS
AAA/Aaa 10.32% 22.6%
AA/Aa 1.69% 4.8%
A/A 4.76% 14.9%
BBB/Baa 31.42% 51.1%
JUNK BONDS
BB/Ba 45.12% 5.3%
B/B 1.63% 0.9%
CCC/Caa 0.00% 0.00%
CC/Ca 0.00% 0.00%
C/C 0.00% 0.00%
% OF PORTFOLIO IN BONDS 100.0 99.6
</TABLE>
(1) Data as of fund's last fiscal year end.
(2) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
26 FUND DETAILS
<PAGE>
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Two documents are available that To request a free copy of the current
offer further information on John annual/semi-annual report or SAI,
Hancock tax-free income funds: please write or call:
ANNUAL/SEMI-ANNUAL John Hancock Investor Services
REPORT TO SHAREHOLDERS Corporation
Includes financial statements, P.O. Box 9116
detailed performance information, Boston, MA 02205-9116
portfolio holdings, a statement from Telephone: 1-800-225-5291
portfolio management and the EASI-Line: 1-800-338-8080
auditor's report. TDD: 1-800-544-6713
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI contains more detailed
information on all aspects of the
funds. The current annual/
semi-annual report is included
in the SAI.
A current SAI has been filed with
the Securities and Exchange
Commission and is incorporated
by reference (is legally a part of this
prospectus).
JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts 02199-7603
[JOHN HANCOCK LOGO] (C) 1996 John Hancock Funds, Inc.
TEXPN 9/96
<PAGE>
JOHN HANCOCK TAX-FREE BOND FUND
Class A and Class B Shares
Statement of Additional Information
September 30, 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
September 30, 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.............................................. 7
Investment Restrictions................................................... 14
Those Responsible for Management.......................................... 18
Investment Advisory and Other Services.................................... 25
Distribution Contract..................................................... 28
Net Asset Value........................................................... 31
Initial Sales Charge On Class A Shares.................................... 32
Deferred Sales Charge on Class B Shares................................... 34
Special Redemptions....................................................... 37
Additional Services and Programs.......................................... 38
Description of the Fund's Shares.......................................... 39
Tax Status................................................................ 41
Calculation of Performance................................................ 47
Brokerage Allocation...................................................... 50
Transfer Agent Services................................................... 52
Custody of Portfolio...................................................... 52
Independent Auditors...................................................... 52
Appendix A - Equivalent Yields............................................ A-1
Appendix B - Bond and Commercial Paper Rating............................. B-1
Financial Statements...................................................... F-1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a diversified open-end management investment company
organized as a Massachusetts business trust in 1989. Prior to the approval of
John Hancock Advisers, Inc. (the "Adviser"), as the Fund's adviser effective
December 22, 1994, the Fund was known as Transamerica Tax-Free Income Fund. The
Adviser is an indirect wholly owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. The following information supplements the
discussion of the Fund's investment objectives and policies discussed under
"Goal and Strategy" in the Prospectus. The Fund's investment objective is to
obtain as high a level of current interest 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 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 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
2
<PAGE>
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 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 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
3
<PAGE>
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.
Ratings Criteria. 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 may be rated below investment grade or maybe unrated. The Fund
may retain Municipal Obligations whose ratings are downgraded below permissible
ratings until the Adviser determines that disposing of such Obligations is in
the best interests 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 service requirements but provide a limited
margin of safety and are vulnerable to default in the event of adverse business,
financial or economic conditions. In addition, the market for these instruments
may be less liquid than the market for higher rated securities. Therefore, the
Adviser's judgment at times plays a greater role in the performance and
valuation of the Fund's investments in these instruments. See Appendix B 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
4
<PAGE>
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.
When the Adviser determines that unfavorable investment conditions
warrant a temporary defensive position, the Fund may invest more than 20% of its
assets in taxable short-term securities that are investment grade as determined
by Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's Ratings Group
("S&P") or Fitch Investment Service ("Fitch") or, if unrated, determined by the
Adviser to be of comparable quality. See Appendix B for a description of those
ratings.
Variable or Floating Rate Obligations. Certain of the obligations in
which the Fund may invest may be variable or floating rate obligations on which
the interest rate is adjusted at predesignated periodic intervals (variable
rate) or when there is a change in the market rate of interest on which the
interest rate payable on the obligation is based (floating rate). Variable or
floating rate obligations may include a demand feature which entitles the
purchaser to demand prepayment of the principal amount prior to stated maturity.
Also, the issuer may have a corresponding right to prepay the principal amount
prior to maturity. As with any other type of debt security, the marketability of
variable or floating rate instruments may vary depending upon a number of
factors, including the type of issuer and the terms of the instruments. The Fund
may also invest in more recently developed floating rate instruments which are
created by dividing a municipal security's interest rate into two or more
different components. Typically, one component ("floating rate component" or
"FRC") pays an interest rate that is reset periodically through an auction
process or by reference to an interest rate index. A second component ("inverse
floating rate component" or "IFRC") pays an interest rate that varies inversely
with changes to market rates of interest, because the interest paid to the IFRC
holders is generally determined by subtracting a variable or floating rate from
a predetermined amount (i.e., the difference between the total interest paid by
the municipal security and that paid by the FRC). The Fund may purchase FRC's
without limitation. Up to 10% of the Fund's total assets may be invested in
IFRC's in an attempt to protect against a reduction in the income earned on the
Fund's other investments due to a decline in interest rates. The extent of
increases and decreases in the value of an IFRC generally will be greater than
comparable changes in the value of an equal principal amount of a fixed-rate
municipal security having similar credit quality, redemption provisions and
maturity. To the extent that such instruments are not readily marketable, as
determined by the Adviser pursuant to guidelines adopted by the Board of
Trustees, they will be considered illiquid for purposes of the Fund's 10%
investment restriction on investment in non-readily marketable securities.
Participation Interests. The Fund may purchase from financial
institutions tax exempt participation interests in tax exempt securities. A
participation interest gives the Fund an undivided interest in the tax exempt
security in the proportion that the Fund's participation interest bears to the
total amount of the tax exempt security. For certain participation interests,
5
<PAGE>
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 Adviser determines that there is
a readily available market for such securities. In reaching liquidity decisions,
the Adviser will consider, among others, the following factors: (1) the
frequency of trades and quotes for the security; (2) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the security and (4) the
nature of the security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer.) With respect to municipal lease obligations, the
Adviser also considers: (1) the willingness of the municipality to continue,
annually or biannually, to appropriate funds for payment of the lease; (2) the
general credit quality of the municipality and the essentiality to the
municipality of the property covered by the lease; (3) an analysis of factors
similar to that performed by nationally recognized statistical rating
organizations in evaluating the credit quality of a municipal lease obligation,
including (i) whether the lease can be canceled; (ii) if applicable, what
assurance there is that the assets represented by the lease can be sold; (iii)
the strength of the lessee's general credit (e.g., its debt, administrative,
economic and financial characteristics); (iv) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an event of nonappropriation); and (v) the
legal recourse in the event of failure to appropriate; and (4) any other factors
unique to municipal lease obligations as determined by the Adviser.
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 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
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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 Adviser deems relevant in
light of economic or market conditions.
The Fund is a "diversified" management investment company under the
Investment Company Act of 1940 (the "1940 Act"). This means that with respect to
75% of its total assets: (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer other than U.S. government securities
and securities of other investment companies and (2) the Fund may not own more
than 10% of the outstanding voting securities of any one issuer. In applying
these limitations, a guarantee of a security will not be considered a security
of the guarantor, provided that the value of all securities issued or guaranteed
by that guarantor, and owned by the Fund, does not exceed 10% of Fund's total
assets. Since Municipal Obligations ordinarily purchased by the Fund are not
voting securities (notwithstanding the 75% limitation described above), there is
generally no limit on the percentage of a single issuer's obligations which the
Fund may own so long as it does not invest more than 5% of its total assets in
the securities of that issuer. Consequently, the Fund may invest in a greater
percentage of the outstanding securities of a single issuer than would an
investment company which invests in voting securities. In determining the issuer
of a security, each state and each political subdivision, agency, and
instrumentality of each state and each multi-state agency of which such state is
a member is a separate issuer. Where securities are backed only by assets and
revenues of a particular instrumentality, facility or subdivision, such entity
is considered the issuer.
CERTAIN INVESTMENT PRACTICES
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. For purposes of realizing additional (taxable)
income, the Fund may lend portfolio securities to brokers, dealers, and
financial institutions if the loan is collateralized by cash or U.S. Government
securities according to applicable regulatory requirements. The Fund may
reinvest any cash collateral in short-term securities. When the Fund lends
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portfolio securities, there is a risk that the borrower may fail to return the
securities involved in the transaction. As a result, the Fund may incur a loss
or, in the event of the borrower's bankruptcy, the Fund may be delayed in or
prevented from liquidating the collateral. It is a fundamental policy of the
Fund not to lend portfolio securities having a total value exceeding 33 1/3% of
its total assets.
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 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. For purposes of realizing additional (taxable)
income, the Fund may enter into repurchase agreements. A repurchase agreement is
a contract under which the Fund acquires a security for a relatively short
period (usually 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 "primary dealers" in U.S. Government securities. The Adviser will
continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements.
The Fund has established a procedure providing that the securities
serving as collateral for each repurchase agreement must be delivered to the
Fund's custodian either physically or in book-entry form and that the collateral
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must be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income and lack of
access to income during this period and the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements which involve the sale of U.S. Government securities held
in its portfolio to a bank with an agreement that the Fund will buy back the
securities at a fixed future date at a fixed price plus an agreed amount of
"interest" which may be reflected in the repurchase price. Reverse repurchase
agreements are considered to be borrowings by the Fund. Reverse repurchase
agreements involve the risk that the market value of securities purchased by the
Fund with proceeds of the transaction may decline below the repurchase price of
the securities sold by the Fund which it is obligated to repurchase. The Fund
will also continue to be subject to the risk of a decline in the market value of
the securities sold under the agreements because it will reacquire those
securities upon effecting their repurchase. The Fund will not enter into reverse
repurchase agreements and other borrowings exceeding in the aggregate15% of the
market value of its total assets. The Fund will enter into reverse repurchase
agreements only with federally insured banks or savings and loan associations
which are approved in advance as being creditworthy by the Board of Trustees.
Under procedures established by the Board of Trustees, the Adviser will monitor
the creditworthiness of the banks involved.
Short Term Trading and Portfolio Turnover. The Fund may attempt to
maximize current income through short-term portfolio trading. This will involve
selling portfolio instruments and purchasing different instruments to take
advantage of yield disparities in different segments of the market for
Government Obligations. Short-term trading may have the effect of increasing
portfolio turnover rate. A high rate of portfolio turnover (100% or greater)
involves corresponding higher transaction expenses and may make it more
difficult for the Fund to qualify as a regulated investment company for federal
income tax purposes.
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, and its
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distributions of such interest would therefore be taxable to shareholders. 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 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".
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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.
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 Fund may also write straddles, which are
combinations of put and call options on the same security.
The purchase of a financial futures contract obligates the buyer to
accept and pay for the specific type of debt security called for in the contract
at a specified future time and at a specified price. The Fund would purchase a
financial futures contract when it is not fully invested in long-term debt
securities but wishes to defer its purchases for a time until it can invest in
such securities in an orderly manner or because short-term yields are higher
than long-term yields. Such purchases would enable the Fund to earn the income
on a short-term security while at the same time minimizing the effect of all or
part of an increase in the market price of the long-term debt security which the
Fund intends to purchase in the future. A rise in the price of the long-term
debt security prior to its purchase either would generally be offset by an
increase in the value of the futures contract purchased by the Fund or avoided
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
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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 margin deposits on the Fund's existing
futures and related options positions and the amount of premiums paid for
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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 the Fund to
close 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.
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Swaps, Caps, Floor and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payment in different
currencies, the parties might agree to exchange the notional principal amount as
well. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate exceeds
an agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in a foreign currency, the swap agreement would
tend to decrease the Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Caps and floors have an effect
similar to buying or writing options. Depending on how they are used, swap
agreements may increase or decrease the overall volatility of a Fund's
investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
the Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
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
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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 to be
invested in the securities of such issuer or the Fund would own more
than 10% of the outstanding voting securities of such issuer.
4. Make loans to others, except through the purchase of obligations in
which the Fund is authorized to invest, entering in repurchase
agreements and lending portfolio securities in an amount not exceeding
one third of its total assets.
5. Purchase 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 Adviser who own beneficially more than 1/2
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of 1% of the securities of such issuer, together own more than 5% of
the securities of such issuer.
7. Write, purchase or sell puts, calls or combinations thereof, except
put and call options on debt securities, futures contracts based on
debt securities, indices of debt securities and futures contracts
based on indices of debt securities, sell securities on margin or make
short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short, and unless not
more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.
8. Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
9. 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
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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 the value of 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 on 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.
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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") .
The following table sets forth the principal occupation or employment
of the Trustees and principal officers of the Fund during the past five years.
Unless otherwise indicated, the business address of each is 101 Huntington
Avenue, Boston, Massachusetts 02199.
18
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Registrant During the Past 5 Years
- ---------------- ------------------- -----------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman Chairman and Chief Executive
October 1944 and Chief Executive Officer, the Adviser and The
Officer (1)(2) Berkeley Financial Group ("Berkeley
Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), John
Hancock Investor Services
Corporation ("Investor Services"),
First Signature Bank and Trust
Company and Sovereign Asset
Management Corporation
("SAMCorp."); Director, John
Hancock Freedom Securities
Corporation, John Hancock Capital
Corporation and New England/Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science; Vice
Chairman and President, the Adviser
(until July 1992); Chairman, John
Hancock Distributors, Inc. (until
April, 1994).
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea
(until August 1992).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson- Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
19
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Registrant During the Past 5 Years
- ---------------- ------------------- -----------------------
Charles F. Fretz Trustee (3) Retired; self employed; former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
Anne C. Hodsdon * President and President and Chief Operating
April 1953 Trustee (1)(2) Officer, the Adviser; Director,
Advisers International; Executive
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 of UGI Corp. (public utilities
February 1938 LPGAS).
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief
3810 W. Alabama Executive Officer and Director,
Houston, TX 77027 Linbeck Corporation (a holding
August 1934 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
Eastern Corporation (a diversified
energy company), Daniel Industries,
Inc. (manufacturer of gas measuring
products and energy related
equipment), GeoQuest International,
Inc. (a geophysical consulting
firm) (1980-1993); Director,
Greater Houston Partnership.
Patricia P. McCarter Trustee (3) Director and Secretary of the
1230 Brentford Road McCarter Corp. (machine
Malvern, PA 19355 manufacturer).
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
20
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Registrant During the Past 5 Years
- ---------------- ------------------- -----------------------
Steven R. Pruchansky Trustee (1)(3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione* Trustee General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John
Boston, MA 02117 Hancock Funds, Investor Services,
August 1937 John Hancock Distributors, Inc.,
John Hancock Subsidiaries, Inc.,
John Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993), SAMCorp. and NM
Capital; Trustee, The Berkeley
Group; Director JH Networking
Insurance Agency, Inc.
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
John P. Toolan Trustee (3) Director, Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman* Vice Chairman and Vice Chairman and Chief Investment
July 1938 Chief Investment Officer, the Adviser; President,
Officer (2) the Adviser (until December 1994);
Director, the Adviser, Advisers
International, John Hancock Funds,
Investor Services, SAMCorp., and NM
Capital; Senior Vice President, The
Berkeley Group.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
21
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Registrant During the Past 5 Years
- ---------------- ------------------- -----------------------
James B. Little* Senior Vice President Senior Vice President, the Adviser,
February 1935 and Chief Financial The Berkeley group, John Hancock
Officer Funds and Investor Services; Senior
Vice President and Chief Financial
Officer, each of the John Hancock
funds.
Susan S. Newton* Vice President Vice President and Assistant
March 1950 and Secretary Secretary, the Adviser; Vice
President and Secretary, John
Hancock Funds, Investor Services
and John Hancock Distributors, Inc.
(until 1994) and certain John
Hancock funds; Secretary, SAMCorp;
Vice President, The Berkeley Group.
John A. Morin* Vice President Vice President, the Adviser,
July 1950 Investor Services and John Hancock
Funds and each of the John Hancock
funds; Compliance Officer, certain
John Hancock Funds; Counsel, the
Life Company; Vice President and
Assistant Secretary, The Berkeley
Group.
James J. Stokowski* Vice President Vice President, the Adviser; Vice
November 1946 and Treasurer President and Treasurer, each of
the John Hancock funds.
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of September 4, 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 September 4, 1996, Merrill Lynch Pierce Fenner & Smith Inc., Trade House
Account Team B, 4800 Deerlake Drive East, Jacksonville, FL held 814,148 shares
representing 10.30% of the Fund's Class B shares. At such date, no person owned
22
<PAGE>
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 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.
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.
23
<PAGE>
Compensation of the Board of Trustees and Advisory Board. The following
table provides information regarding the compensation paid by the Fund during
its most recently completed fiscal year and the other investment companies in
the John Hancock Fund Complex to the Independent Trustees and the Advisory Board
members for their services. The Trustees not listed below were not trustees of
the Company during its most recently completed fiscal year. The three
non-Independent Trustees, Ms. Hodsdon, Messrs. Boudreau and Scipione, and each
of the officers of the Funds are interested persons of the Adviser, are
compensated by the Adviser or affiliated companies and received no compensation
from the Funds for their services.
Total Compensation
Aggregate from all Funds in
Compensation John Hancock Fund
Trustees from the Fund 1 Complex to Trustees 2
- -------- --------------- ---------------------
James F. Carlin $ 1,588 $ 60,700
William H. Cunningham+ 4,421 69,700
Charles F. Fretz 245 56,200
Harold R. Hiser, Jr.+ 122 60,200
Charles L. Ladner 1,984 60,700
Leo E. Linbeck, Jr. 4,671 73,200
Patricia P. McCarter 1,984 60,700
Steven R. Pruchansky 2,050 62,700
Norman H. Smith 2,050 62,700
John P. Toolan+ 1,984 60,700
------- --------
Total $21,099 $627,500
1 Compensation for the fiscal year ended December 31, 1995.
2 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. As of such date there were 61 funds in the John Hancock Fund Complex,
of which each of these Independent Trustees except Messrs. Cunningham and
Linbeck served 33. Messrs. Cunningham and Linbeck served 31 of these funds.
+ As of December 31, 1995, the value of the aggregate deferred compensation
from all funds in the John Hancock Fund Complex for Mr. Cunningham was
24
<PAGE>
$54,413, for Mr. Hiser was $31,324 and for Mr. Toolan was $71,437 under the
John Hancock Deferred Compensation Plan for Independent Trustees.
Pension or Total Compensation
Retirement from all Funds
Aggregate Benefits Accrued in John Hancock
Compensation as Part of the Fund Complex to
Advisory Board*** from the Fund Fund's Expenses Advisory Board***
- ----------------- ------------- --------------- -----------------
R. Trent Campbell $ 3,672 $0 $ 54,000
Mrs. Lloyd Bentsen 3,783 0 54,000
Thomas R. Powers 3,672 0 54,000
Thomas B. McDade 3,672 0 54,000
------- -- --------
TOTAL $14,799 $0 $216,000
*** As of December 31, 1995
INVESTMENT ADVISORY AND OTHER SERVICES
The Fund receives its investment advice from the 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 Adviser
is named above, together with the capacity in which such person is affiliated
with the Fund and the Adviser.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199- 7603, was organized in 1968 and has more than $19 billion in assets under
management in its capacity as Adviser to the Fund and the other mutual funds and
publicly traded investment companies in the John Hancock group of funds having a
combined total of over 1,080,000 shareholders. The Adviser is 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.
25
<PAGE>
The Fund has entered into an investment management contract with the
Adviser. Under the investment management contract, the Adviser provides the Fund
with (i) a continuous investment program, consistent with the Fund's stated
investment objective and policies and (ii) supervision of all aspects of the
Fund's operations except those that are delegated to a custodian, transfer agent
or other agent. The Adviser is responsible for the management of the Fund's
portfolio assets.
No person other than the 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 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.
All expenses which are not specifically paid by the Adviser and which
are incurred in the operation of the Fund including, but not limited to, (i) the
fees of the Trustees of the Fund who are not "interested persons," as such term
is defined in the 1940 Act (the "Independent Trustees"), (ii) the fees of the
members of the Fund's Advisory Board (described above) and (iii) the continuous
public offering of the shares of the Fund are borne by the Fund.
As provided by the investment management contract, the Fund pays the
Adviser an investment management fee, which is accrued daily and paid monthly in
arrears, equal on an annual basis of the Fund's average daily net asset value as
follows:
Net Asset Value Annual Rate
--------------- -----------
First $500,000,000 0.55%
Next $500,000,000 0.50%
Amount over $1,000,000,000 0.45%
The Adviser may voluntarily and temporarily reduce its advisory fee or
make other arrangements to limit the Fund's expenses to a specified percentage
of average daily net assets. The Adviser retains the right to re-impose the
advisory fee and recover any other payments to the extent that, at the end of
any fiscal year, the Fund's annual expenses fall below this limit.
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
26
<PAGE>
the 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 Adviser is not
liable to the Fund or its shareholders for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
its contract relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Adviser in the performance of its
duties or from its reckless disregard of 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 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 Adviser or its affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser or for other funds or clients for which the Adviser
renders investment advice arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
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 Adviser. In addition, the Adviser or the Life Company may grant the
non-exclusive right to use the name "John Hancock" or any similar name to any
27
<PAGE>
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
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
reduction and expense limitation agreement then in effect.
Administrative Services Agreement. The Fund was a party to an
administrative services agreement with TFMC (the "Services Agreement"), pursuant
to which TFMC performed bookkeeping and accounting services and functions,
including preparing and maintaining various accounting books, records and other
documents and keeping such general ledgers and portfolio accounts as are
reasonably necessary for the operation of the Fund. Other administrative
services included communications in response to shareholder inquiries and
certain printing expenses of various financial reports. In addition, such staff
and office space, facilities and equipment was provided as necessary to provide
administrative services to the Fund. The Services Agreement was amended in
connection with the appointment of the Adviser as investment adviser to the Fund
to permit services under the Agreement to be provided to the Fund by the Adviser
and its affiliates.
The Services Agreement was terminated during 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 were paid or
incurred during the fiscal year 1995.
DISTRIBUTION CONTRACT
The Fund's shares are sold on a continuous basis at the public offering
price. The Distributor, a wholly owned subsidiary of the 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.
28
<PAGE>
The Distribution Agreement was initially adopted by the affirmative
vote of the Fund's Board of Trustees including the vote of 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 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 interested 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 service 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 and the shareholders have
approved an increase in the distribution and service fee on Class A Shares 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 service fee to be paid by the
Fund will not exceed an annual rate of 1.00% of the average daily net assets of
the Class B Shares of the Fund (determined in accordance with such Fund's
prospectus as from time to time in effect); provided that the portion of such
fee used to cover Service Expenses (described below) shall not exceed an annual
rate of 0.25% of the average daily net asset value of the Class B Shares of the
Fund. The Distributor has agreed to limit the payment of expenses pursuant to
the Class B Plan to 0.90% of the average daily net assets of the Class B Shares
of the Fund 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
29
<PAGE>
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 to, merges with 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:
Interest,
Printing and Carrying
Mailing of Compensation or Other
Prospectuses to to Selling Finance
Advertising New Shareholders Brokers Charges
----------- ---------------- ------- -------
Class A shares $13,395 $518 $116,514 $ 0
Class B shares $17,054 $707 $247,449 $338,251
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
30
<PAGE>
the Independent Trustees, or a majority of the respective Class's 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
its 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 therefor 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 the Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations
furnished by a principal market maker or a pricing service, both of which
generally utilize electronic data processing techniques to determine valuations
for normal institutional size trading units of debt securities without exclusive
reliance upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days
or less are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
The 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.
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
31
<PAGE>
contingent deferred basis (the "deferred sales charge alternative"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then only will be issued for full shares. The Board of Trustees reserves the
right to change or waive the minimum investment requirements and to reject any
order to purchase shares (including purchase by exchange) when in the judgment
of the Adviser such rejection is in the Fund's best interest.
INITIAL SALES CHARGE ON CLASS A SHARES
Initial Sales Charge. The sales charges applicable to purchases of
Class A Shares of the Fund are described in the Fund's 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. Class A shares may be offered without a front-end
sales charge or contingent deferred sales charge ("CDSC") to various individuals
and institutions as follows:
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee/Director or officer of the Fund; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, mother, father, sister, brother, mother-in-law,
32
<PAGE>
father-in-law) of any of the foregoing; or any fund, pension, profit
sharing or other benefit plan for the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
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.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception of
the Fund account, may purchase Class A shares with no initial sales charge.
However, if the shares are redeemed within 12 months after the end of the
calendar year in which the purchase was made, a CDSC will be imposed at the
following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Accumulation Privilege. Investors (including investors combining
purchases) who are already Class A Shareholders may also obtain the benefit of
the reduced sales charge by taking into account not only the amount then being
invested but also the purchase price or value of the Class A Shares already held
by such person.
Combination Privilege. Reduced sales charges (according to the schedule
set forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A Shares of
the Fund and shares of all other John Hancock funds which carry a sales charge.
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
33
<PAGE>
under the LOI. All investors have the option of making their investments over a
period of thirteen (13) months. Investors who are using the Fund as a funding
medium for a qualified retirement plan, however, may opt to make the necessary
investments called for by the LOI over a forty- eight (48) month period. These
qualified retirement plans include IRA, SEP, SARSEP, 401(k), 403(b) (including
TSAs) and 457 plans. Such an investment (including accumulations and
combinations) must aggregate $50,000 or more invested during the specified
period from the date of the LOI or from a date within ninety (90) days prior
thereto, upon written request to Investor Services. The sales charge applicable
to all amounts invested under the LOI is computed as if the aggregate amount
intended to be invested had been invested immediately. If such aggregate amount
is not actually invested, the difference in the sales charge actually paid and
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made with the specified period
(either 13 or 48 months), the sales charge applicable will not be higher than
that which would have been applied (including accumulations and combinations)
had the LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class
A shares (approximately 5%) of the aggregate to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charges as may be due. By signing
the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrowed shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by the Fund to sell, any additional shares and may be terminated at
any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Contingent Deferred Sales Charge. Investments in Class B shares are
purchased at net asset value per share without the imposition of a sales charge
so that the Fund will receive the full amount of the purchase payment. Class B
Shares which are redeemed within six years of purchase will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the
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.
34
<PAGE>
Class B shares are not available to 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.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B Shares until the time
of redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation
will be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the six- year CDSC redemption period or those you acquired
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the six-year period. For this purpose, the amount
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount please
indicate if you require the proceeds to equal the dollar amount requested. If
not indicated, only the specified dollar amount will be redeemed from your
account and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment.
If you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to 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
35
<PAGE>
for selling Class B Shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B Shares
without a sales charge being deducted at the time of the purchase. See the
Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemption of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account value,
including reinvested dividends, at the time you established your periodic
withdrawal plan and 12% of the value of subsequent investments (less
redemptions) in that account at the time you notify Investor Services.
(Please note, this waiver does not apply to periodic withdrawal plan
redemptions of Class A shares that are subject to a CDSC.)
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other qualified plans as
described in the Internal Revenue Code of 1986, as amended (the "Code") unless
otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions under
the Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under Section 401(a) of the Code
(such as 401(k), Money Purchase Pension Plans and Profit Sharing Plans).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares prior
to May 15, 1995.
Please see matrix for reference.
36
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions or in periodic
12% of account payments
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or 12% value annually
of account value in periodic
annually in payments
periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for annuity Waived for annuity Waived for annuity 12% of account
payments (72t)or payments (72t)or payments (72t)or value annually
12% of account 12% of account 12% of account in periodic
value annually in value annually in value annually in payments
periodic payments periodic payments periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ------------------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Return of
Excess Waived Waived Waived Waived N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you
must notify Investor Services at the time you make your redemption. The waiver
will be granted once Investor Services has confirmed that you are entitled to
the waiver.
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
37
<PAGE>
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. 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. The Fund permits the establishment of a
Systematic Withdrawal Plan. Payments under this plan represent proceeds arising
from the redemption of Fund shares. Since the redemption price of Fund shares
may be more or less than the shareholder's cost, depending upon the market value
of the securities owned by the Fund at the time of redemption, the distribution
of cash pursuant to this plan may result in recognition of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional Class A or
Class B Shares of the Fund could be disadvantageous to a shareholder because of
the initial sales charge payable on 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"). The program, as it
relates to automatic investment checks, is subject to the following conditions:
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by 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.
38
<PAGE>
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
The Trustees of the Fund are responsible for the management and
supervision of the Fund. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund without par value. Under the Declaration of Trust, the Trustees have the
authority to create and classify shares of beneficial interest in separate
series, without further action by shareholders. As of the date of this Statement
of Additional Information, the Trustees have only authorized shares of the Fund.
Additional series may be added in the future. The Declaration of Trust also
authorizes the Trustees to classify and reclassify the shares of the Fund, into
one or more classes. 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.
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
Holders of Class A shares and Class B shares have certain exclusive voting
rights on matters relating to their respective distribution plans. The different
39
<PAGE>
classes of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except for differences resulting from the
facts that (i) the distribution and service fees relating to Class A and Class B
shares will be borne exclusively by that class (ii) Class B shares will pay
higher distribution and service fees than Class A shares and (iii) each of Class
A shares and Class B shares will bear any other class expenses properly
allocable to such class of shares, subject to the requirements imposed by the
Internal Revenue Service on funds having a multiple-class structure. Similarly,
the net asset value per share may vary depending on whether Class A shares or
Class B shares are purchased.
In the event of liquidation, shareholders of each class are entitled to
share pro rata in the net assets of the class of the Fund available for
distribution to these shareholders. Shares entitle their holders to one vote per
share, are freely transferable and have no preemptive, subscription or
conversion rights. When issued, shares are fully paid and non-assessable except
as set forth below.
Unless otherwise required by the 1940 Act or the Declaration of Trust,
the Trust has no intention of holding annual meetings of shareholders. Fund
shareholders may remove a Trustee by the affirmative vote of at least two-thirds
of the Fund's outstanding shares and the Trustees shall promptly call a meeting
for such purpose when requested to do so in writing by the record holders of not
less than 10% of the outstanding shares of the Fund. Shareholders may, under
certain circumstances, communicate with other shareholders in connection with
requesting a special meeting of shareholders. However, at any time that less
than a majority of the Trustees holding office were elected by the shareholders,
the Trustees will call a special meeting of shareholders for the purpose of
electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Fund's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations or affairs of
the Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Fund shall be liable for the liabilities of
any other series. Liability is therefore limited to circumstances in which the
Fund itself would be unable to meet its obligations, and the possibility of this
occurrence is remote.
40
<PAGE>
Pursuant to an order granted by the SEC, the Fund has adopted a
deferred compensation plan for its Independent Trustees which allows Trustees'
fees to be invested by the Fund in other John Hancock funds.
In order to avoid conflicts with portfolio trades for the Fund, the
Adviser and the Fund have adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. Some of these
restrictions are: pre-clearance for all personal trades and a ban on the
purchase of initial public offerings, as well as contributions to specified
charities of profits on securities held for less than 91 days. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come first.
Notwithstanding the fact that the Prospectus is a combined prospectus
for the Fund and other John Hancock mutual funds, the Fund shall not be liable
for the liabilities of any other John Hancock mutual fund.
TAX STATUS
The Fund has qualified and elected to be treated as a "regulated
investment company" under Subchapter M of the Code, and intends to continue to
so qualify for each taxable year. As such and by complying with the applicable
provisions of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on taxable and tax-exempt income (including net
realized capital gains, if any) which is distributed to shareholders at least
annually in accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to seek to avoid or minimize liability
for such tax by satisfying such distribution requirements.
The Fund expects to qualify to pay "exempt-interest dividends," as
defined in the Code. To qualify to pay exempt-interest dividends, the Fund must,
at the close of each quarter of its taxable year, have at least 50% of the value
of its total assets invested in municipal securities whose interest is excluded
from gross income under Section 103(a) of the Code. In purchasing municipal
securities, the Fund intends to rely on opinions of nationally recognized bond
counsel for each issue as to the excludability of interest on such obligations
from gross income for federal income tax purposes. The Fund will not undertake
independent investigations concerning the tax-exempt status of such obligations,
nor does it guarantee or represent that bond counsels' opinions are correct.
41
<PAGE>
Bond counsels' opinions will generally be based in part upon covenants by the
issuers and related parties regarding continuing compliance with federal tax
requirements. Tax laws enacted principally during the 1980's not only had the
effect of limiting the purposes for which tax-exempt bonds could be issued and
reducing the supply of such bonds, but also increased the number and complexity
of requirements that must be satisfied on a continuing basis in order for bonds
to be and remain tax-exempt. If the issuer of a bond or a user of a
bond-financed facility fails to comply with such requirements at any time,
interest on the bond could become taxable, retroactive to the date the
obligations was issued. In that event, a portion of the Fund's distributions
attributable to interest the Fund received on such bond for the current year and
for prior years could be characterized or recharacterized as taxable income. The
availability of tax-exempt obligations and the value of the Fund's portfolio may
be affected by restrictive federal income tax legislation enacted in recent
years or by similar future legislation.
If the Fund satisfies the applicable requirements, dividends paid by
the Fund which are attributable to tax exempt interest on municipal securities
and designated by the Fund as exempt-interest dividends in a written notice
mailed to its shareholders within sixty days after the close of its taxable year
may be treated by shareholders as items of interest excludable from their gross
income under Section 103(a) of the Code. The recipient of tax-exempt income is
required to report such income on his federal income tax return. However, a
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain the exclusion under Section 103(a) if such
shareholder would be treated as a "substantial user" under Section 147(a)(1)
with respect to some or all of the tax-exempt obligations held by the Fund. The
Code provides that interest on indebtedness incurred or continued to purchase or
carry shares of the Fund is not deductible to the extent it is deemed related to
the Fund's exempt- interest dividends. Pursuant to published guidelines, the
Internal Revenue Service may deem indebtedness to have been incurred for the
purpose of purchasing or carrying shares of the Fund even though the borrowed
funds may not be directly traceable to the purchase of shares.
Although all or a substantial portion of the dividends paid by the Fund
may be excluded by the Fund's shareholders from their gross income for federal
income tax purposes, the Fund may purchase specified private activity bonds, the
interest from which (including the Fund's distributions attributable to such
interest) may be a preference item for purposes of the federal alternative
minimum tax (both individual and corporate). All exempt-interest dividends from
the Fund, whether or not attributable to private activity bond interest, may
increase a corporate shareholder's liability, if any, for corporate alternative
minimum tax and will be taken into account in determining the extent to which a
shareholder's Social Security or certain railroad retirement benefits are
taxable.
42
<PAGE>
Distributions other than exempt-interest dividends from the Fund's
current or accumulated earnings and profits ("E&P") will be taxable under the
Code for investors who are subject to tax. Taxable distributions include
distributions from the Fund that are attributable to (i) taxable income,
including but not limited to taxable bond interest, recognized market discount
income, original issue discount income accrued with respect to taxable bonds,
income from repurchase agreements, income from securities lending, income from
dollar rolls, income from interest rate swaps, caps, floors and collars, and a
portion of the discount from certain stripped tax-exempt obligations or their
coupons or (ii) capital gains from the sale of securities or other investments
(including from the disposition of rights to when-issued securities prior to
issuance) or from options and futures contracts. If these distributions are paid
from the Fund's "investment company taxable income," they will be taxable as
ordinary income; and if they are paid from the Fund's "net capital gain," they
will be taxable as long-term capital gain. (Net capital gain is the excess (if
any) of net long-term capital gain over net short-term capital loss, and
investment company taxable income is all taxable income and capital gains or
losses, other than those gains and losses included in computing net capital
gain, after reduction by deductible expenses.) Some distributions may be paid in
January but may be taxable to shareholders as if they had been received on
December 31 of the previous year. The tax treatment described above will apply
without regard to whether distributions are received in cash or reinvested in
additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of
capital under the Code, which will first reduce an investor's federal tax basis
in Fund shares and then, to the extent such basis is exceeded, will generally
give rise to capital gains. Amounts that are not allowable as a deduction in
computing taxable income, including expenses associated with earning tax-exempt
interest income, do not reduce the Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of the Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders who have chosen automatic reinvestment of their distributions will
have a federal tax basis in each share received pursuant to such a reinvestment
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received in the
reinvestment.
After the close of each calendar year, the Fund will inform
shareholders of the federal income tax status of its dividends and distributions
for such year, including the portion of such dividends that qualifies as
tax-exempt and the portion, if any, that should be treated as a tax preference
item for purposes of the federal alternative minimum tax. Shareholders who have
not held shares of the Fund for its full taxable year may have designated as
tax-exempt or as a tax preference item a percentage of distributions which is
not equal to the actual amount of tax-exempt income or tax preference item
income earned by the Fund during the period of their investment in the Fund.
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<PAGE>
The amount of the Fund's net realized capital gains, if any, in any
given year will vary depending upon the Adviser's current investment strategy
and whether the Adviser believes it to be in the best interest of the Fund to
dispose of portfolio securities or enter into options or futures transactions
that will generate capital gains. At the time of an investor's purchase of Fund
shares, a portion of the purchase price is often attributable to realized or
unrealized appreciation in the Fund's portfolio. Consequently, subsequent
distributions on these shares from such appreciation may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's tax holding period for the shares
and subject to the special rules described below. A sales charge paid in
purchasing Class A shares of the Fund cannot be taken into account for purposes
of determining gain or loss on the redemption or exchange of such shares within
90 days after their purchase to the extent shares of the Fund or another John
Hancock Fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. Such disregarded load will
result in an increase in the shareholder's tax basis in the shares subsequently
acquired. Also, any loss realized on a redemption or exchange may be disallowed
to the extent the shares disposed of are replaced with other shares of the Fund
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of, such as pursuant to automatic dividends reinvestments.
In such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be disallowed to the extent of all
exempt-interest dividends paid with respect to such shares and, to the extent in
excess of the disallowed amount, 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 the Fund's present intention is to distribute, at least
annually, all net capital gain, if any, the Fund reserves the right to retain
and reinvest all or any portion of the excess of net long-term capital gain over
net short-term capital loss in any year. The Fund will not in any event
distribute net capital gain realized in any year to the extent that a capital
loss is carriedforward 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. Upon proper designation of this amount by the Fund, each shareholder would
be treated for Federal income tax purposes as if the Fund had distributed to him
on the last day of its taxable year his pro rata share of such excess, and he
44
<PAGE>
had paid his pro rata share of the taxes paid by the Fund and reinvested the
remainder in the Fund. Accordingly, each shareholder would (a) include his pro
rata share of such excess as long-term capital gain in his return for his
taxable year in which the last day of the Fund's taxable year falls, (b) be
entitled either to a tax credit on his return for, or to a refund of, his pro
rata share of the taxes paid by the Fund, and (c) be entitled to increase the
adjusted tax basis for his shares in the Fund by the difference between his pro
rata share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward
a net capital loss in any year to offset its net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent 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.
Dividends and capital gain distributions paid by the Fund will not
qualify for the dividends received deduction for corporate shareholders.
The Fund may invest in debt obligations that are in the lower rating
categories or are unrated. Investments in debt obligations that are at risk of
default present special tax issues for the Fund. Tax rules are not entirely
clear about issues such as when the Fund may cease to accrue interest, original
issue discount, or market discount, when and to what extent deductions may be
taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable. These
and other issues will be addressed by the Fund, in the event it invests in such
securities, in order to seek to ensure that it distributes sufficient income to
preserve its status as a regulated investment company and seek to avoid becoming
subject to Federal income or excise tax.
The Fund is required to accrue income on any debt securities that have
more than a de minimis amount of original issue discount (or debt securities
acquired at a market discount, if the Fund elects to include market discount in
income currently) prior to the receipt of the corresponding cash payments. The
mark to market rules applicable to certain options and futures contracts may
also require the Fund to recognize gain without a concurrent receipt of cash.
However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy these distribution
requirements.
45
<PAGE>
The Fund will be required to report to the Internal Revenue Service
(the "IRS") all taxable distributions to shareholders, as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt recipients, i.e., corporations and certain other investors distributions
to which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. However, the Fund's
taxable distributions may not be subject to backup withholding if the Fund can
reasonably estimate that at least 95% of its distributions for the year will be
exempt-interest dividends. The Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
Limitations imposed by the Code on regulated investment companies like
the Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may
cause the Fund to recognize gains or losses from marking to market even though
its positions have not been sold or terminated and affect the character as
long-term or short-term and timing of some capital gains and losses realized by
the Fund. Also, certain of the Fund's losses on its transactions involving
options or futures contracts and/or offsetting portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's taxable income or gain. Some of these transactions may also cause the
Fund to dispose of investments sooner than would otherwise have occurred. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options and
futures contracts in order to seek to minimize any potential adverse tax
consequences.
A state income (and possibly local income and/or intangible property)
tax exemption is generally available to the extent (if any) 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 or municipal obligations of issuers in the state in which a
shareholder is subject to tax, provided in some states that certain thresholds
46
<PAGE>
for holdings of such obligations and/or reporting requirements are satisfied.
The Fund will not seek to satisfy any threshold or reporting requirements that
may apply in particular taxing jurisdictions, although the Fund may in its sole
discretion provide relevant information to shareholders.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as insurance companies and financial
institutions. Dividends, 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 different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
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 June 30, 1996, the annualized yields of the
Fund's Class A Shares and Class B Shares were 5.47% and 4.99%, respectively.
As of June 30, 1996, 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 2.92% and 7.51%, respectively (2.72% and 7.20%, respectively, without
taking into account the expense limitation arrangements). As of June 30, 1996,
the average annual returns for the Fund's Class B Shares for the one-year period
and since inception on December 31, 1991 were 1.94% and 6.19%, respectively
(1.74% and 6.02%, respectively, without taking into account the expense
limitation arrangements).
47
<PAGE>
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.
The calculation assumes that all dividends and distributions are
reinvested at net asset value on the reinvestment dates during the period.
Because each share has its own sales charge and fee structure, the
classes have different performance results. In the case of Class A Shares or
Class B Shares, this calculation assumes the maximum sales charge is included in
the initial investment or the CDSC is applied at the end of the period. This
calculation also assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period. The "distribution
rate" is determined by annualizing the result of dividing the declared dividends
of the Fund during the period stated by the maximum offering price or net asset
value at the end of the period.
In addition to average annual total returns, the Fund may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's maximum sales
charge on Class A Shares or the CDSC on Class B Shares into account. Excluding
the Fund's sales charge on Class A Shares and the CDSC on Class B Shares from a
total return calculation produces a higher total return figure.
The Fund may advertise yield, where appropriate. The Fund's yield is
computed by dividing net investment income per share determined for a 30-day
period by the maximum offering price per share (which includes the full sales
charge) on the last day of the period, according to the following standard
formula:
48
<PAGE>
Yield = 2 ([(a - b) + 1] 6 - 1)
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(NAV where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Fund which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt. The tax equivalent yields for the
Fund's Class A and Class B Shares at a 36% tax rate for the 30-day period ended
June 30, 1996 were 8.55% and 7.80%, respectively.
From time to time, in reports and promotional literature, the Fund's
yield and total return will be compared to indices of mutual funds and bank
deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed
Income Fund Performance Analysis," a monthly publication which tracks net
assets, total return, and yield on fixed income mutual funds in the United
States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well 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
49
<PAGE>
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and
the allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by its investment committee, which consists of officers and
directors of the Adviser and affiliates and officers and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the 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 Adviser may consider sales of shares of the Fund as
a factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
To the extent consistent with the foregoing, the Fund will be governed
in the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser of the
Fund, and their value and expected contribution to the performance of the Fund.
It is not possible to place a dollar value on information and services to be
received from brokers and dealers, since it is only supplementary to the
research efforts of the Adviser. The receipt of research information is not
expected to reduce significantly the expenses of the Adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other advisory clients of the Adviser, and
conversely, brokerage commissions and spreads paid by other advisory clients of
the Adviser may result in research information and statistical assistance
beneficial to the Fund. The Fund will make no commitments to allocate portfolio
transactions upon any prescribed basis. While the 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
50
<PAGE>
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 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 Adviser or the Affiliated Brokers. Because the
Adviser, which is affiliated with the Affiliated Brokers, has, as an investment
adviser to the Fund, the obligation to provide investment management services,
which includes elements of research and related investment skills, such research
and related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria. 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.
51
<PAGE>
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 $20 per account for the Class A Shares and
$22.50 per account for the Class B Shares, plus out-of-pocket expenses. These
expenses are aggregated and charged to the Fund and allocated to each class on
the basis of the 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, 89 South 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. With the exception of
the financial Statements for the six month period ended June 30, 1996, 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.
52
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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.
<TABLE>
<CAPTION>
TAX-FREE YIELDS 1996 TAX TABLE
Single Return Joint Return Marginal TAX-EXEMPT YIELD
- ------------- ------------- Income ---------------------------------------------------
(Taxable Income) Tax Rate 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 Statement of
Additional Information. 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 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
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.
B-1
<PAGE>
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.
B-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.
B-3
<PAGE>
MIG 3 Loans bearing this designation are of favorable quality, with all
securities elements accounted for but lacking the undeniable strength
of the preceding grades. Market access for refinancing, in particular,
is likely to be less well established.
Standard & Poor's ratings for state and municipal notes and other
short-term loans are designated Standard & Poor's Grade (SP).
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
Fitch Ratings for short-term debt obligations that are payable on
demand or have original maturities of up to three years including commercial
paper, certificates of deposits, medium term notes and municipal and investment
notes are designated by the following ratings:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin for
safety is not as great as for issues assigned F-1+ and F-1 ratings.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
B-4
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK HIGH YIELD TAX-FREE FUND
Statement of Additional Information
September 30, 1996
This Statement of Additional Information provides information about John Hancock
High Yield Tax-Free Fund (the "Fund"), a diversified series of John Hancock
Tax-Free Bond Trust (the "Trust"), in addition to the information that is
contained in the Fund's Prospectus dated September 30, 1996 (the "Prospectus").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund................................................ 1
Investment Objective and Policies....................................... 2
Certain Investment Practices............................................ 3
Investment Restrictions................................................. 14
Those Responsible for Management........................................ 17
Investment Advisory and Other Services.................................. 24
Distribution Agreement.................................................. 27
Net Asset Value......................................................... 28
Initial Sales Charge on Class A Shares.................................. 29
Deferred Sales Charge on Class B Shares................................. 31
Special Redemptions..................................................... 35
Additional Services and Programs........................................ 35
Description of the Fund's Shares........................................ 36
Tax Status.............................................................. 37
Calculation of Performance.............................................. 42
Brokerage Allocation.................................................... 44
Transfer Agent Services................................................. 46
Custody of Portfolio.................................................... 46
Independent Auditors.................................................... 46
Appendix................................................................ 47
Financial Statements
<PAGE>
ORGANIZATION OF THE FUND
John Hancock High Yield Tax-Free Fund (the "Fund") is organized as a separate,
diversified series of John Hancock Tax-Free Bond Trust (the "Trust"), an
open-end management investment company organized as a Massachusetts business
trust under the laws of The Commonwealth of Massachusetts. Prior to the date of
this Statement of Additional Information, the Fund was a series of John Hancock
Series, Inc.
John Hancock Advisers, Inc. (the "Adviser") acts as investment adviser to the
Fund. The Adviser is an indirect, wholly owned subsidiary of John Hancock Mutual
Life Insurance Company (the "Life Company"), a Massachusetts life insurance
company chartered in 1862, with national headquarters at John Hancock Place,
Boston, Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's primary investment objective is to obtain a high level of current
income that is largely exempt from federal income taxes and is consistent with
the preservation of capital. The Fund pursues this objective by normally
investing substantially all of its assets in medium and lower quality
obligations, including bonds, notes and commercial paper, issued by or on behalf
of states, territories and possessions of the United States, The District of
Columbia and their political subdivisions, agencies or instrumentalities, the
interest on which is exempt from federal income tax ("tax-exempt securities").
The Fund seeks as its secondary objective preservation of capital by purchasing
and selling interest rate futures contracts ("financial futures") and tax-exempt
bond index futures contracts ("index futures"), and by purchasing and writing
put and call options on debt securities, financial futures, tax-exempt bond
indices and index futures to hedge against changes in the general level of
interest rates. There can be no assurance that the Fund will achieve its
investment objectives.
As a fundamental policy, the Fund invests, in normal circumstances, at least 80%
of its total assets in municipal bonds ("Municipal Bonds") rated, at the time of
purchase, "A," "Baa" or "Ba" by Moody's Investor Services, Inc. ("Moody's"); or
"A", "BBB" or "BB" by Standard and Poor's Ratings Group ("S&P"); or, if unrated,
that are of comparable quality as determined by the Adviser. Municipal Bonds
rated lower than "Ba" or "BB" may be bought by the Fund. However, the Fund will
limit its investments in such securities to not more than 5% of its total assets
at the time of purchase. The Fund may invest in Municipal Bonds with ratings as
low as "CC" by S&P or "Ca" by Moody's, but will invest in securities rated lower
than ""Ba" or "BB" only where, in the opinion of the Adviser, the rating does
not accurately reflect the true quality of the credit of the issuer and the
quality of such securities is comparable to that of securities rated at least
"Ba" or "BB." The rating limitations applicable to the Fund's investments apply
at the time of acquisition of a security; any subsequent change in the rating or
quality of a security will not require the Fund to sell the security. A general
description of Moody's and S&P's ratings is set forth in Appendix A.
"Tax-exempt securities" are debt obligations generally issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their political subdivisions, agencies or instrumentalities the
interest on which, in the opinion of the bond issuer's counsel (not the Fund's
counsel), is excluded from gross income for federal income tax purposes. These
securities consist of Municipal Bonds, municipal notes and municipal commercial
paper as well as variable or floating rate obligations and participation
interests.
In addition to the hedging strategies employed by the Fund in pursuit of its
secondary objective of preservation of capital, the Fund can purchase bonds
rated "BBB" and "BB" or "Baa" and "Ba," where based upon price, yield and the
Adviser's assessment of quality, investment in such bonds is determined to be
consistent with the Fund's secondary objective of preserving capital. To the
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<PAGE>
extent that the Fund purchases, retains or disposes of such bonds for this
purpose, the Fund may not earn as high a yield as might otherwise be obtainable
from lower quality securities.
While the Fund normally will invest primarily in medium and lower quality
Municipal Bonds as indicated above, it may invest in higher quality tax-exempt
securities, particularly when the difference in returns between rating
classifications is very narrow.
To the extent that the Fund does not invest in medium and lower quality
Municipal Bonds, it will attempt to invest its assets in tax-exempt securities
that are rated at least as high as follows:
(1) Municipal Commercial Paper rated "MIG-3" by Moody's, or "A-3" by S&P;
(2) Municipal Notes rated "MIG-3" by Moody's or "SP-2" by S&P; and
(3) Municipal Variable Rate Demand Obligations rated "VMIG3"
by Moody's, or "SP2/A-3" and "A/A-3" by S&P.
For temporary purposes (such as pending new investments) or liquidity purposes
(such as to meet redemption obligations), the Fund may invest up to 20% of its
total assets in taxable short-term debt securities with remaining maturities of
one year or less ("money market instruments"), including obligations guaranteed
or issued by the U.S. Government, its agencies or instrumentalities ("U.S.
Government securities"), high quality corporate debt securities, high quality
commercial paper, certificates of deposit, bankers' acceptances and related
repurchase agreements.
For defensive purposes, the Fund may temporarily invest more than 20% of the
value of its total assets in taxable money market instruments to enhance
liquidity or preserve capital when, in the Adviser's opinion, it is advisable to
do so because of prevailing market conditions so long as at the end of any
quarter of its taxable year, tax-exempt securities comprise at least 50% of the
Fund's total assets.
CERTAIN INVESTMENT PRACTICES
Government Securities. The Fund may invest in U.S. Government securities, which
are obligations issued or guaranteed by the U.S. Government and its agencies,
authorities or instrumentalities. Certain U.S. Government securities, including
U.S. Treasury bills, notes and bonds, and Government National Mortgage
Association certificates ("Ginnie Maes"), are supported by the full faith and
credit of the United States. Certain other U.S. Government securities, issued or
guaranteed by Federal agencies or government sponsored enterprises, are not
supported by the full faith and credit of the United States, but may be
supported by the right of the issuer to borrow from the U.S. Treasury. These
securities include obligations of the Federal Home Loan Mortgage Corporation
("Freddie Macs"), and obligations supported by the credit of the
instrumentality, such as Federal National Mortgage Association Bonds ("Fannie
Maes"). No assurance can be given that the U.S. Government will provide
financial support to such Federal agencies, authorities, instrumentalities and
government sponsored enterprises in the future.
Custodial Receipts. The Fund may acquire custodial receipts in respect of U.S.
Government securities. Such custodial receipts evidence ownership of future
interest payments, principal payments or both on certain notes or bonds. These
custodial receipts are known by various names, including Treasury Receipts,
Treasury Investors Growth Receipts ("TIGRs"), and Certificates of Accrual on
Treasury Securities ("CATS"). For certain securities law purposes, custodial
receipts are not considered U.S. Government securities.
Bank and Corporate Obligations. The Fund may invest in commercial paper.
Commercial paper represents short-term unsecured promissory notes issued in
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<PAGE>
bearer form by banks or bank holding companies, corporations and finance
companies. The commercial paper purchased by the Fund consists of direct U.S.
dollar denominated obligations of domestic or foreign issuers. Bank obligations
in which the Fund may invest include certificates of deposit, bankers'
acceptances and fixed time deposits. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Municipal Obligations. The Fund may invest in a variety of municipal obligations
which consist of municipal bonds, municipal notes and municipal commercial
paper.
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 (often referred to as "private activity bonds") are issued by
or on behalf of public authorities to obtain funds for many types of local,
privately operated facilities. The payment of the principal and interest on such
bonds is generally dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment. 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 Adviser in determining whether a municipal
obligation meets the Fund's credit 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 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.
4
<PAGE>
Federal tax legislation enacted in the 1980s 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.
Lower Rated High Yield Debt Obligations. As described in "Investment Objective
and Policies," the Fund may invest in high yielding debt securities that are
rated below investment grade (i.e., rated Baa or lower by Moody's or BBB or
lower by S&P). Ratings are based largely on the historical financial condition
of the issuer. Consequently, the rating assigned to any particular security is
not necessarily a reflection of the issuer's current financial condition, which
may be better or worse than the rating would indicate. The Fund may invest in
comparable quality unrated securities which, in the opinion of the Adviser,
offer comparable yields and risks to those securities which are rated.
Debt securities rated lower than Baa or BBB by Moody's or S&P, respectively and
unrated securities of comparable quality (commonly called "junk bonds")
generally have larger price fluctuations and involve increased risks to the
principal and interest than do higher rated securities. Many of these securities
are considered to be speculative investments. In general, these risks include:
(1) substantial market price volatility; (2) changes in credit status, including
weaker overall credit condition of issuers and risks of default; and (3)
industry, market and economic risks, including limited liquidity and secondary
market support.
The market price and liquidity of lower rated fixed income securities generally
respond to short-term corporate and market developments to a greater extent than
the price and liquidity of higher rated securities, because these developments
are perceived to have a more direct relationship to the ability of an issuer of
lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield high risk bond market or the
reduced availability of market quotations may make it more difficult to dispose
of the bonds and to value accurately the Fund's assets. The reduced availability
of reliable, objective data may increase the Fund's reliance on management's
judgment in valuing high yield high risk bonds. In addition, the Fund's
investments in high yield high risk securities may be susceptible to adverse
publicity and investor perceptions, whether or not justified by fundamental
factors.
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 Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service,
Inc. ("Moody's") and Fitch Investors Service ("Fitch") represent their
respective opinions on 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 the
Appendix for a description of ratings. Many issuers of securities choose not to
have their obligations rated. Although unrated securities eligible for purchase
5
<PAGE>
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.
Credit and Interest Rate Risks. Investors should note that while ratings by a
rating institution provide a generally useful guide to credit risks, they do
not, nor do they purport to, offer any criteria for evaluating interest rate
risk. Changes in the general level of interest rates cause fluctuations in the
prices of fixed-income securities already outstanding and will therefore result
in fluctuation in net asset value of the shares of the Fund. The extent of the
fluctuation is determined by a complex interaction of a number of factors. The
Adviser will evaluate those factors it considers relevant and will make
portfolio changes when it deems it appropriate in seeking to reduce the risk of
depreciation in the value of the Fund's portfolio. However, in seeking to
achieve the Fund's primary objective, there will be times, such as during
periods of rising interest rates, when depreciation and realization of
comparable losses on securities in the portfolio will be unavoidable. Moreover,
medium and lower-rated securities and unrated securities of comparable quality
tend to be subject to wider fluctuations in yield and market values than higher
rated securities. Such fluctuations after a security is acquired do not affect
the cash income received from that security but are reflected in the net asset
value of the Fund's portfolio. Other risks of lower quality securities include:
(i) subordination to the prior claims of banks and other senior
lenders and
(ii) the operation of mandatory sinking fund or call/redemption
provisions during periods of declining interest rates whereby
the Fund may reinvest premature redemption proceeds in lower
yielding portfolio securities.
In determining which securities to purchase or hold in the Fund's portfolio and
in seeking to reduce credit and interest rate risk consistent with the Fund's
investment objective and policies, the Adviser will rely on information from
various sources, including: the rating of the security; research, analysis and
appraisals of brokers and dealers; the views of the Trust's Trustees and others
regarding economic developments and interest rate trends; and the Adviser's own
analysis of factors it deems relevant as it pertains to achieving the Fund's
investment objectives.
Municipal Lease Obligations. The Fund may purchase participation interests which
give the Fund an undivided pro rata interest in a 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 illiquid securities.
The Fund may also invest in certificates of participation ("COPs"), 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 monitored pursuant
to analysis by the Adviser and reviewed according to procedures adopted by the
Board of Trustees, which considers various factors in determining 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.
6
<PAGE>
Callable Bonds. The Fund may purchase and hold callable Municipal Bonds which
contain a provision in the indenture permitting the issuer to redeem the bonds
prior to their maturity dates at a specified price which typically reflects a
premium over the bonds' original issue price. These bonds generally have
call-protection (a period of time during which the bonds may not be called),
which usually lasts for 7 to 10 years, after which time such bonds may be called
away. An issuer may generally be expected to call its bonds, or a portion of
them during periods of relatively declining interest rates, when borrowings may
be replaced at lower rates than those obtained in prior years. If the proceeds
of a bond called under such circumstances are reinvested, the result may be a
lower overall yield due to lower current interest rates. If the purchase price
of such bonds included a premium related to the appreciated value of the bonds,
some or all of that premium may not be recovered by bondholders, such as the
Fund, depending on the price at which such bonds were redeemed.
Variable and Floating Rate Obligations. The Fund may invest in variable 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 based. Variable and 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 on a number of factors, including the type of
issuer and the terms of the instrument. The Fund may invest in more recently
developed floating rate instruments which are created by dividing a municipal
security's interest rate into two or more different components. Typically, one
component ("floating rate component" or "FRC") pays an interest rate that is
reset periodically through an auction process or by reference to an interest
rate index. A second component ("inverse floating rate component" or "IFRC")
pays an interest rate that varies inversely with changes to market rates of
interest, because the interest paid to the IFRC holders is generally determined
by subtracting a variable or floating rate from a predetermined amount (i.e.,
the difference between the total interest paid by the municipal security and
that paid by the FRC). The extent of increases and decreases in the value of an
IFRC generally will be greater than comparable changes in the value of an equal
principal amount of a fixed-rate municipal security having similar credit
quality, redemption provisions and maturity. To the extent that such instruments
are not readily marketable, as determined by the Adviser pursuant to guidelines
adopted by the Board of Trustees, they will be considered illiquid for purposes
of the Fund's 10% investment restriction on investment in illiquid securities.
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps and
other types of swap agreements such as caps, collars and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements tend to shift the Fund's investment exposure from one type of
investment to another. Caps and floors have an effect similar to buying or
writing options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of the Fund's investments and its share price
and yield.
7
<PAGE>
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions. The Fund will maintain in a segregated account
with its custodian, cash or liquid securities equal to the net amount, if any,
of the excess of the Fund's obligations over its entitlements with respect to
swap, cap, collar or floor transactions.
Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Risk Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. The risk of early prepayments
is the primary risk associated with interest only debt securities ("IOs"), super
floaters and other leveraged floating rate instruments. In some instances, early
prepayments may result in a complete loss of investment in certain of these
securities. The primary risks associated with certain other derivative debt
securities are the potential extension of average life and/or depreciation due
to rising interest rates.
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
leveraged inverse floating rate securities ("inverse floaters"), principal only
debt securities ("POs") and certain residual or support tranches of index
amortizing notes. Index amortizing notes are subject to extension risk resulting
from the issuer's failure to exercise its option to call or redeem the notes
before their stated maturity date. Leveraged inverse IOs present an especially
intense combination of prepayment, extension and interest rate risks.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X- reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Financial Futures Contracts. The Fund may buy and sell futures contracts (and
related options) on debt securities, interest rate indices and tax-exempt bond
indices. The Fund may hedge its portfolio by selling or purchasing financial
futures contracts as an offset against the effects of changes in interest rates
or in security values. Although other techniques could be used to reduce
exposure to market fluctuations, the Fund may be able to hedge its exposure more
effectively and perhaps at a lower cost by using financial futures contracts.
8
<PAGE>
The Fund may enter into financial futures contracts for hedging and other
non-speculative purposes to the extent permitted by regulations of the Commodity
Futures Trading Commission ("CFTC").
Financial futures contracts have been designed by boards of trade which have
been designated "contract markets" by the CFTC. Futures contracts are traded on
these markets in a manner that is similar to the way a stock is traded on a
stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate instruments such as long-term U.S. Treasury
bonds, U.S. Treasury notes, Government National Mortgage Association ("GNMA")
modified pass-through mortgage-backed securities, three-month U.S. Treasury
bills, 90-day commercial paper, bank certificates of deposit and Eurodollar
certificates of deposit. It is expected that if other financial futures
contracts are developed and traded the Fund may engage in transactions in such
contracts.
Although some financial futures contracts by their terms call for actual
delivery or acceptance of financial instruments, in most cases the contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security and delivery
month). Other financial futures contracts, such as futures contracts on
securities indices, by their terms call for cash settlements. If the offsetting
purchase price is less than the Fund's original sale price, the Fund realizes a
gain, or if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the Fund's original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. The transaction costs must
also be included in these calculations. The Fund will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing transaction. For a discussion of the federal income tax considerations
of trading in financial futures contracts, see the information under the caption
"Tax Status" below.
At the time the Fund enters into a financial futures contract, it is required to
deposit with its custodian a specified amount of cash or U.S. Government
securities, known as "initial margin," ranging upward from 1.1% of the value of
the financial futures contract being traded. The margin required for a financial
futures contract is set by the board of trade or exchange on which the contract
is traded and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
financial futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The Fund
expects to earn interest income on its initial margin deposits. Each day, the
futures contract is valued at the official settlement price of the board of
trade or exchange on which it is traded. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. This process is known
as "mark to market." Variation margin does not represent a borrowing or lending
by the Fund but is instead a settlement between the Fund and the broker of the
amount one would owe the other if the financial futures contract expired. In
computing net asset value, the Fund will mark to market its open financial
futures positions.
Successful hedging depends on a strong correlation between the market for the
underlying securities and the futures contract market for those securities.
There are several factors that will probably prevent this correlation from being
a perfect one, and even a correct forecast of general interest rate trends may
not result in a successful hedging transaction. There are significant
differences between the securities and futures markets which could create an
imperfect correlation between the markets and which could affect the success of
a given hedge. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for financial
futures and debt securities, including technical influences in futures trading
and differences between the financial instruments being hedged and the
instruments underlying the standard financial futures contracts available for
trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
9
<PAGE>
the underlying debt securities are lower-rated and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise of skill
and judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market or interest rate trends. The Fund will bear the
risk that the price of the securities being hedged will not move in complete
correlation with the price of the futures contracts used as a hedging
instrument. Although the Adviser believes that the use of financial futures
contracts will benefit the Fund, an incorrect market prediction could result in
a loss on both the hedged securities in the Fund's portfolio and the hedging
vehicle so that the Fund's return might have been better had hedging not been
attempted. However, in the absence of the ability to hedge, the Adviser might
have taken portfolio actions in anticipation of the same market movements with
similar investment results but, presumably, at greater transaction costs. The
low margin deposits required for futures transactions permit an extremely high
degree of leverage. A relatively small movement in a futures contract may result
in losses or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount the price of a futures contract may vary either up or down
from the previous day's settlement price, at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
Finally, although the Fund engages in financial futures transactions only on
boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
event participants decide to make or take delivery, liquidity in the market
could be reduced. In addition, the Fund could be prevented from executing a buy
or sell order at a specified price or closing out a position due to limits on
open positions or daily price fluctuation limits imposed by the exchanges or
boards of trade. If the Fund cannot close out a position, it must continue to
meet margin requirements until the position is closed.
Options on Financial Futures Contracts. The Fund may buy and sell options on
financial futures contracts on debt securities, interest rate indices and
tax-exempt bond indices. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise, the writer of the option delivers the futures contract to
the holder at the exercise price. The Fund would be required to deposit with its
custodian initial and variation margin with respect to put and call options on
futures contracts written by them. Options on futures contracts involve risks
similar to the risks of transactions in financial futures contracts. Also, an
option purchased by the Fund may expire worthless, in which case the Fund would
lose the premium it paid for the option.
Other Considerations. The Fund will engage in futures and options transactions
for bona fide hedging or other non-speculative purposes to the extent permitted
by CFTC regulations. The Fund will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
which it expects to purchase. Except as stated below, the Fund's futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
10
<PAGE>
securities that the Fund owns, or futures contracts will be purchased to protect
the Fund against an increase in the price of securities, or the currency in
which they are denominated, the Fund intends to purchase. As evidence of this
hedging intent, the Fund expects that on 75% or more of the occasions on which
it takes a long futures or option position (involving the purchase of futures
contracts), the Fund will have purchased, or will be in the process of
purchasing equivalent amounts of related securities or assets denominated in the
related currency in the cash market at the time when the futures contract or
option position is closed out. However, in particular cases, when it is
economically advantageous for the Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.
As an alternative to literal compliance with the bona fide hedging definition, a
CFTC regulation permits the Fund to elect to comply with a different test, under
which the aggregate initial margin and premiums required to establish nonhedging
positions in futures contracts and options on futures will not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. The Fund will engage in
transactions in futures contracts only to the extent such transactions are
consistent with the requirements of the Code for maintaining its qualification
as a regulated investment company for federal income tax purposes.
When the Fund purchases financial futures contracts, or writes put options or
purchases call options thereon, cash or liquid securities will be deposited in a
segregated account with the Fund's custodian in an amount that, together with
the amount of initial and variation margin held in the account of the broker,
equals the market value of the futures contracts.
Options Transactions. The Fund may write listed and over-the-counter covered
call options and covered put options on securities in order to earn additional
income from the premiums received. In addition, the Fund may purchase listed and
over-the-counter call and put options. The Fund may also write straddles, which
are combinations of put and call options on the same security. The extent to
which covered options will be used by the Fund will depend upon market
conditions and the availability of alternative strategies.
The Fund will write listed and over-the-counter call options only if they are
"covered," which means that the Fund owns or has the immediate right to acquire
the securities underlying the options without additional cash consideration upon
conversion or exchange of other securities held in its portfolio. A call option
written by the Fund may also be "covered" if the Fund holds on a share-for-share
basis a covering call on the same securities where (i) the exercise price of the
covering call held is equal to or less than the exercise price of the call
written or the exercise price of the covering call is greater than the exercise
price of the call written, in the latter case only if the difference is
maintained by the Fund in cash or liquid securities in a segregated account with
the Fund's custodian, and (ii) the covering call expires at the same time as the
call written. If a covered call option is not exercised, the Fund would keep
both the option premium and the underlying security. If the covered call option
written by the Fund is exercised and the exercise price, less the transaction
costs, exceeds the cost of the underlying security, the Fund would realize a
gain in addition to the amount of the option premium it received. If the
exercise price, less transaction costs, is less than the cost of the underlying
security, the Fund's loss would be reduced by the amount of the option premium.
As the writer of a covered put option, the Fund will write a put option only
with respect to securities it intends to acquire for its portfolio and will
maintain in a segregated account with its custodian bank cash or liquid
securities with a value equal to the price at which the underlying security may
be sold to the Fund in the event the put option is exercised by the purchaser.
The Fund may also write a "covered" put option by purchasing on a
11
<PAGE>
share-for-share basis a put on the same security as the put written by the Fund
if the exercise price of the covering put held is equal to or greater than the
exercise price of the put written and the covering put expires at the same time
as or later than the put written.
When writing listed and over-the-counter covered put options on securities, the
Fund would earn income from the premiums received. If a covered put option is
not exercised, the Fund would keep the option premium and the assets maintained
to cover the option. If the option is exercised and the exercise price,
including transaction costs, exceeds the market price of the underlying
security, the Fund would realize a loss, but the amount of the loss would be
reduced by the amount of the option premium.
If the writer of an exchange-traded option wishes to terminate its obligation
prior to its exercise, it may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option previously
written. The effect of the purchase is that the Fund's position will be offset
by the Options Clearing Corporation. The Fund may not effect a closing purchase
transaction after it has been notified of the exercise of an option. There is no
guarantee that a closing purchase transaction can be effected. Although the Fund
will generally write only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange or board of trade will exist for any particular option or at any
particular time, and for some options no secondary market on an exchange may
exist.
In the case of a written call option, effecting a closing transaction will
permit the Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. In the case of a
written put option, it will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or liquid
securities. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other investments. If the Fund desires to sell a particular security
from its portfolio on which it has written a call option, it will effect a
closing transaction prior to or concurrent with the sale of the security.
The Fund will realize a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option.
The Fund will realize a loss from a closing transaction if the cost of the
closing transaction is more than the premium received for writing the option.
However, because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation in the value of the underlying security owned by the
Fund.
Over-the-Counter Options. The Fund may engage in options transactions on
exchanges and in the over-the-counter markets. In general, exchange-traded
options are third-party contracts (i.e., performance of the parties' obligations
is guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. Over-the-counter ("OTC") transactions are two-party
contracts with price and terms negotiated by the buyer and seller. The Fund will
acquire only those OTC options for which management believes the Fund can
receive on each business day at least two separate bids or offers (one of which
will be from an entity other than a party to the option) or those OTC options
valued by an independent pricing service. The Fund will write and purchase OTC
options only with member banks of the Federal Reserve System and primary dealers
in U.S. Government securities or their affiliates which have capital of at least
$50 million or whose obligations are guaranteed by an entity having capital of
at least $50 million. The SEC has taken the position that OTC options are
subject to the Fund's 10% restriction on illiquid investments. The SEC, however,
allows the Fund to exclude from the 10% limitation on illiquid securities a
portion of the value of the OTC options written by the Fund, provided that
certain conditions are met. First, the other party to the OTC options has to be
a primary U.S. Government securities dealer designated as such by the Federal
12
<PAGE>
Reserve Bank. Second, the Fund must have an absolute contractual right to
repurchase the OTC options at a formula price. If the above conditions are met,
the Fund may treat as illiquid only that portion of the OTC option's value (and
the value of its underlying securities) which is equal to the formula price for
repurchasing the OTC option, less the OTC option's intrinsic value.
Repurchase Agreements. The Fund may invest in repurchase agreements. A
repurchase agreement is a contract under which the Fund acquires a security for
a relatively short period (generally not more than seven 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 "primary dealers" in U.S. Government securities. The Adviser
will continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements. The Fund has established a procedure
providing that the securities serving as collateral for each repurchase
agreement must be delivered to the Fund's custodian either physically or in
book-entry form and that the collateral must be marked to market daily to ensure
that each repurchase agreement is fully collateralized at all times. In the
event of bankruptcy or other default by a seller of a repurchase agreement, the
Fund could experience delays in liquidating the underlying securities during the
period 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.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank or securities firm with an agreement that the Fund will buy
back the securities at a fixed future date at a fixed price plus an agreed
amount of "interest" which may be reflected in the repurchase price. Reverse
repurchase agreements are considered to be borrowings by the Fund. Reverse
repurchase agreements involve the risk that the market value of securities
purchased by the Fund with proceeds of the transaction may decline below the
repurchase price of the securities sold by the Fund which it is obligated to
repurchase. The Fund will also continue to be subject to the risk of a decline
in the market value of the securities sold under the agreements because it will
reacquire those securities upon effecting their repurchase. The Fund will not
enter into reverse repurchase agreements and other borrowings exceeding in the
aggregate 33 1/3% of the market value of its total assets. The Fund will enter
into reverse repurchase agreements only with federally insured banks or savings
and loan associations which are approved in advance as being creditworthy by the
Board of Trustees. Under procedures established by the Board of Trustees, the
Adviser will monitor the creditworthiness of the banks involved.
Forward Commitment and When-Issued 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's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
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<PAGE>
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal in value to the Fund's commitment. These
assets will be valued daily at market, and additional cash or securities will be
segregated in a separate account to the extent that the total value of the
assets in the account declines below the amount of the when-issued commitments.
Alternatively, the Fund may enter into offsetting contracts for the forward sale
of other securities that it owns.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including securities offered and sold to "qualified institutional buyers" under
Rule 144A under the 1933 Act. However, the Fund will not invest more than 10% of
its assets in illiquid investments, which include repurchase agreements maturing
in more than seven days, securities that are not readily marketable and
restricted securities. However, if the Board of Trustees determines, based upon
a continuing review of the trading markets for specific Rule 144A securities,
that they are liquid, then such securities may be purchased without regard to
the 10% limit. The Trustees may adopt guidelines and delegate to the Adviser the
daily function of determining and monitoring the liquidity of restricted
securities. The Trustees, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Trustees will carefully
monitor the Fund's investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in the Fund if qualified institutional buyers become for a time
uninterested in purchasing these restricted securities.
The Fund may acquire other restricted securities including securities for which
market quotations are not readily available. These securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the 1933 Act. Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted securities will be priced at
fair market value as determined in good faith by the Trust's Trustees.
Short Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund may engage in short-term trading in response to changes
in interest rates or other economic trends and developments, or to take
advantage of yield disparities between various fixed income securities in order
to realize capital gains or improve income. Short term trading may have the
effect of increasing portfolio turnover rate. A high rate of portfolio turnover
(100% or greater) involves corresponding higher transaction expenses and may
make it more difficult for the Fund to qualify as a regulated investment company
for federal income tax purposes.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The following investment restrictions will not be changed without approval of a
majority of the Fund's outstanding voting securities which, as used in the
Prospectus and this Statement of Additional Information, means approval by the
lesser of (1) 67% or more of the Fund's shares represented at a meeting if at
least 50% of the Fund's outstanding shares are present in person or by proxy at
that meeting or (2) more than 50% of the Fund's outstanding shares.
The Fund may not:
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<PAGE>
(1) Borrow money except from banks for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests that might otherwise
require the untimely disposition of securities, in an amount up to 15% of the
value of the Fund's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at the time the
borrowing was made. While borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not purchase any additional securities. Interest paid on
borrowings will reduce the Fund's net investment income. The borrowing
restriction set forth above does not prohibit the use of reverse repurchase
agreements, in an amount (including any borrowings) not to exceed 33-1/3% of net
assets.
(2) Pledge, hypothecate, mortgage or otherwise encumber its assets, except in an
amount up to 10% of the value of its total assets but only to secure borrowings
for temporary or emergency purposes as may be necessary in connection with
maintaining collateral in connection with writing put or call options or making
initial margin deposits in connection with the purchase or sale of financial
futures or index futures contracts and related options.
(3) Purchase securities (except obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if the purchase would cause the
Fund at the time to have more than 5% of the value of its total assets invested
in the securities of any one issuer or to own more than 10% of the outstanding
debt securities of any one issuer; provided, however, that up to 25% of the
value of the Fund's asset may be invested without regard to these restrictions.
(4) Purchase or retain the securities of any issuer, if to the knowledge of the
Fund, any officer or director of the Fund or its Adviser owns more than 1/2 of
1% of the outstanding securities of such issuer, and all such officers and
directors own in the aggregate more than 5% of the outstanding securities of
such issuer.
(5) 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.
(6) 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.
(7) Purchase the securities of any issuer if as a result more than 10% of the
value of the Fund's total assets would be invested in securities that are
subject to legal or contractual restrictions on resale ("restricted securities")
and in securities for which there are no readily available market quotations; or
enter into a repurchase agreement maturing in more than seven days, if as a
result such repurchase agreement together with restricted securities and
securities for which there are no readily available market quotations would
constitute more than 10% of the Fund's total assets.
(8) 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, but this shall not prevent the Fund from investing in municipal
obligations secured by real estate or interests in real estate.
15
<PAGE>
(9) Make loans to others, except insofar as the Fund may enter in repurchase
agreements as set forth in the Prospectus or this SAI. The purchase of an issue
of publicly distributed bonds or other securities, whether or not the purchase
was made upon the original issuance of securities, is not to be considered the
making of a loan.
(10) Invest more than 25% of its assets in the securities of the "issuers" in
any single industry; provided that there shall be no limitation on the purchase
of municipal obligations and obligations issued or guaranteed by the United
States Government, its agencies or instrumentalities. For purposes of this
limitation and that set forth in investment restriction (3) above, 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.
(11) Invest more than 5% of the value of its total assets in the securities of
issuers having a record, including predecessors, of fewer than three years of
continuous operation, except obligations issued or guaranteed by the United
States Government, its agencies or instrumentalities, unless the securities are
rated by a nationally recognized rating service.
(12) Invest for the purpose of exercising control or management of another
company.
(13) Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder. For the purpose of this restriction, collateral
arrangements with respect to options, futures contracts and options on futures
contracts and collateral arrangements with respect to initial and variation
margins are not deemed to be the issuance of a senior security.
Other Operating Policies
In order to comply with certain state regulatory policies, the Fund will not, as
a matter of operating policy, pledge, mortgage or hypothecate its portfolio
securities if the percentage of securities so pledged, mortgaged or hypothecated
would exceed 15%.
In order to comply with certain state regulatory policies, the cost of
investments in options, financial futures, stock index futures and currency
futures, other than those acquired for hedging purposes, may not exceed 10% of
the Fund's total net assets.
As a matter of operating policy, the Fund will not purchase a security if, as a
result (i) more than 10% of the Fund's total assets would be invested in the
securities of other investment companies, (ii) the Fund would hold more than 3%
of the total outstanding voting securities of any one investment company, or
(iii) more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not apply to (a)
the investment of cash collateral, received by the Fund in connection with
lending the Fund's portfolio securities, in the securities of open-end
investment companies or (b) the purchase of shares of any investment company in
connection with a merger, consolidation, reorganization or purchase of
substantially all of the assets of another investment company. Subject to the
above percentage limitations, 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. The Fund may not purchase the shares of any closed-end investment
16
<PAGE>
company except in the open market where no commission or profit to a sponsor or
dealer results from the purchase, other than customary brokerage fees.
These operating policies are not fundamental and may be changed without
shareholder approval. In order to comply with certain state regulatory
practices, certain policies, if changed, would require advance written notice to
shareholders.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trustees of the Trust, who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Trust are also officers or directors of the Adviser or officers
or directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
The following table sets forth the principal occupation or employment of the
Trustees and principal officers of the Trust during the past five years:
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<PAGE>
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
*Edward J. Boudreau, Jr.* Trustee, Chairman Chairman and Chief Executive
101 Huntington Avenue and Chief Executive Officer, the Adviser and The
Boston, MA 02199 Officer (1)(2) Berkeley Financial Group ("The
October 1944 Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital"); John Hancock Advisers
International Limited ("Advisers
International"); Chairman, Chief
Executive Officer and President,
John Hancock Funds, Inc. ("John
Hancock Funds"); John Hancock
Investor Services Corporation
("Investor Services"), First
Signature Bank and Trust Company
and Sovereign Asset Management
Corporation ("SAMCorp"); Director,
John Hancock Freedom Securities
Corporation, John Hancock Capital
Corporation and New England/Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science; Vice
Chairman and President, the Adviser
(until July 1992); Chairman, John
Hancock Distributors, Inc. (until
April, 1994).
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurnace 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
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
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<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
Higher Education (since 1995);
Receiver, the City of Chelsea
(until August 1992).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1994 Regents Chair for Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
Schering-Plough Schering-Plough Corporation
Corporation (pharmaceuticals) (retired 1996);
One Giralda Farms Director, ReCapital Corporation
Madison, NJ 07940-1000 (reinsurance) (until 1995).
October 1931
Charles F. Fretz Trustee (3) Retired; self-employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Forster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Anne C. Hodsdon* President and President and Chief Operating
101 Huntington Avenue Trustee (1)(2) Officer, the Adviser; Executive
Boston, MA 02199 Vice President, the Adviser (until
April 1953 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)
460 North Gulph Road (until 1992); Senior Vice
King of Prussia, PA 19406 President, Finance UGI Corp.
February 1938 (holding company, public utilities,
LPGAS).
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
18
<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief
3810 W. Alabama Executive Officer and Director,
Houston, TX 77027 Linbeck Corporation (a holding
August 1934 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
Eastern Corporation (a diversified
energy company), Daniel Industries,
Inc. (manufacturer of gas measuring
products and energy related
equipment), GeoQuest International,
Inc. (a geophysical consulting
firm) (1980-1993); Director,
Greater Houston Partnership.
Patricia P. McCarter Trustee (3) Director and Secretary, The
Swedesford Road McCarter Corp. (machine
RD #3, Box 121 manufacturer).
Malvern, PA 19355
May 1928
Steven R. Pruchansky Trustee (1)(3) Director and President, Mast
360 Horse Creek Drive, #208 Holdings, Inc. (since 1991);
Naples, FL 33942 DirectorFirst Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust
(1982-1994); President, Maxwell
Building Corp. (until 1991).
Richard S. Scipione* Trustee General Counsel, John Hancock
John Hancock Place Mutual Life Insurance Company;
P.O. Box 111 Director, the Adviser, Advisers
Boston, MA 02199 International, John Hancock Funds,
August 1937 Investor Services, John Hancock
Distributors, Inc., John Hancock
Subsidiaries, Inc., John Hancock
Property and Casualty Insurance and
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
19
<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
its affiliates (until November
1993), SAMCorp and NM Capital;
Trustee, The Berkeley Group;
Director, JH Networking Insurance
Agency, Inc.
Norman H. Smith Trustee (3) Lieutenant General, USMC, Deputy
Rt. 1, Box 249 E Chief of Staff for Manpower and
Linden, VA 22642 Reserve Affairs, Headquarters
March 1933 Marine Corps; Commanding General
III Marine Expeditionary Force/3rd
Marine Division (retired 1991).
John P. Toolan Trustee (3) Director, The Smith Barney Muni
13 Chadwell Place Bond Funds, The Smith Barney
Morristown, NJ 07960 Tax-Free Money Fund, Inc., Vantage
September 1930 Money Market Funds (mutual funds),
The Inefficient- Market Fund, Inc.
(closed- end investment company)
and Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired 1991);
Director, Smith Barney, Inc.,
Mutual Management Company and
Smith, Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman* Vice Chairman and Vice Chairman and Chief Investment
101 Huntington Avenue Chief Investment Officer, the Adviser; President,
Boston, MA 02199 Officer(2) the Adviser (until December 1994);
July 1938 Director, the Adviser, Advisers
International, John Hancock Funds,
Investor Services, SAMCorp., and NM
Capital; Senior Vice President, The
Berkeley Group.
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
20
<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address With the Trust During Past Five Years
- ---------------- -------------- ----------------------
James B. Little* Senior Vice President Senior Vice President, the Adviser,
101 Huntington Avenue and Chief Financial The Berkeley Group, John Hancock
Boston, MA 02199 Officer Funds and Investor Services.
February 1935
James J. Stokowski* Vice President and Vice President, the Adviser.
101 Huntington Avenue Treasurer
Boston, MA 02199
November 1946
Susan S. Newton* Vice President and Vice President and Assistant
101 Huntington Avenue Secretary Secretary, the Adviser; Vice
Boston, MA 02199 President and Secretary, John
March 1950 Hancock Funds, Investor Services
and John Hancock Distributors, Inc.
(until 1994); Secretary, SAM Corp;
Vice President, The Berkeley Group.
John A. Morin* Vice President Vice President, the Adviser,
101 Huntington Avenue Investor Services and John Hancock
Boston, MA 02199 Funds; Counsel, John Hancock Mutual
July 1950 Life Insurance Company; Vice
President and Assistant Secretary,
The Berkeley Group.
</TABLE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or Directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
21
<PAGE>
As of September 4, 1996, the officers and Trustees of the Trust as a group
beneficially owned less than 1% of the outstanding shares of the Fund. On such
date, the following shareholders were the only record holders and beneficial
owners of 5% or more of the shares of the Fund:
Number of Percentage of
shares of total outstanding
Name and Address Class of beneficial shares of the
of Shareholder Shares interest owned class of the Fund
- -------------- ------ -------------- -----------------
Merrill Lynch Pierce Class B 3,064,279.58 19.03%
Fenner & Smith Inc.
4800 Deerlake Drive East
Jacksonville, FL
32246-6484
At such date, no other person(s) owned of record or was known by the Trust to
beneficially own 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 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.
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.
22
<PAGE>
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 tables
provide information regarding the compensation paid by the Fund and the other
investment companies in the John Hancock Fund Complex to the Independent
Trustees and the Advisory Board members for their services for the Fund's fiscal
year ended October 31, 1995. The two non-Independent Trustees, Mr. Boudreau and
Ms. Hodsdon, and each of the officers of the Trust are interested persons of the
Adviser, are compensated by the Adviser and its affiliates and receive no
compensation from the Fund for their services. The Trustees not listed below
were not trustees of the Trust during its most recently completed fiscal year.
Total Compensation
Aggregate from the Fund and John
Independent Compensation Hancock Fund Complex to
Trustees from the Fund(1) Trustees(2)
- -------- ---------------- -----------
James F. Carlin $ 1,313 $ 60,700
William H. Cunningham(t) 3,175 69,700
Charles F. Fretz 0 56,200
Harold R. Hiser. Jr.(t) 107 60,200
Charles L. Ladner 1,671 60,700
Leo E. Linbeck, Jr. 4,145 73,200
Patricia P. McCarter 1,671 60,700
Steven R. Pruchansky 1,730 62,700
Norman H. Smith 1,730 62,700
John P. Toolan(t) 1,298 60,700
- ---------------------- ------- --------
Total $16,840 $627,500
(1) Compensation made pursuant to different compensation arrangements then in
effect for the fiscal year ended October 31, 1995.
(2) Total compensation from the Fund and the other John Hancock funds is as of
December 31, 1995. All Trustees except Messrs. Cunningham and Linbeck are
Trustees or Directors of 33 funds in the John Hancock Complex. Messrs.
Cunningham and Linbeck are Trustees or Directors of 31 funds.
23
<PAGE>
(t) As of December 31, 1995, the value of aggregate accrued deferred
compensation from all funds in the John Hancock Fund complex for Mr.
Cunningham was $54,413, for Mr. Hiser was $31,324 and for Mr. Toolan was
$71,437 under the John Hancock Deferred Compensation Plan for Independent
Trustees/Directors.
Total Compensation
from the Funds in
Aggregate John Hancock
Compensation Fund Complex to
Advisory Board* from the Fund Advisory Board*
- --------------- ------------- ---------------
R. Trent Campbell $ 750 $ 70,000
Mrs. Lloyd Bentsen 750 63,000
Thomas R. Powers 750 63,000
Thomas B. McDade 750 63,000
------ --------
TOTAL $3,000 $259,000
* As of December 31, 1995.
INVESTMENT ADVISORY AND OTHER SERVICES
The Fund receives its investment advice from the Adviser. Investors should refer
to the Prospectuses for a description of certain information concerning the
investment management contract. Each of the Trustees and principal officers
affiliated with the Trust who is also an affiliated person of the Adviser is
named above, together with the capacity in which such person is affiliated with
the Trust and the Adviser.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-
7603, was organized in 1968 and has more than $18 billion in total assets under
management in its capacity as investment adviser to the Fund and the other
mutual funds and publicly traded investment companies in the John Hancock group
of funds having a combined total of over 1,080,000 shareholders. The Adviser is
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 most recognized and respected financial institutions in
the nation. With total assets under management of more than $80 billion, the
Life Company is one of the ten largest life insurance companies in the United
States, and carries high ratings from Standard & Poor's and A.M. Best's. Founded
in 1862, the Life Company has been serving clients for over 130 years.
The Trust, on behalf of the Fund, has entered into an investment management
contract with the Adviser. Under the investment management contract, the Adviser
provides the Fund with (i) a continuous investment program, consistent with the
Fund's stated investment objective and policies and (ii) supervision of all
aspects of the Fund's operations except those that are delegated to a custodian,
transfer agent or other agent. The Adviser is responsible for the day-to-day
management of the Fund's portfolio assets.
24
<PAGE>
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made, insofar as feasible,
for the respective funds or clients in a manner deemed equitable to all of them.
To the extent that transactions on behalf of more than one client of the Adviser
or its affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
No person other than the Adviser and 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 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.
All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Fund (including fees of Trustees of the Trust
who are not "interested persons," as such term is defined in the Investment
Company Act, but excluding certain distribution-related expenses required to be
paid by the Adviser or John Hancock Funds), and the continuous public offering
of the shares of the Fund are borne by the Fund. Class expenses properly
allocable to either Class A or Class B shares will be borne exclusively by such
class of shares, subject to conditions the Internal Revenue Service imposes with
respect to multiple class structures.
As provided by the investment management contract, the Fund pays the Adviser an
investment management fee, which is accrued daily and paid monthly in arrears at
the following rates of the Fund's average daily net assets as follows:
Net Asset Value Annual Rate
--------------- -----------
The first $75 million 0.625%
The next $75 million 0.5625%
Over $150 million 0.50%
The Adviser may temporarily reduce its advisory fee or make other arrangements
to reduce the Fund's expenses to a specified percentage of average daily net
assets. The Adviser retains the right to re-impose the advisory fee and recover
any other payments to the extent that, at the end of any fiscal year, the Fund's
annual expenses fall below this limit.
For the period from November 1, 1994 to December 22, 1994 and for the fiscal
years ended October 31, 1994 and 1993, the Fund paid TFMC, its former investment
adviser, advisory fees in the amounts of $161,643, $886,380 and $541,737,
respectively. For the period from December 22, 1994 to October 31, 1995, the
Fund paid the Adviser advisory fees in the amount of $830,016. During the period
from December 22, 1994 to April 17, 1995, the Adviser paid subadvisory fees in
the amount of $147,903 to Transamerica Investment Services, Inc.
If the total of all ordinary business expenses of the Fund for any fiscal year
exceeds limitations prescribed in any state in which shares of the Fund are
qualified for sale, the fee payable to the Adviser will be reduced to the extent
required by these limitations. At this time, the most restrictive limit on
25
<PAGE>
expenses imposed by a state requires that expenses charged to the Fund in any
fiscal year may not exceed 2 1/2% of the first $30,000,000 of the Fund's average
net assets, 2% of the next $70,000,000 of such net assets and 1 1/2% of the
remaining average net assets. When calculating the above limit, the Fund may
exclude interest, brokerage commissions and extraordinary expenses.
Pursuant to the investment management contract, the Adviser is not liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which the contract relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its duties or from its reckless disregard of
the obligations and duties under the contract.
Under the investment management contract, the Fund may use the name "John
Hancock" or any name derived from or similar to it only for as long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If the Fund's investment management contract is no longer in
effect, the Fund (to the extent that it lawfully can) will cease to use such
name or any other name indicating that it is advised by or otherwise connected
with the Adviser. In addition, the Adviser or the Life Company may grant the
non-exclusive right to use the name "John Hancock" or any similar name to any
other corporation or entity, including but not limited to any investment company
of which the Life Company or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
The investment management contract and the distribution contract discussed below
each continue in effect from year to year if approved annually by vote of a
majority of the Trustees who are not interested persons of one of the parties to
the contract, cast in person at a meeting called for the purpose of voting on
such approval, and by either the Trustees or the holders of a majority of the
Fund's outstanding voting securities. Each of these contracts automatically
terminates upon assignment and may be terminated without penalty on 60 days'
notice at the option of either party to the respective contract or by vote of a
majority of the outstanding voting securities of the Fund.
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 Adviser as adviser to the Fund to permit services under the
Agreement to be provided to the Funds by the Adviser and its affiliates. The
Services Agreement was terminated during the fiscal year 1995.
For the fiscal years ended October 31, 1995, 1994 and 1993, the Fund paid to
TFMC (and to the Adviser for the period from December 22, 1994 to January 16,
1995) administrative services fees of $10,565, $88,709 and $69,485,
respectively.
26
<PAGE>
DISTRIBUTION AGREEMENT
The Fund has entered into a distribution contract with John Hancock Funds. Under
the contract, John Hancock Funds is obligated to use its best efforts to sell
shares of each class of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock Funds. John Hancock Funds accepts orders for the
purchase of the shares of the Fund which are continually offered at net asset
value next determined, plus any applicable sales charge. In connection with the
sale of Class A or Class B shares, John Hancock Funds and Selling Brokers
receive compensation in the form of a sales charge imposed, in the case of Class
A shares, at the time of sale or, in the case of Class B shares, John Hancock
Funds and Selling Brokers receive compensation in the form of a sales charge
imposed, in the case of Class A shares, at the time of sale or, in the case of
Class B shares, on a deferred basis. Upon notice to all Selling Brokers, John
Hancock Funds may allow them up to the full applicable sales charge during
periods specified in such notice. During these periods, Selling Brokers may be
deemed to be underwriters as that term is defined in the 1933 Act. The sales
charges are discussed further in the Prospectus.
The Fund's Trustees adopted Distribution Plans with respect to Class A and Class
B shares (together, the "Plans") pursuant to Rule 12b-1 under the Investment
Company Act. Under the Plans, the Fund will pay distribution and service fees at
an aggregate annual rate of up to 0.25% and 1.00%, respectively, of the Fund's
daily net assets attributable to shares of that class. However, the amount of
the service fee will not exceed 0.25% of the Fund's average daily net assets
attributable to each class of shares. In accordance with generally accepted
accounting principles, the Fund does not treat unreimbursed distribution
expenses 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 under the Class B Plan 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 John Hancock Funds 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 to Selling Brokers
and others (including affiliates of John Hancock Funds) engaged in the sale of
Fund shares; (ii) marketing, promotional and overhead expenses incurred in
connection with the distribution of Fund shares; and (iii) with respect to Class
B shares only, interest expenses on unreimbursed payments made to, or on account
of, account executives of selected broker-dealers (including affiliates of John
Hancock Funds) and others who furnish personal and account maintenance services
to shareholders of the relevant class of the Fund. For the fiscal year ended
October 31, 1995, an aggregate of $5,853,826 of Distribution Expenses or 3.77%
of the average net assets of the Fund's Class B Shares was not reimbursed or
recovered by John Hancock Funds through the receipt of deferred sales charges or
Rule 12b-1 fees in prior periods.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis. During the fiscal year ended October 31, 1995, the Fund paid
John Hancock Funds the following amounts of expenses with respect to the Class A
and Class B shares of the Fund:
27
<PAGE>
Expense Items
Interest,
Printing and Carrying
Mailing of Compensation or Other
Prospectus to to Selling Finance
Advertising Shareholders Brokers Charges
----------- ------------ ------- -------
Class A shares $ 5,882 $1,187 $ 5,714 $ 0
Class B shares $62,187 $6,679 $525,782 $666,273
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
without penalty, (a) by vote of a majority of the Independent Trustees, (b) by a
vote of a majority of the Fund's outstanding shares of the applicable class in
each case upon 60 days' written notice to John Hancock Funds and (c)
automatically in the event of assignment. 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. And finally, each of the Plans provides that no material amendment to the
Plan will, in any event, be effective unless it is approved by a 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. In adopting the Plans the
Trustees concluded that, in their judgment, there is a reasonable likelihood
that the Plans will benefit the holders of the applicable class of shares of the
Fund.
When the Trust seeks an Independent Trustee to fill a vacancy or as a nominee
for election by shareholders, the selection or nomination of the Independent
Trustee is under resolutions adopted by the Trustees contemporaneously with
their adoption of the Plans, committed to the discretion of the Committee on
Administration of the Trustees. The members of the Committee on Administration
are all Independent Trustees and are identified in this Statement of Additional
Information under the heading "Those Responsible for Management."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the mean
between the current closing bid and asked prices.
28
<PAGE>
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank based on London currency
exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on
the date of any determination of the Fund's NAV.
The Fund will not price its securities on the following national holidays: New
Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor
Day; Thanksgiving Day; and Christmas Day.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then only
will be issued for full shares. The Trustees reserve the right to change or
waive the Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares, the investor is
entitled to cumulate current purchases with the greater of the current value (at
offering price) of the Class A shares of the Fund, or if John Hancock Investor
Services ("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. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
registered investment management company.
29
<PAGE>
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee or officer of the Trust; a Director or officer of the Adviser and
its affiliates or Selling Brokers; employees or sales representatives of
any of the foregoing; retired officers employees or Directors of any of the
foregoing; a member of the immediate family (spouse, children, mother,
father, sister, brother, mother-in-law, father-in-law) of any of the
foregoing; or any fund, pension, profit sharing or other benefit plan of
the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into an agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception of
the Fund account, may purchase Class A shares with no initial sales charge.
However, if the shares are redeemed within 12 months after the end of the
calendar year in which the purchase was made, a CDSC will be imposed at the
following rate:
Amount Invested CDSC RATE
- --------------- ---------
$1 to $4,999,000 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transaction involving
other investment companies or personal holding companies.
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.
30
<PAGE>
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of
the Fund and shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. The reduced sales loads are also applicable to investments
made over a specified period pursuant to a Letter of Intention (LOI), which
should be read carefully prior to its execution by an investor. The Fund offers
two options regarding the specified period for making investments under the LOI.
All investors have the option of making their investments over a period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
qualified retirement plan, however, may opt to make the necessary investments
called for by the LOI over a forty-eight (48) month period. These qualified
retirement plans include IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs) and
457 plans. Such an investment (including accumulations and combinations) must
aggregate $100,000 or more invested during the specified period from the date of
the LOI or from a date within ninety (90) days prior thereto, upon written
request to 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
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 Class A shares will be released. If the total investment specified in the
LOI is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales 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 Class A 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 Class A shares and
may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of a sales charge so that the Fund will receive the full amount
of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a CDSC at the rates set forth in the
Prospectus as a percentage of the dollar amount subject to the CDSC. The charge
will be assessed on an amount equal to the lesser of the current market value or
the original purchase cost of the Class B shares being redeemed. 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.
Class B shares are not available to 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.
31
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
dividend and capital gain reinvestment, and next from the shares you have held
the longest during the six-year period. For this purpose, the amount of any
increase in a share's value above its initial purchase price is not regarded as
a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price. Upon redemption, appreciation is effective only on a per share basis for
those shares being redeemed. Appreciation of shares cannot be redeemed CDSC free
at the account level.
When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares
(40 shares X $2) - 80
----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase. See the
Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in the circumstances defined below:
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<PAGE>
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" in the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account value,
including reinvested dividends, at the time you established your periodic
withdrawal plan and 12% of the value of subsequent investments (less
redemptions) in that account at the time you notify Investor Services.
(Please note that this waiver does not apply to periodic withdrawal plan
redemptions of Class A shares that are subject to a CDSC).
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other qualified plans as
described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions under
the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under Section 401(a) of the Code
(such as 401(k), Money Purchase Pension Plan, Profit Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares prior
to May 15, 1995.
Please see matrix for reference.
33
<PAGE>
CDSC Waiver Matrix for Class B Funds
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions or in periodic
12% of account payments
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or 12% value annually
of account value in periodic
annually in payments
periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for annuity Waived for annuity Waived for annuity 12% of account
payments (72t)or payments (72t)or payments (72t)or value annually
12% of account 12% of account 12% of account in periodic
value annually in value annually in value annually in payments
periodic payments periodic payments periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ------------------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Return of
Excess Waived Waived Waived Waived N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services at the time you make your redemption. The waiver will be
granted once Investor Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, he will incur a brokerage charge. Any such
security would be valued for the purpose of making such payment at the same
value as used in determining the Fund's net asset value. The Fund has, however,
elected to be governed by Rule 18f-1 under the 1940 Act. Under that rule, the
Fund must redeem its shares solely in cash except to the extent that the
redemption payments to any shareholder during any 90- day period would exceed
the lesser of $250,000 or 1% of the net asset value of the Fund at the beginning
of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. As described more fully in the Prospectus, the Fund permits
exchanges of shares of any class for shares of the same class in any other John
Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Prospectus, the Fund
permits the establishment of a Systematic Withdrawal Plan. Payments under this
plan represent proceeds arising from the redemption of Fund shares. Since the
redemption price of Fund shares may be more or less than the shareholder's cost,
depending upon the market value of the securities owned by the Fund at the time
of redemption, the distribution of cash pursuant to this plan may result in
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 Investor Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is explained fully
in the Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic Accumulation
Program may be revoked by 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 checks.
35
<PAGE>
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
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund, $.01
par value per share. Under the Declaration of Trust, the Trustees have the
authority to create and classify shares of beneficial interest in separate
series, without further action by shareholders. As of the date of this Statement
of Additional Information, the Trustees have authorized shares of the Fund and
one other series. Additional series may be added in the future. The Declaration
of Trust also authorizes the Trustees to classify and reclassify the shares of
the Fund, or any new series of the Trust, into one or more classes. 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.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of the Fund. A sales
charge will be imposed either at the time of the purchase, for Class A shares,
or on a contingent deferred basis, for Class B shares. For Class A shares, no
sales charge is payable at the time of purchase on investments of $1 million or
more, but for such investments a contingent deferred sales charge may be imposed
in the event of certain redemption transactions within one year of purchase.
Class A shares and Class B shares have certain exclusive voting rights on
matters relating to their respective distribution plans. The different classes
of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
36
<PAGE>
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to Class A and Class B shares will be
borne exclusively by that class, (ii) Class B shares will pay higher
distribution and service fees than Class A shares, and (iii) each of Class A and
Class B shares will bear any other class expenses properly allocable to such
class of shares, subject to the conditions the Internal Revenue Service imposes
with respect to multiple-class structures. Similarly, the net asset value per
share may vary depending on the class of shares purchased.
In the event of liquidation, shareholders are entitled to share pro rata in the
net assets of the Fund available for distribution to such shareholders. Shares
entitled their holders to one vote per share, are freely transferable and have
no preemptive, subscription or conversion rights. When issued, shares are fully
paid and non-assessable by the Trust, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Trust has no intention of holding annual meetings of shareholders.
Trust shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any Fund shareholder held
personally liable by reason of being or having been a shareholder. The
Declaration of Trust also provides that no series of the Trust shall be liable
for the liability of any other series. Liability is therefore limited to
circumstances in which the Fund itself would be unable to meet its obligations,
and the possibility of this occurrence is remote.
Notwithstanding the fact that the Prospectus is a combined prospectus for the
Fund and other John Hancock mutual funds, the Fund shall not be liable for the
liabilities of any other John Hancock mutual fund.
TAX STATUS
The Fund is treated as a separate entity for accounting and tax purposes. The
Fund has qualified and elected to be treated as a "regulated investment company"
under Subchapter M of the Code, and intends to continue to so qualify for each
taxable year. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, the Fund will not be subject to federal
income tax on taxable income (including net realized capital gains) which is
distributed to shareholders at least annually in accordance with the timing
requirements of the Code.
37
<PAGE>
The Fund will be subject to a 4% non-deductible federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to avoid liability for such tax by satisfying
such distribution requirements.
The Fund expects to qualify to pay "exempt-interest dividends," as defined in
the Code. To qualify to pay exempt-interest dividends, the Fund must, at the
close of each quarter of its taxable year, have at least 50% of the value of its
total assets invested in municipal securities whose interest is excluded from
gross income under Section 103(a) of the Code. In purchasing municipal
securities, the Fund intends to rely on opinions of nationally recognized bond
counsel for each issue as to the excludability of interest on such obligations
from gross income for federal income tax purposes. The Fund will not undertake
independent investigations concerning the tax-exempt status of such obligations,
nor does it guarantee or represent that bond counsels' opinions are correct.
Bond counsels' opinions will generally be based in part upon covenants by the
issuers and related parties regarding continuing compliance with federal tax
requirements. Tax laws enacted principally during the 1980's not only had the
effect of limiting the purposes for which tax-exempt bonds could be issued and
reducing the supply of such bonds, but also increased the number and complexity
of requirements that must be satisfied on a continuing basis in order for bonds
to be and remain tax-exempt. If the issuer of a bond or a user of a
bond-financed facility fails to comply with such requirements at any time,
interest on the bond could become taxable, retroactive to the date the
obligations was issued. In that event, a portion of the Fund's distributions
attributable to interest the Fund received on such bond for the current year and
for prior years could be characterized or recharacterized as taxable income. The
availability of tax-exempt obligations and the value of the Fund's portfolio may
be affected by restrictive federal income tax legislation enacted in recent
years or by similar future legislation.
If the Fund satisfies the applicable requirements, dividends paid by the Fund
which are attributable to tax exempt interest on municipal securities and
designated by the Fund as exempt-interest dividends in a written notice mailed
to its shareholders within sixty days after the close of its taxable year may be
treated by shareholders as items of interest excludable from their gross income
under Section 103(a) of the Code. The recipient of tax-exempt income is required
to report such income on his federal income tax return. However, a shareholder
is advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" under Section 147(a)(1) with respect to some or
all of the tax-exempt obligations held by the Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund is not deductible to the extent it is deemed related to the Fund's
exempt-interest dividends. Pursuant to published guidelines, the Internal
Revenue Service may deem indebtedness to have been incurred for the purpose of
purchasing or carrying shares of the Fund even though the borrowed funds may not
be directly traceable to the purchase of shares.
Although all or a substantial portion of the dividends paid by the Fund may be
excluded by the Fund's shareholders from their gross income for federal income
tax purposes, the Fund may purchase specified private activity bonds, the
interest from which (including the Fund's distributions attributable to such
interest) may be a preference item for purposes of the federal alternative
minimum tax (both individual and corporate). All exempt-interest dividends from
the Fund, whether or not attributable to private activity bond interest, may
increase a corporate shareholder's liability, if any, for corporate alternative
38
<PAGE>
minimum tax and will be taken into account in determining the extent to which a
shareholder's Social Security or certain railroad retirement benefits are
taxable.
Distributions other than exempt-interest dividends from the Fund's current or
accumulated earnings and profits ("E&P") will be taxable under the Code for
investors who are subject to tax. Taxable distributions include distributions
from the Fund that are attributable to (i) taxable income, including but not
limited to taxable bond interest, recognized market discount income, original
issue discount income accrued with respect to taxable bonds, income from
repurchase agreements, income from securities lending, income from dollar rolls,
income from interest rate swaps, caps, floors and collars, and a portion of the
discount from certain stripped tax-exempt obligations or their coupons or (ii)
capital gains from the sale of securities or other investments (including from
the disposition of rights to when-issued securities prior to issuance) or from
options and futures contracts. If these distributions are paid from the Fund's
"investment company taxable income," they will be taxable as ordinary income;
and if they are paid from the Fund's "net capital gain," they will be taxable as
long-term capital gain. (Net capital gain is the excess (if any) of net
long-term capital gain over net short-term capital loss, and investment company
taxable income is all taxable income and capital gains, other than net capital
gain, after reduction by deductible expenses.) Some distributions may be paid in
January but may be taxable to shareholders as if they had been received on
December 31 of the previous year. The tax treatment described above will apply
without regard to whether distributions are received in cash or reinvested in
additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Amounts that are not allowable as a deduction in computing
taxable income, including expenses associated with earning tax-exempt interest
income, do not reduce the Fund's current earnings and profits for these
purposes. Consequently, the portion, if any, of the Fund's distributions from
gross tax-exempt interest income that exceeds its net tax-exempt interest would
be taxable as ordinary income to the extent of such disallowed deductions even
though such excess portion may represent an economic return of capital.
Shareholders who have chosen automatic reinvestment of their distributions will
have a federal tax basis in each share received pursuant to such a reinvestment
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received in the
reinvestment.
After the close of each calendar year, the Fund will inform shareholders of the
federal income tax status of its dividends and distributions for such year,
including the portion of such dividends that qualifies as tax-exempt and the
portion, if any, that should be treated as a tax preference item for purposes of
the federal alternative minimum tax. Shareholders who have not held shares of
the Fund for its full taxable year may have designated as tax-exempt or as a tax
preference item a percentage of distributions which is not equal to the actual
amount of tax-exempt income or tax preference item income earned by the Fund
during the period of their investment in the Fund.
The amount of net realized capital gains, if any, in any given year will vary
depending upon the Adviser's current investment strategy and whether the Adviser
believes it to be in the best interest of the Fund to dispose of portfolio
securities that will generate capital gains or to enter into options or futures
transactions. At the time of an investor's purchase of Fund shares, a portion of
the purchase price is often attributable to realized or unrealized appreciation
in the Fund's portfolio. Consequently, subsequent distributions on these shares
from such appreciation may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
39
<PAGE>
below the investor's cost for such shares, and the distributions in reality
represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the exchange
privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's tax holding period for the shares
and subject to the special rules described below. A sales charge paid in
purchasing Class A shares of the Fund cannot be taken into account for purposes
of determining gain or loss on the redemption or exchange of such shares within
ninety (90) days after their purchase to the extent Class A shares of the Fund
or another John Hancock fund are subsequently acquired without payment of a
sales charge pursuant to the reinvestment or exchange privilege. This
disregarded charge will result in an increase in the shareholder's tax basis in
the shares subsequently acquired. Also, any loss realized on a redemption or
exchange may be disallowed to the extent the shares disposed of are replaced
with other shares of the Fund within a period of sixty-one (61) days beginning
thirty (30) days before and ending thirty (30) days after the shares are
disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be disallowed to the extent of any
exempt-interest dividends paid with respect to such shares and, to the extent in
excess of the disallowed amount, will be treated as a long-term capital loss to
the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess of net long-term capital gain over net short-term
capital loss in any year. The Fund will not in any event distribute net capital
gain realized in any year to the extent that a capital loss is carried forward
from prior years against such gain. To the extent such excess was retained and
not exhausted by the carryforward of prior years' capital losses, it would be
subject to Federal income tax in the hands of the Fund. Upon proper designation
of this amount by the Fund, each shareholder would be treated for Federal income
tax purposes as if the Fund had distributed to him on the last day of its
taxable year his pro rata share of such excess, and he had paid his pro rata
share of the taxes paid by the Fund and reinvested the remainder in the Fund.
Accordingly, each shareholder would (a) include his pro rata share of such
excess as long-term capital gain in his return for his taxable year in which the
last day of the Fund's taxable year falls, (b) be entitled either to a tax
credit on his return for, or to a refund of, his pro rata share of the taxes
paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his
shares in the Fund by the difference between his pro rata share of this excess
and his pro rata share of these taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset 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 to shareholders. As of
October 31, 1995, the Fund had capital loss carryforwards of $3,216,205 of which
$2,785,979 expires in 2002 and $430,226 expires in 2003.
Dividends and capital gain distributions from the Fund will not qualify for the
dividends-received deduction for corporations.
40
<PAGE>
The Fund is required to accrue income on any debt securities that have more than
a de minimis amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options and futures contracts may also
require the Fund to recognize gain within a concurrent receipt of cash. However,
the Fund must distribute to shareholders for each taxable year substantially all
of its net income and net capital gains, including such income or gain, to
qualify as a regulated investment company and avoid liability for any federal
income or excise tax. Therefore, the Fund may have to dispose of its portfolio
securities under disadvantageous circumstances to generate cash, or may have to
leverage itself by borrowing the cash, to satisfy these distribution
requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) 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 or municipal
obligations of issuers in the state in which a shareholder is subject to tax,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. However, the Fund's
taxable distributions may not be subject to backup withholding if the Fund can
reasonably estimate that at least 95% of its distributions for the year will be
exempt-interest dividends. The Fund may refuse to accept an application that
does not contain any required taxpayer identification number or certification
that the number provided is correct. If the backup withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Any amounts withheld may be credited against a shareholder's U.S. federal income
tax liability. Investors should consult their tax advisers about the
applicability of the backup withholding provisions.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into futures and options transactions.
Certain options and futures transactions undertaken by the Fund may cause the
Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, some of the Fund's losses on its transactions involving options and
futures contracts and/or offsetting or successor portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's taxable income or gain. Certain of such transactions may also cause the
Fund to dispose of investments sooner than would otherwise have occurred. These
transactions may thereafter affect the amount, timing and character of the
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Fund's distributions to shareholders. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options and futures transactions in order to seek to minimize any potential
adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as insurance companies and financial institutions. Dividends
(including exempt-interest dividends), capital gain distributions and ownership
of or gains realized on the redemption (including an exchange) of shares of the
Fund 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 Fund
investment is effectively connected will be subject to U.S. Federal income tax
treatment that is different from that described above. These investors may be
subject to nonresident alien withholding tax at the rate of 30% (or a lower rate
under an applicable tax treaty), on amounts treated as ordinary dividends from
the Fund and, unless an effective IRS Form W-8 or authorized substitute for Form
W-8 is on file, to 31% backup withholding on certain other payments from the
Fund. Non-U.S. investors should consult their tax advisors 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 April 30, 1996, the annualized yields on Class A and
Class B shares of the Fund were 6.06% and 5.58%, respectively. The average
annual total return of the Class B shares of the Fund for the 1 year and 5 year
periods ended April 30, 1996 and since inception on August 29, 1986 were 0.38%
7.00% and 6.38%, respectively and reflect payment of the applicable CDSC at the
end of the period.
The average annual total return of Class A shares of the Fund for the 1 year
period ended April 30, 1996 and since inception on December 31, 1993 were 1.31%
and 2.11%, respectively, and reflect payment of the maximum sales charge. 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:
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
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Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period (NAV where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Fund which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt. The tax equivalent yields for the
Fund's Class A and Class B Shares at the maximum 36% tax rate for the 30-day
period ended April 30, 1996 were 9.47% and 8.72%, 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 hypothetical $1,000 investment made at
the beginning of the 1 year, 5 year and life-of-fund periods.
Because each share has its own sales charge and fee structure, the
classes have different performance results. In the case of Class A shares or
Class B shares, this calculation assumes the maximum sales charge is included in
the initial investment or the CDSC 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.
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 sales charge on
Class A shares or the CDSC on Class B shares into account. The "distribution
rate" is determined by annualizing the result of dividing the declared dividends
43
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of the Fund during the period stated by the maximum offering price or net asset
value at the end of the period. Excluding the Fund's sales charge on Class A
shares and the CDSC on Class B shares from a total return calculation produces a
higher total return figure.
In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest is
used in lieu of the yield to maturity. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value exceeds the then-remaining portion of original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value is less than the then-remaining portion of original issue discount
(market premium), the yield to maturity is based on the market value.
From time to time, in reports and promotional literature, the Fund's
yield and total return will be compared to indices of mutual funds and bank
deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed
Income Fund Performance Analysis," a monthly publication which tracks net
assets, total return, and yield on fixed income mutual funds in the United
States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well 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, MORNINGSTAR, and BARRON'S may also be utilized.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by its investment committee, which consists of officers and
directors of the Adviser and affiliates and officers and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the 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
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Rules of Fair Practice of the NASD and other policies that the Trustees may
determine, the Adviser may consider sales of shares of the Fund as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitments to allocate portfolio transactions upon any
prescribed basis. While the Adviser's officers will be primarily responsible for
the allocation of the Fund's brokerage business, the policies and practices of
the Adviser in this regard must be consistent with the foregoing and will at all
times be subject to review by the Trustees.
For the year ended October 31, 1995, the Fund paid $6,650 in brokerage
commissions. For the years ended October 31, 1994 and 1993, the Fund paid no
brokerage commissions.
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 Directors that the price is
reasonable in light of the services provided and to policies that the Directors
may adopt from time to time. During the fiscal year ended October 31, 1995, the
Fund did not pay commissions to compensate brokers for research services such as
industry, economic and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Freedom Securities Corporation and its subsidiaries,
three of which, Tucker Anthony Incorporated ("Tucker Anthony") John Hancock
Distributors, Inc. ("John Hancock Distributors") and Sutro & Company, Inc.
("Sutro"), are broker-dealers ("Affiliated Brokers"). Pursuant to procedures
determined by the Trustees and consistent with the above policy of obtaining
best net results, the Fund may execute portfolio transactions with or through
Affiliated Brokers. During the year ended October 31, 1995, the Fund did not
execute any portfolio transactions with 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
45
<PAGE>
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 Adviser or the Affiliated Brokers. Because the
Adviser, which is affiliated with the Affiliated Brokers, has, as an investment
adviser to the Fund, the obligation to provide investment management services,
which includes elements of research and related investment skills, such research
and related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria. The Fund will not effect principal transactions with
Affiliated Brokers. The Fund may, however, purchase securities from other
members of underwriting syndicates of which Tucker Anthony and Sutro are
members, but only in accordance with the policy set forth above and procedures
adopted and reviewed periodically by the Trustees.
Brokerage or other transactions costs of a Fund are generally commensurate with
the rate of portfolio activity. The Fund's portfolio turnover rates for the
fiscal years ended October 31, 1995 and 1994 were 64% and 62%, respectively.
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.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation ("Investor Services"), 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 monthly a transfer agent fee of $20 per account for the Class A shares
and $22.50 per account for the Class B shares on an annual basis, 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, 89 South Street, Boston,
Massachusetts. Under the custodian agreement, the custodian performs custody,
portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200 Clarendon
Street, Boston, Massachusetts 02116. The independent auditors audit and render
an opinion on the Fund's annual financial statements and review the Fund's
annual income tax returns. With the exception of the financial statements for
the six-month period ended April 30, 1996, 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
46
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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.
47
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APPENDIX A
CORPORATE AND TAX-EXEMPT BOND RATINGS
Moody's Investors Service, Inc. ("Moody's)
Aaa, Aa, A and Baa - Tax-exempt bonds rated Aaa are judged to be of the "best
quality." The rating of Aa is assigned to bonds that are of "high quality by all
standards," but long-term risks appear somewhat larger than Aaa rated bonds. The
Aaa and Aa rated bonds are generally known as "high grade bonds." The foregoing
ratings for tax-exempt bonds are rated conditionally. Bonds for which the
security depends upon the completion of some act or upon the fulfillment of some
condition are rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals that begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Such conditional
ratings denote the probable credit stature upon completion of construction or
elimination of the basis of the condition. Bonds rated A are considered as upper
medium grade obligations. Principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. Bonds rated Baa are considered a medium grade obligations; i.e.,
they are neither highly protected 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.
Standard & Poor's Ratings Group ("S&P")
AAA, AA, A and BBB - Bonds rated AAA bear the highest rating assigned to debt
obligations, which indicates an extremely strong capacity to pay principal and
interest. Bonds rated AA are considered "high grade," are only slightly less
marked than those of AAA ratings and have the second strongest capacity for
payment of debt service. Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat susceptible to the adverse effects of
changes in circumstances and economic conditions. The foregoing ratings are
sometimes followed by a "p" indicating that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the bonds being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. Although a provisional rating addresses credit quality subsequent to
completion of the project, it makes no comment on the likelihood of, or the risk
of default upon failure of, such completion. Bonds rated BBB are regarded as
having an adequate capacity to repay principal and pay interest. Whereas they
normally exhibit protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to repay principal
and pay interest for bonds in this category than for bonds in the A category.
Fitch Investors Service ("Fitch")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and of
the highest quality. The obligor has an extraordinary ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
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possible change over the term of the issue. Bonds rated A are considered to be
investment grade and of good quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds with higher
ratings. Bonds rated BBB are considered to be investment grade and of
satisfactory quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to weaken this ability than bonds with
higher ratings.
TAX-EXEMPT NOTE RATINGS
Moody's - MIG-1 and MIG-2. Notes rated MIG-1 are judged to be of the best
quality, enjoying strong protection from established cash flow or funds for
their services or from established and broad-based access to the market for
refinancing or both. Notes rated MIG-2 are judged to be of high quality with
ample margins of protection, though not as large as MIG-1.
S&P - SP-1 and SP-2. SP-1 denotes a very strong or strong capacity to pay
principal and interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+). SP-2 denotes a
satisfactory capacity to pay principal and interest.
Fitch - FIN-1 and FIN-2. Notes assigned FIN-1 are regarded as having the
strongest degree of assurance for timely payment. A plus symbol may be used to
indicate relative standing. Notes assigned FIN-2 reflect a degree of assurance
for timely payment only slightly less in degree than the highest category.
CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
Moody's - Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Prime-1, indicates highest quality repayment capacity of
rated issue and Prime-2 indicates higher quality.
S&P - Commercial Paper ratings are a current assessment of the likelihood of
timely payment of debts having an original maturity of no more than 365 days.
Issues rated A have the greatest capacity for a timely payment and the
designation 1, 2 and 3 indicates the relative degree of safety. Issues rated
"A-1+" are those with an "overwhelming degree of credit protection."
Fitch - Commercial Paper ratings reflect current appraisal of the degree of
assurance of timely payment. F-1 issues are regarded as having the strongest
degree of assurance for timely payment. (+) is used to designate the relative
position of an issuer within the rating category. F-2 issues reflect an
assurance of timely payment only slightly less in degree than the strongest
issues. The symbol (LOC) may follow either category and indicates that a letter
of credit issued by a commercial bank is attached to the commercial paper note.
Other Considerations - The ratings of S&P, Moody's, and Fitch represent their
respective opinions of the quality of the municipal securities they undertake to
rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, municipal securities with the same
maturity, coupon and ratings may have different yields and municipal securities
of the same maturity and coupon with different ratings may have the same yield.
49
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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 Tax
Free Income Fund 1995 Annual Report to Shareholders for the year ended December
31, 1995 (filed electronically on February 26, 1996; file nos. 811-5968 and
33-32246; accession number 0000950135-96-001144) and Semi Annual Reports for the
period ended June 30, 1996 filed electronically on August 21, 1996; file nos.
811-5968 and 33-32246; accession number 0001005477-96-000249; and High Yield Tax
Free Fund 1995 Annual Report to Shareholders for the year ended October 31, 1995
(filed electronically on January 3, 1996; file nos. 811-5254 and 33-16048;
accession number 0000950135-96-000031) and Semi Annual Reports for the period
ended April 30, 1996 filed electronically on June 28, 1996; file nos. 811-4254
and 33-16048; accession number 0001005477-96-000175.
John Hancock Tax Free Bond Fund
Statement of Assets and Liabilities as of December 31, 1995.
Statement of Operations of the year ended December 31, 1995.
Statement of Changes in Net Asset for each of the two years in the period
ended December 31, 1995.
Notes to Financial Statements.
Financial Highlights for each of the years in the period ended
December 31, 1995.
Schedule of Investments as of December 31, 1995.
Report of Independent Auditors.
Statement of Assets and Liabilities as of June 30, 1996 (unaudited).
Statement of Operations of the year ended June 30, 1996 (unaudited).
Statement of Changes in Net Asset for each of the two years ended December
31, 1995 and for the six months ended June 30 1996 (unaudited).
Notes to Financial Statements (unaudited).
Financial Highlights for each of the years in the period ended December
31, 1995 and for the six months ended June 30, 1996 (unaudited).
Schedule of Investments as of June 30, 1996 (unaudited).
John Hancock High Yield Tax Free Fund
Statement of Assets and Liabilities as of October 31, 1995.
Statement of Operations of the year ended October 31, 1995.
Statement of Changes in Net Asset for each of the two years in the period
ended October 31, 1995.
Notes to Financial Statements.
Financial Highlights for each of the years in the period ended
October 31, 1995.
Schedule of Investments as of October 31, 1995.
Report of Independent Auditors.
C-1
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Statement of Assets and Liabilities as of April 30, 1996 (unaudited).
Statement of Operations of the year ended April 30, 1996 (unaudited).
Statement of Changes in Net Asset for each of the two years in the period
ended October 31, 1995 and for the six months ended April 30, 1996
(unaudited).
Notes to Financial Statements (unaudited).
Financial Highlights for each of the years in the period ended October 31,
1995 and for the six months ended April 30, 1996 (unaudited).
Schedule of Investments as of April 30, 1996 (unaudited).
(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 September 4, 1996, the number of record holders of shares of the
Registrant was as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Tax-Free Bond Fund
Class A Shares - 30,441
Class B Shares - 3,396
High Yield Tax-Free
Class A Shares - 1,110
Class B Shares - 4,470
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-2
<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-3
<PAGE>
against policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Investment
Adviser, reference is made to Forms ADV (801-8124) filed under the Investment
Advisers Act of 1940, which is incorporated herein by reference.
Item 29. Principal Underwriters
(a) John Hancock Funds acts as principal underwriter for the Registrant and
also serves as principal underwriter or distributor of shares for John Hancock
Cash Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John
Hancock Series, Inc., John Hancock Tax-Free Bond Trust, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Limited Term
Government Fund, John Hancock Sovereign Investors Fund, Inc., John Hancock
Special Equities Fund, John Hancock Sovereign Bond Fund, John Hancock Tax-Exempt
Series, John Hancock Strategic Series, John Hancock Technology Series, Inc.,
John Hancock World Fund, John Hancock Investment Trust, John Hancock
Institutional Series Trust, Freedom Investment Trust, Freedom Investment Trust
II and Freedom Investment Trust III.
(b) The following table lists, for each director and officer of John
Hancock Funds, the information indicated.
C-4
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. President, Chief Executive Chairman
101 Huntington Avenue Officer and Director
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Compliance Officer
P.O. Box 111
Boston, Massachusetts
Robert G. Freedman Director Vice Chairman, Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Stephen M. Blair Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
James W. McLaughlin Senior Vice President None
101 Huntington Avenue and
Boston, Massachusetts Chief Financial Officer
David A. King Senior Vice President and Director None
101 Huntington Avenue
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
C-5
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
William S. Nichols Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Anthony P. Petrucci Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Albuquerque, New Mexico
John A. Morin Vice President and Secretary Vice President
101 Huntington Avenue
Boston, Massachusetts
Susan S. Newton Vice President Vice President and
101 Huntington Avenue Secretary
Boston, Massachusetts
Keith Harstein Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
Karen Walsh Vice President None
101 Huntington Avenue
Boston, Massachusetts
Christopher M. Meyer Treasurer None
101 Huntington Avenue
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-6
<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-7
<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-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under 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 20th day of September, 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
- ------------------------ Senior Vice President and Chief September 20, 1996
James B. Little Financial Officer (Principal
Financial and Accounting Officer)
*
- ------------------------ Trustee
James F. Carlin
*
- ------------------------ Trustee
William H. Cunningham
*
- ------------------------ Trustee
Charles F. Fretz
*
- ------------------------ Trustee
Harold R. Hiser, Jr.
C-9
<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/ Susan S. Newton September 20, 1996
-------------------------
Susan S. Newton
Attorney-in-Fact under
Powers of Attorney dated
June 25, 1996, filed
herewith
</TABLE>
C-10
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee/Director of each of the above listed Trusts, each a
Massachusetts business trust, and Corporations, each a Maryland Corporation,
does hereby severally constitute and appoint EDWARD J. BOUDREAU, JR., SUSAN S.
NEWTON, AND JAMES B. LITTLE, and each acting singly, to be my true, sufficient
and lawful attorneys, with full power to each of them, and each acting singly,
to sign for me, in my name and in the capacity indicated below, any Registration
Statement on Form N-1A and any Registration Statement on Form N-14 to be filed
by the Trust under the Investment Company Act of 1940, as amended (the "1940
Act"), and under the Securities Act of 1933, as amended (the "1933 Act"), and
any and all amendments to said Registration Statements, with respect to the
offering of shares and any and all other documents and papers relating thereto,
and generally to do all such things in my name and on my behalf in the capacity
indicated to enable the Trust to comply with the 1940 Act and the 1933 Act, and
all requirements of the Securities and Exchange Commission thereunder, hereby
ratifying and confirming my signature as it may be signed by said attorneys or
each of them to any such Registration Statements and any and all amendments
thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as of
the 25th day of June, 1996.
/s/Edward J. Boudreau, Jr. /s/Leo E. Linbeck, Jr.
- ----------------------------- --------------------------
Edward J. Boudreau, Jr. Leo E. Linbeck, Jr.
/s/ James F. Carlin /s/Patricia P. McCarter
- ----------------------------- --------------------------
James F. Carlin Patricia P. McCarter
/s/ William H. Cunningham /s/Steven R. Pruchansky
- ----------------------------- --------------------------
William H. Cunningham Steven R. Pruchansky
/s/Charles F. Fretz /s/Richard S. Scipione
- ----------------------------- --------------------------
Charles F. Fretz Richard S. Scipione
/s/Harold R. Hiser, Jr. /s/Norman H. Smith
- ----------------------------- --------------------------
Harold R. Hiser, Jr. Norman H. Smith
/s/Anne C. Hodsdon /s/John P. Toolan
- ----------------------------- --------------------------
Anne C. Hodsdon John P. Toolan
/s/Charles L. Ladner
- -----------------------------
Charles L. Ladner
C-11
<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 Not applicable.
99.B11 Independent Auditor's Consents.+
99.B12 None
99.B13 None
C-12
<PAGE>
99.B15 Class A Distribution Plan between Registrant and John Hancock
Funds, Inc. dated June 26, 1996.+
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 High Yield Tax-Free Semi-Annual+
27.1B High Yield Tax-Free Semi-Annual+
27.2A Tax-Free Bond Fund Semi-Annual+
27.2B Tax-Free Bond Fund Semi-Annual+
* 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-13
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" for High Yield Tax-Free Fund in the John Hancock Tax-Free Income
Funds Prospectus and "Independent Auditors" in the John Hancock High Yield
Tax-Free Fund Class A and Class B Shares Statement of Additional Information in
Post-Effective Amendment No. 11 to the Registration Statement (Form N-1A, No.
33-32246) dated September 30, 1996.
We also consent to the incorporation by reference therein of our report dated
December 15, 1995, with respect to the financial statements and financial
highlights of the John Hancock High Yield Tax-Free Fund (one of the portfolios
constituting John Hancock Tax-Free Bond Trust) in this Form N-1A.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
September 20, 1996
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" for Tax-Free Bond Fund in the John Hancock Tax-Free Income Funds
Prospectus and "Independent Auditors" in the John Hancock Tax-Free Bond Fund
Class A and Class B Shares Statement of Additional Information in Post Effective
Amendment No. 11 to the Registration Statement (Form N-1A, No. 33-32246) dated
September 30, 1996.
We also consent to the incorporation by reference therein of our report dated
January 31, 1996, with respect to the financial statements and financial
highlights of the John Hancock Tax-Free Bond Fund (one of the portfolios
constituting John Hancock Tax-Free Bond Trust) in this Form N-1A.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
September 20, 1996
JOHN HANCOCK TAX-FREE BOND FUND
Class A Shares
June 26, 1996
Article I. This Plan
This Distribution Plan (the "Plan") sets forth the terms and conditions on
which John Hancock Tax-Free Bond Fund (the "Fund"), on behalf of its Class A
shares, will, after the effective date hereof, pay certain amounts to John
Hancock Funds, Inc. ("JH Funds") in connection with the provision by JH Funds of
certain services to the Fund and its Class A shareholders, as set forth herein.
Certain of such payments by the Fund may, under Rule 12b-1 of the Securities and
Exchange Commission, as from time to time amended (the "Rule"), under the
Investment Company Act of 1940, as amended (the "Act"), be deemed to constitute
the financing of distribution by the Fund of its shares. This Plan describes all
material aspects of such financing as contemplated by the Rule and shall be
administered and interpreted, and implemented and continued, in a manner
consistent with the Rule. The Fund and JH Funds heretofore entered into a
Distribution Agreement, dated December 22, 1994, as amended, (the "Agreement"),
the terms of which, as heretofore and from time to time continued, are
incorporated herein by reference.
Article II. Distribution and Service Expenses
The Fund shall pay to JH Funds a fee in the amount specified in Article III
hereof. Such fee may be spent by JH Funds on any activities or expenses
primarily intended to result in the sale of Class A shares of the Fund,
including, but not limited to the payment of Distribution Expenses (as defined
below) and Service Expenses (as defined below). Distribution Expenses include
but are not limited to, (a) initial and ongoing sales compensation out of such
fee as it is received by JH Funds of the Fund or other broker-dealers ("Selling
Brokers") that have entered into an agreement with JH Funds for the sale of
Class A shares of the Fund, (b) direct out-of-pocket expenses incurred in
connection with the distribution of Class A shares of the Fund, including
expenses related to printing of prospectuses and reports to other than existing
Class A shareholders of the Fund, and preparation, printing and distribution of
sales literature and advertising materials, (c) an allocation of overhead and
other branch office expenses of JH Funds related to the distribution of Class A
shares of the Fund and (d) distribution expenses incurred in connection with the
distribution of a corresponding class of any open-end, registered investment
company which sells all or substantially all of its assets to the Fund or which
merges or otherwise combines with the Fund.
Service Expenses include payments made to, or on account of, account
executives of selected broker-dealers (including affiliates of JH Funds) and
others who furnish personal and shareholder account maintenance services to
Class A shareholders of the Fund.
Article III. Maximum Expenditures
The expenditures to be made by the Fund pursuant to this Plan, and the
basis upon which such expenditures will be made, shall be determined by the
Fund, and in no event shall such expenditures exceed 0.15% (0.25% effective
December 23, 1996) of the average daily net asset value of the Class A shares of
the Fund (determined in accordance with the Fund's prospectus as from time to
<PAGE>
time in effect) on an annual basis to cover Distribution Expenses and Service
Expenses, provided that the portion of such fee used to cover Service Expenses
shall not exceed an annual rate of up to 0.25% of the average daily net asset
value of the Class A shares of the Fund. Such expenditures shall be calculated
and accrued daily and paid monthly or at such other intervals as the Trustees
shall determine. In the event JH Funds is not fully reimbursed for payments made
or other expenses incurred by it under this Plan, such expenses will not be
carried beyond one year from the date such expenses were incurred. Any fees paid
to JH Funds under this Plan during any fiscal year of the Fund and not expended
or allocated by JH Funds for actual or budgeted Distribution Expenses and
Service Expenses during such fiscal year will be promptly returned to the Fund.
Article IV. Expenses Borne by the Fund
Notwithstanding any other provision of this Plan, the Fund and its
investment adviser, John Hancock Advisers, Inc. (the "Adviser"), shall bear the
respective expenses to be borne by them under the Investment Management
Contract, dated December 22, 1994, as from time to time continued and amended
(the "Management Contract"), and under the Fund's current prospectus as it is
from time to time in effect. Except as otherwise contemplated by this Plan, the
Fund shall not, directly or indirectly, engage in financing any activity which
is primarily intended to or should reasonably result in the sale of shares of
the Fund.
Article V. Approval by Trustees, etc.
This Plan shall not take effect until it has been approved, together with
any related agreements, by votes, cast in person at a meeting called for the
purpose of voting on this Plan or such agreements, of a majority (or whatever
greater percentage may, from time to time, be required by Section 12(b) of the
Act or the rules and regulations thereunder) of (a) all of the Trustees of the
Fund and (b) those Trustees of the Fund who are not "interested persons" of the
Fund, as such term may be from time to time defined under the Act, and have no
direct or indirect financial interest in the operation of this Plan or any
agreements related to it (the "Independent Trustees").
Article VI. Continuance
This Plan and any related agreements shall continue in effect for so long
as such continuance is specifically approved at least annually in advance in the
manner provided for the approval of this Plan in Article V.
Article VII. Information
JH Funds shall furnish the Fund and its Trustees quarterly, or at such
other intervals as the Fund shall specify, a written report of amounts expended
or incurred for Distribution Expenses and Service Expenses pursuant to this Plan
and the purposes for which such expenditures were made and such other
information as the Trustees may request.
2
<PAGE>
Article VIII. Termination
This Plan 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 Fund's
outstanding voting Class A shares, or (b) by JH Funds on 60 days' notice in
writing to the Fund.
Article IX. Agreements
Each agreement with any person relating to implementation of this Plan
shall be in writing, and each agreement related to this Plan shall provide:
(a) That, with respect to the Fund, such agreement may be terminated at
any time, without payment of any penalty, by vote of a majority of the
Independent Trustees or by vote of a majority of the Fund's then
outstanding voting Class A shares.
(b) That such agreement shall terminate automatically in the event of its
assignment.
Article X. Amendments
This Plan may not be amended to increase the maximum amount of the fees
payable by the Fund hereunder without the approval of a majority of the
outstanding voting Class A shares of the Fund. No material amendment to the Plan
shall, in any event, be effective unless it is approved in the same manner as is
provided for approval of this Plan in Article V.
Article XI. Limitation of Liability
The name "John Hancock Tax-Free Bond Fund" is the designation of the
Trustees under the Amended and Restated Declaration of Trust, dated December 18,
1989, as amended from time to time. The Amended and Restated Declaration of
Trust has been filed with the Secretary of State of the Commonwealth of
Massachusetts. The obligations of the Fund are not personally binding upon, nor
shall resort be had to the private property of, any of the Trustees,
shareholders, officers, employees or agents of the Fund, but only the Fund's
property shall be bound.
IN WITNESS WHEREOF, the Fund has executed this amended and restated
Distribution Plan effective as of the 26th day of June, 1996 in Boston,
Massachusetts.
JOHN HANCOCK TAX-FREE BOND FUND
By: /s/ Anne C. Hodsdon
President
JOHN HANCOCK FUNDS, INC.
By: /s/ Edward J. Boudreau, Jr.
Chairman, President & CEO
3
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> JOHN HANCOCK HIGH YIELD TAX-FREE FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 168,994,659
<INVESTMENTS-AT-VALUE> 170,174,780
<RECEIVABLES> 7,668,303
<ASSETS-OTHER> 227,868
<OTHER-ITEMS-ASSETS> 1,180,121
<TOTAL-ASSETS> 178,070,951
<PAYABLE-FOR-SECURITIES> 2,027,917
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,834,631
<TOTAL-LIABILITIES> 5,862,548
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 175,059,639
<SHARES-COMMON-STOCK> 2,264,785
<SHARES-COMMON-PRIOR> 1,502,547
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,171,208)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,319,972
<NET-ASSETS> 172,208,403
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,339,226
<OTHER-INCOME> 0
<EXPENSES-NET> 1,480,776
<NET-INVESTMENT-INCOME> 4,858,450
<REALIZED-GAINS-CURRENT> (187,961)
<APPREC-INCREASE-CURRENT> (4,383,461)
<NET-CHANGE-FROM-OPS> 287,028
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 492,159
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 902,454
<NUMBER-OF-SHARES-REDEEMED> 160,360
<SHARES-REINVESTED> 20,144
<NET-CHANGE-IN-ASSETS> 2,748,671
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,983,247)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 512,145
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,493,248
<AVERAGE-NET-ASSETS> 173,480,787
<PER-SHARE-NAV-BEGIN> 9.47
<PER-SHARE-NII> 0.30
<PER-SHARE-GAIN-APPREC> (0.24)
<PER-SHARE-DIVIDEND> 0.30
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.23
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> JOHN HANCOCK HIGH YIELD TAX-FREE FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 168,994,659
<INVESTMENTS-AT-VALUE> 170,174,780
<RECEIVABLES> 7,668,303
<ASSETS-OTHER> 227,868
<OTHER-ITEMS-ASSETS> 1,180,121
<TOTAL-ASSETS> 178,070,951
<PAYABLE-FOR-SECURITIES> 2,027,917
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,834,631
<TOTAL-LIABILITIES> 5,862,548
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 175,059,639
<SHARES-COMMON-STOCK> 16,395,276
<SHARES-COMMON-PRIOR> 16,392,624
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,171,208)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,319,972
<NET-ASSETS> 172,208,403
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,339,226
<OTHER-INCOME> 0
<EXPENSES-NET> 1,480,776
<NET-INVESTMENT-INCOME> 4,858,450
<REALIZED-GAINS-CURRENT> (187,961)
<APPREC-INCREASE-CURRENT> (4,383,461)
<NET-CHANGE-FROM-OPS> 287,028
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,366,291
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,385,857
<NUMBER-OF-SHARES-REDEEMED> 1,541,613
<SHARES-REINVESTED> 158,408
<NET-CHANGE-IN-ASSETS> 2,748,671
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,983,247)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 512,145
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,493,248
<AVERAGE-NET-ASSETS> 173,480,787
<PER-SHARE-NAV-BEGIN> 9.47
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> (0.24)
<PER-SHARE-DIVIDEND> 0.27
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.23
<EXPENSE-RATIO> 1.78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> JOHN HANCOCK TAX-FREE BOND FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 633,516,142
<INVESTMENTS-AT-VALUE> 660,566,903
<RECEIVABLES> 26,097,799
<ASSETS-OTHER> 54,277
<OTHER-ITEMS-ASSETS> 27,050,761
<TOTAL-ASSETS> 686,718,979
<PAYABLE-FOR-SECURITIES> 29,751,854
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,477,157
<TOTAL-LIABILITIES> 36,229,011
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